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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, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
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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 5, 1996, the aggregate market value of the Registrant's
voting stock held by nonaffiliates of the Registrant was $9,564,350 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 5, 1996, there were 4,693,916 shares of the Registrant's
common stock issued and outstanding.
Exhibit Index is on Page 53
Page 1 of 208 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) seven wholly-owned operating
subsidiaries: McClain of Alabama, Inc. ("McClain-Alabama"); McClain of Georgia,
Inc. ("McClain-Georgia"); McClain of Ohio, Inc. ("McClain-Ohio"); McClain of
Oklahoma, Inc. ("Oklahoma"); McClain EPCO, Inc. ("EPCO"); Shelby Steel
Processing Co. ("Shelby Steel"); and McClain Tube Company (d/b/a Quality
Tubing) ("Tube"); (ii) one wholly-owned lease financing subsidiary: McClain
Group Leasing, Inc. ("Leasing"); (iii) one wholly-owned holding company
subsidiary: Galion Holding Company ("Galion Holding"); and (iv) an
international sales corporation, McClain International FSC, Inc. ("FSC").
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-Alabama, McClain-Georgia, McClain-Ohio,
McClain-Oklahoma, E-Z Pack and Galion Dump Bodies. Sales owns all of the
issued and outstanding stock of McClain Group Sales of Florida, Inc., a
distributor of the Company's products in Florida. All of these companies are
Michigan corporations, except for McClain-Georgia, which is a Georgia
corporation, EPCO, which is a New York corporation, and FSC, which is a Virgin
Islands corporation.
McClain-Alabama was formed during the past year to acquire, on August 29,
1996, the Demopolis, Alabama roll off container manufacturing facility and
related equipment of Waste Management of Alabama, Inc. See Note 2 of the Notes
to Consolidated Financial Statements.
McClain-Michigan, McClain-Alabama, McClain-Georgia, McClain-Ohio,
McClain-Oklahoma 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
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mean McClain-Michigan and all of the entities owned or controlled by
McClain-Michigan.
The Company's executive offices are located at 6200 Elmridge Road,
Sterling Heights, Michigan 48310 and its telephone number is (810) 264-3611.
PRODUCTS
The Company manufactures and markets dump truck bodies and four solid
waste handling equipment product lines: (1) containers; (2) compactors and
baling equipment; (3) garbage and recycling truck bodies; and (4) transfer
trailers. Sales of dump truck bodies accounted for approximately 23%, and
sales of solid waste handling equipment accounted for approximately 75%, of the
Company's consolidated net sales for the fiscal year ended September 30, 1996.
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-Georgia and McClain-Oklahoma, under license from Galion Dump Bodies,
also manufacture dump truck bodies at their Macon, Georgia and Oklahoma City,
Oklahoma 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.
Containers
Detachable Roll-Off Containers and Roll-Off Hoists. McClain-Michigan,
McClain-Alabama, McClain-Georgia, McClain-Ohio and McClain-Oklahoma manufacture
several types of detachable roll-off containers and roll-off hoists at the
Company's facilities in Sterling Heights, Michigan, Macon, Georgia, Demopolis,
Alabama, 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."
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, Demopolis, Alabama,
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
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waste. Sludge containers vary in capacity from ten to thirty-five cubic yards
and are designed for highway movement of slurry type waste products.
Compactors and Baling Equipment
The Company manufactures compactors at its 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 "OCTAMAG". 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.
Garbage and Recycling Truck Bodies
E-Z Pack manufactures at its Galion, Ohio facility traditional garbage
truck bodies comprised of front, rear and side loading truck bodies and a
recycling truck body used in solid waste handling and disposal. The front
loading truck bodies vary in capacity from thirty-two cubic yards to
forty-three cubic yards, the rear loading truck bodies vary in capacity from
eighteen cubic yards to thirty-one cubic yards, and the side loading truck
bodies vary in capacity from twenty-nine cubic yards to thirty-nine cubic
yards. The recycling truck bodies vary in capacity from thirty cubic yards to
forty cubic yards. The products manufactured by E-Z Pack are sold under the
registered trademark "E-Z Pack". Within this line, E-Z Pack sells its rear
loading truck bodies under the trademarks "Goliath", "Goliath II", and
"Apollo", and its front loading truck bodies under the trademark "Hercules".
The side loading truck bodies and the recycling truck bodies are principally
identified by the E-Z Pack name only. These trademarks will expire in the year
2001, unless renewed. The Company has several patents covering its recycling
truck.
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.
CUSTOMERS AND DISTRIBUTION
For the fiscal year ended September 30, 1996, the Company's consolidated
net sales were divided approximately 47% to distributors, 48% to solid waste
handling companies, 3% to end users and 2% to governmental agencies.
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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, 1996, 1995 or 1994. 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.
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 for its solid waste handling equipment
product lines.
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, 1996, there were
approximately 285 authorized Company dealers located in numerous states and 15
authorized Company dealers, licensees and commissioned district managers in 9
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.
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The Company, through Leasing, also provides both sales-type financing and
operating leases. At September 30, 1996, Leasing held net lease receivables of
approximately $5.6 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 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 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
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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.
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 89%, 78.6%, and 86.7% of
Shelby Steel's business and 1.9%, 1.2%, and 2.0% of the Company's consolidated
net sales for the fiscal years ended September 30, 1996, 1995 and 1994,
respectively.
Tube Manufacturing
Tube, a wholly-owned subsidiary of the Company, began operating its tube
manufacturing line in the Company's Kalamazoo facility in mid-1994. The
facility receives coiled steel, slits the coil to proper width and forms it
into square and rectangular tubing. The tubing produced by this facility
provides the Company with approximately 90% of its steel tubing requirements.
COMPETITION
The Company faces intense competition in the solid waste handling
equipment and dump truck bodies industries. Certain of the Company's
competitors offer as wide a range of products, have greater market share and
financial, marketing, manufacturing and other resources than the Company. At
present, the Company's order backlogs are approximately two to four weeks. In
addition, the Company believes that several of its competitors have added or
are in the process of adding additional manufacturing capacity, which could
reduce order backlogs and price levels, and consequently adversely affect the
Company. Moreover, the absence of highly sophisticated technology results in a
number of small regional companies entering the container product business
periodically and competing with the Company.
Shortly after the Company acquired the E-Z Pack business in July of 1992,
management began a project to redesign and restructure the E-Z Pack product
line in order to make it competitive in the garbage truck body market. Since
that date the Company has expended on this project approximately $2.5 million.
This program is
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now essentially complete and management believes the E-Z Pack line is firmly
positioned in the market.
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 processing. Shelby Steel's ability to
warehouse customers' steel attracts customers such as steel brokers who do not
maintain facilities of their own to warehouse steel.
BACKLOG AND INVENTORY
The Company generally produces solid waste handling equipment and dump
truck bodies pursuant to customer purchase orders. The Company includes in its
backlog only firm product orders, which are subject to termination at will and
rescheduling, without penalty. The Company's backlog was approximately $11.5
million and $8.6 million at September 30, 1996 and 1995, 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, 1996, 1995 and 1994, the Company had inventory
of $25.6 million, $31.2 million, and $23.3 million, respectively.
EMPLOYEES
The Company had approximately 700 employees as of December 1, 1996. Sixty
of the Company's hourly employees are represented by the McClain Hourly
Employees' Union pursuant to a collective bargaining agreement which expires
September 16, 1999. The 130 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
46 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 November 1, 1999. On February 23, 1995 the
National Labor Relations Board (the "NLRB") conducted an election in response
to a petition filed by the Shopmen's Local
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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. 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. On October 17, 1996, the NLRB issued a Decision, Order and Direction
upholding the unfair labor practice charges, and on November 5, 1996, the NLRB
determined that the results of the election were in favor of the Union. The
Company continues to vigorously defend against the unfair labor practice
allegations. The Company does not believe a final decision upholding the Union
certification or the unfair labor practice charges would have a material
adverse affect on the Company. The Company believes 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.
State and local agencies have become increasingly active in the
environmental area. The increased regulation by multiple agencies can be
expected to increase the Company's future environmental costs. In particular,
properties under federal and state scrutiny frequently result in significant
clean-up costs and litigation expenses related to a party's clean-up
obligation. However, the Company believes that the ever-increasing waste
stream and the continuing initiatives of government authorities relating to
environmental and waste disposal problems, including restrictions on landfill
locations and operations and extensive regulation relating to the disposal of
waste, create significant opportunities for companies in the solid waste
handling equipment industry.
ITEM 2. PROPERTIES
In the aggregate, the Company owns or leases approximately 968,500 square
feet of real property located in Michigan, Ohio, Georgia, Oklahoma, Alabama and
New York. The Company owns three facilities in Michigan, three facilities in
Ohio, one facility in Georgia, one facility in Oklahoma and one facility in
Alabama. The properties that the Company owns or leases consist of the
following:
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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
Demopolis, Alabama Owned 102,000
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 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. This facility is being
reorganized to manufacture dump bodies, rear loaders and roll-off hoists to
sell principally in the Southeast.
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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.
McClain-Alabama owns an approximately 102,000 square foot manufacturing
facility in Demopolis, Alabama on approximately 84 acres of land. This
facility is used to fabricate and process steel for its own use and to
manufacture roll-off containers.
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 80% of capacity. The
Oklahoma facility is currently operating at 65% of capacity. The Georgia
facility is currently operating at 60% of capacity. The Alabama facility is
currently operating at 80% capacity. The E-Z Pack portion of the Galion, Ohio
facility is currently operating at 75% of capacity. The Winesburg, Ohio
facility is currently operating at 90% of capacity. The Kalamazoo, Michigan
facility is currently operating at 60% of capacity. The EPCO facility is
currently operating at 80% capacity. The determination of the productive
capacity on each facility actually used by the Company is a function of the mix
of products being produced at such facility and the pricing of such products.
The production capacity figures set forth in this paragraph reflect the mix of
products presently produced by each facility and the present pricing of such
products. The Company enjoys expandable capacity at most of these facilities
depending on double-shifting and other performance enhancing activities.
The facilities owned and leased by the Company are well maintained and in
good operating condition. Its plants and equipment are subject to various
liens and encumbrances which collateralize certain obligations. See Notes 7
and 8 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. See ITEM 1. BUSINESS. Employees. 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 Bodies and E-Z Pack brand
products. Galion Holding purchased the business now conducted by Galion Dump
Bodies and E-Z Pack from the Peabody Galion Division of Peabody International
Corporation ("Peabody"). Pursuant to an
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indemnification Galion Holding provided Peabody in connection with the
acquisition, it 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 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 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
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FISCAL YEAR ENDED SEPTEMBER 30, 1995
First Quarter(1)................ 9.1825 6.750
Second Quarter(1)............... 8.625 4.969
Third Quarter................... 8.75 7.125
Fourth Quarter.................. 7.88 6.38
FISCAL YEAR ENDED SEPTEMBER 30, 1996
First Quarter................... 7.00 3.375
Second Quarter.................. 5.00 3.50
Third Quarter................... 6.125 3.875
Fourth Quarter.................. 6.50 4.875
(1) Adjusted to reflect a 4-for-3 stock split
effective February 28, 1995
On December 5, 1996, the last reported sales price for the Common Stock as
reported by Nasdaq/NMS was $5.25. As of such date there were approximately 247
12
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holders of record of the Common Stock. The Company believes there are a
substantial number of beneficial owners of the Company's Common Stock whose
shares are held in street name. The Company has never paid any cash dividends.
The payment of dividends by the Company is within the discretion of the Board
of Directors and will depend on the Company's earnings, its capital
requirements and financial condition, as well as other relevant factors. The
Board of Directors does not intend to declare any dividends in the foreseeable
future, but instead intends to retain earnings for use in the Company's
operations.
ITEM 6. SELECTED FINANCIAL DATA
Selected financial data for each of the Company's last five fiscal years
ended September 30 are as follows:
=========================================================================================================
1996 1995 1994 1993 1992
------------- ------------- ------------- ------------- -------------
Net Sales $84,680,797 $82,263,202 $79,166,990 $61,794,822 $31,895,313
Net Income $ 2,384,957 $ 2,462,755 $ 3,250,996 $ 2,110,838 $ 1,190,385
Net Earnings Per
Common and Common
Equivalent Share (1)(2) $ .50 $ .53 $ .71 $ .51 $ .30
AS OF SEPTEMBER 30,
-------------------------------------------------------------------------
Working Capital $32,371,639 $33,868,556 $21,997,601 $10,664,115 $12,577,620
Total Assets $79,425,255 $73,899,197 $58,189,747 $49,562,268 $36,014,382
Long-Term Debt $34,217,149 $31,170,287 $18,039,869 $ 7,022,215 $ 4,814,324
Stockholders'
Investment $25,457,255 $22,841,274 $19,359,709 $15,794,210 $11,707,722
Weighted Average
Number of Common
Equivalent Shares
Outstanding (1)(2) 4,752,050 4,657,476 4,608,137 4,104,076 3,921,769
Current Ratio 3.18:1 3.37:1 2.49:1 1.55:1 2.20:1
Long Term Debt to
Equity 1.34:1 1.36:1 0.93:1 0.44:1 0.41:1
=========================================================================================================
(1) Average number of shares outstanding includes, as appropriate,
adjustments for the effect of common stock equivalents.
(2) Adjusted to reflect a 4-for-3 stock split effective February 28, 1995.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
The following discussion should be read in conjunction with the
consolidated financial statements, including the notes to them, appearing
elsewhere in this report.
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,
-------------------------------------------------
1996 1995 1994 1993 1992
------- ------- ------- ------- -------
Net Sales 100.00% 100.00% 100.00% 100.00% 100.00%
Cost of Sales 79.07 77.68 78.12 78.13 75.23
-------- ------- ------- ------- -------
Gross Profit 20.93 22.32 21.88 21.87 24.77
Selling, General & Administrative
Expenses 13.31 14.19 13.48 15.00 15.74
-------- ------- ------- ------- -------
Operating Profit 7.62 8.13 8.40 6.87 9.03
Other Expense 3.35 3.59 2.19 2.18 3.01
-------- ------- ------- ------- -------
Income Before Income Taxes 4.27 4.54 6.21 4.69 6.02
Income Taxes 1.45 1.55 2.09 1.27 2.29
-------- ------- ------- ------- -------
Net Income 2.82% 2.99% 4.12% 3.42% 3.73%
======== ======= ======= ======= =======
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.
RESULTS OF OPERATIONS
Comparison of year ended September 30, 1996 to year ended September 30, 1995
Net sales for the fiscal year ended September 30, 1996 amounted to $84.7
million compared to sales of $82.3 million for the fiscal year ended September
30, 1995, an increase of 2.93%. This increase in Fiscal 1996 sales was due
primarily to an increase of $4.0 million in baler sales resulting from the EPCO
acquisition in late Fiscal
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1995. Sales of the Company's other products remained essentially stable
during Fiscal 1996.
Gross profit as a percentage of sales declined to 20.93% for Fiscal 1996
from 22.32% for Fiscal 1995. This decline was due largely to the Company's
inventory reduction program, increased price competition in the solid waste
industry, and certain manufacturing inefficiencies at the Georgia and the
McClain-Ohio facilities. The union organizing efforts in the Georgia facility
(see ITEM 3. LEGAL PROCEEDINGS) caused significant manufacturing inefficiencies
during the past year at that plant, while the manufacturing inefficiencies at
the McClain-Ohio facility resulted from a failure to rapidly adjust its work
force during the first half of the year to compensate for the oversupply of
trailers which began during Fiscal 1995. Management expects that the
reorganization of the Georgia plant will result in an acceptable efficiency
level. The inventory reduction program, begun during March 1996, resulted in a
$5.65 million reduction in inventory levels at September 30, 1996. Management
believes that this program will have a positive effect on both interest expense
and the normal carrying costs associated with inventory during Fiscal 1997.
Selling, general and administrative expenses declined to 13.31% as a
percentage of net sales during Fiscal 1996 compared to 14.19% for Fiscal 1995.
Interest expense increased to 3.59% of net sales during Fiscal 1996 compared to
3.01% during Fiscal 1995. The increase in interest expense resulted from
greater borrowing to fund the Company's increased leasing activities and the
cost of carrying the inventory built up during Fiscal 1995.
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.
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
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
15
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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.
LIQUIDITY AND CAPITAL RESOURCES
The Company's required level of working capital during Fiscal 1996 was
consistent with that of Fiscal 1995, while long-term debt continued to increase
due primarily to the Company's increased leasing activity and its on-going
commitment to increased production efficiency by properly maintaining and
upgrading its production facilities and machinery and equipment.
The Company had working capital of approximately $32.4 million at
September 30, 1996, compared to $33.9 million at September 30, 1995. The ratio
of the Company's current assets to its current liabilities was 3.18:1 at
September 30, 1996 compared to 3.37:1 at September 30, 1995. The Company's
cash and short term investments totaled $1.1 million at September 30, 1996.
Cash flows provided by operating activities were $6.0 million during Fiscal
1996 due primarily to the success of the Company's inventory reduction program.
The Company also invested approximately $2.0 million in new machinery and
equipment during Fiscal 1996. The Company's leasing subsidiary financed
approximately $3 million of new leases in Fiscal 1996.
The Company has several Revolving Credit Facilities with Standard Federal
Bank, a federal savings bank ("Standard"), which provide maximum availability
of $21 million for working capital needs and $1.5 million to fund demonstration
equipment. At September 30, 1996, the Company had borrowed approximately $15.9
million under the working capital line and $1.1 million under the demonstrator
line. Borrowings under the working capital line are limited to 80% of eligible
accounts receivable and 50% of qualified inventory while the demonstrator line
is limited to 85% of related equipment.
The Company also has a Revolving Credit Facility with Standard used to
finance certain of its lease receivables. The agreement calls for a maximum
availability of $7.5 million with borrowings limited to 80% of eligible lease
receivables. At September 30, 1996 approximately $5.1 million had been drawn
on this facility.
16
17
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 amount of capital
expenditures the Company may make each year. The revolving credit
agreements bear interest at prime and expire in March 1998, at which time the
Company expects to obtain renewals on the same or similar terms.
The Company has agreements with two financial institutions to provide
financing for its TRAC (Terminal Rental Adjustment Clause) Leasing Agreements.
The agreements call for maximum availability of $8 million in lease
commitments. Under these facilities, the Company may finance 100% of eligible
lease receivables over the term of the related lease at a fixed interest rate
determined at the time of the lease closing. The notes are secured by the
related lease receivable. At September 30, 1996, approximately $2.5 million
had been drawn on this facility.
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.
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) 55 Chairman of the Board, Chief
Executive Officer and President 3/68
Robert W. McClain(1) 60 Senior Vice President, Assistant
Secretary and Director 3/68
Raymond Elliott 62 Director 8/90
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Walter J. Kirchberger 61 Director 11/95
Carl Jaworski 53 Secretary and Treasurer 10/72
(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 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 and Treasurer of the Company. He has served as
Secretary since October 1972. He was elected Treasurer of the Company
effective March 31, 1996, the date on which the Company's previous treasurer
resigned. Mr. Jaworski 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.
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,
1996, 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.
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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 $100,000 during the
fiscal year ended September 30, 1996.
SUMMARY COMPENSATION TABLE
- ------------------------------------------------------------------------------------
Annual Compensation Long Term
Compensation
- ------------------------------------------------------------------------------------
Name and Fiscal Salary Options/
Principal Position Year Amount($) SARs(#)
- ------------------------------------ ------- --------- ----------
Kenneth D. McClain, President/ CEO 1996 $275,000 ---
1995 219,675 13,333
1994 194,250 26,666
Robert W. McClain, Senior Vice
President 1996 $246,832 ---
1995 216,582 6,666
1994 191,250 22,666
===== ======== ========
AGGREGATED OPTION/SAR EXERCISES AND
FISCAL YEAR-END OPTION/SAR VALUES TABLE
- -------------------------------------------------------------------------------------------------------
Shares
Acquired No. of Unexercised Value of Unexercised
on Exercise Value Options/SARs at In-The-Money Options/SARs at
in 1996 Realized Fiscal Year-End Fiscal Year-End(2)
------------------------------------------------------------
Not Not
Exercisable Exercisable(1) Exercisable Exercisable
- -------------------------------------------------------------------------------------------------------
Kenneth D. McClain 4,135 -0- 18,086 17,778 $ -0- $ -0-
Robert W. McClain 2,064 -0- 15,268 12,000 $ -0- $ -0-
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(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 30, 1996 closing
bid high and low price which was $5.75 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, 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.
For the fiscal year ended September 30, 1996, 3,303 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 5,1996, 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
6200 Elmridge Road
Sterling Heights, MI 48310 1,511,481(3) 32.20%
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AMOUNT AND
NATURE OF PERCENT OF
NAME AND ADDRESS BENEFICIAL OUTSTANDING
OF BENEFICIAL OWNER OWNERSHIP(1) SHARES(2)
- ------------------- ------------ -----------
Robert W. McClain
6200 Elmridge Road
Sterling Heights, MI 48310 1,126,788(4) 24.00%
June McClain
68333 DeQuindre
Oakland, MI 48368 337,178 7.18%
Lisa McClain Pfeil(5)
67667 Sisson
Romeo, MI 48065 310,474 6.61%
Raymond Elliott
290 Town Center
P.O. Box 890
Troy, Michigan 48084 9,879 0.21%
Walter Kirchberger
2301 West Big Beaver Rd., Suite 800
Troy, Michigan 48084 1,407 0.03%
All current executive officers and
directors as a group (5 persons) 2,764,048(6) 58.89%
(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 4,693,916 shares of Common Stock issued and outstanding as of
December 5, 1996. In addition, for purposes of computing the percentage
of outstanding shares held by each person or group of persons named above,
any security that such person or persons has or have the right to acquire
within 60 days is also deemed to be outstanding, but is not deemed to be
outstanding for the purpose of computing the percentage ownership of any
other person.
(3) Includes 2,430 shares of Common Stock owned by Kenneth D. McClain's wife.
Mr. McClain disclaims beneficial ownership of these shares.
(4) Includes 337,178 shares of Common Stock owned by Robert W. McClain's
wife. Mr. McClain disclaims beneficial ownership of these shares.
(5) 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 60,686 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
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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 13 of Notes
to Consolidated Financial Statements.
The Company had sales of approximately $660,000 in Fiscal 1996 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 1996. Sales from these entities to the
Company aggregated approximately $1.2 million during Fiscal 1996, for which
these entities received fees and commissions in the approximate amount of
$120,000.
PART IV
ITEM 14 EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed herewith as part of this Form 10-K:
(1) A list of the financial statements required to be filed as a
part of this Form 10-K is shown in the "Index to the Consolidated
Financial Statements and Schedules" filed herewith.
22
23
(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 filed a report on Form 8-K during September 1996 regarding
its acquisition of the Demopolis, Alabama facility.
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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: December 13, 1996 McCLAIN INDUSTRIES, INC.
By:/s/ Kenneth D. McClain
-------------------------------------
Kenneth D. McClain , President
(Principal Executive Officer)
And By:/s/ Carl Jaworski
-------------------------------------
Carl Jaworski, 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: December 13, 1996 /s/ Kenneth D. McClain
-------------------------------
Kenneth D. McClain, Director
Dated: December 13, 1996 /s/ Robert W. McClain
-------------------------------
Robert W. McClain, Director
Dated: December 13, 1996 /s/ Raymond Elliott
--------------------------------
Raymond Elliott, Director
Dated: December 13, 1996 /s/ Walter J. Kirchberger
--------------------------------
Walter J. Kirchberger, Director
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SECURITIES AND EXCHANGE COMMISSION
- -----------------------------------------------------------------------------
Washington, D. C.
Form 10-K
----
For Corporations
ANNUAL REPORT
-------------
FOR THE YEARS ENDED SEPTEMBER 30, 1996, 1995 and 1994
-----------------------------------------------------
McCLAIN INDUSTRIES, INC. AND SUBSIDIARIES
-----------------------------------------
(NAME OF REGISTRANT)
CONSOLIDATED FINANCIAL STATEMENTS
---------------------------------
AND
---
INDEPENDENT AUDITORS' REPORT
----------------------------
-25-
26
McCLAIN INDUSTRIES, INC. AND SUBSIDIARIES
INDEX TO THE CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES
CONSOLIDATED FINANCIAL STATEMENTS
Independent Auditors' Report
Consolidated Balance Sheets - September 30, 1996 and September 30, 1995
Consolidated Statements of Income for the years ended September 30, 1996, 1995
and 1994
Consolidated Statements of Stockholders' Investment for the years ended
September 30, 1996, 1995 and 1994
Consolidated Statements of Cash Flows for the years ended September 30, 1996,
1995 and 1994
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.
-26-
27
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, 1996 and 1995, and the
related consolidated statements of income, stockholders' investment, and cash
flows for each of the three years in the period ended September 30, 1996.
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 consolidated financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the consolidated
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of McClain Industries,
Inc. and Subsidiaries as of September 30, 1996 and 1995, and the results of
their operations and their cash flows for each of the three years in the period
ended September 30, 1996 in conformity with generally accepted accounting
principles.
REHMANN ROBSON
Farmington Hills, Michigan
December 20, 1996
-27-
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MCCLAIN INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1996 AND 1995
ASSETS 1 9 9 6 1 9 9 5
----------- -----------
CURRENT ASSETS
Cash and cash equivalents $ 1,065,039 $ 1,173,370
Accounts receivable, net of allowance for doubtful accounts
of $600,000 in 1996 and 1995 (Notes 4, 7 and 8) 18,502,950 14,284,478
Inventory (Notes 5, 7 and 8) 25,577,000 31,229,399
Net investment in sales-type leases, current portion 1,910,000 1,305,800
Prepaid expenses 191,645 176,075
----------- -----------
TOTAL CURRENT ASSETS 47,246,634 48,169,122
----------- -----------
PLANT AND EQUIPMENT (NOTES 7 AND 8)
Land 2,233,906 1,895,367
Buildings 11,271,975 9,701,280
Storage areas 1,601,190 1,518,928
Machinery and equipment 18,835,127 16,448,110
Furniture and fixtures 2,254,177 1,644,569
Transportation equipment 1,376,963 1,407,063
Leasehold improvements 574,184 462,818
----------- -----------
Total 38,147,522 33,078,135
Less accumulated depreciation and amortization 13,899,589 11,894,922
----------- -----------
NET PLANT AND EQUIPMENT 24,247,933 21,183,213
----------- -----------
OTHER ASSETS
Net investment in sales-type leases, net of
current portion (Notes 6 and 7) 3,706,350 2,255,164
Goodwill, net of amortization (Note 1) 3,453,772 1,737,921
Other 390,141 553,777
Equipment under construction (Note 15) 380,425 -
----------- -----------
TOTAL OTHER ASSETS 7,930,688 4,546,862
----------- -----------
TOTAL ASSETS $79,425,255 $73,899,197
=========== ===========
LIABILITIES AND STOCKHOLDERS' INVESTMENT 1 9 9 6 1 9 9 5
----------- -----------
CURRENT LIABILITIES
Accounts payable $10,547,642 $ 9,190,309
Current portion of long-term debt 2,132,201 2,179,449
Accrued expenses (Note 9) 2,165,869 2,331,809
Federal and state income taxes 29,283 598,999
----------- -----------
TOTAL CURRENT LIABILITIES 14,874,995 14,300,566
Long-term debt, net of current portion (Note 8) 34,217,149 31,170,287
Product liability (Note 15) 2,775,856 4,147,070
Deferred income taxes (Note 10) 2,100,000 1,440,000
----------- -----------
TOTAL LIABILITIES 53,968,000 51,057,923
----------- -----------
COMMITMENTS AND CONTINGENCIES (NOTE 15)
STOCKHOLDERS' INVESTMENT
Common stock, no par value, authorized 10,000,000 shares;
issued and outstanding, 4,693,916 shares
(4,587,744 shares in 1995) 5,803,870 5,572,846
Retained earnings 20,157,385 17,772,428
Less amount due from officers (Note 13) (504,000) (504,000)
----------- -----------
TOTAL STOCKHOLDERS' INVESTMENT 25,457,255 22,841,274
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' INVESTMENT $79,425,255 $73,899,197
=========== ===========
See notes to consolidated financial statements.
-28-
29
MCCLAIN INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED SEPTEMBER 30, 1996, 1995 AND 1994
1 9 9 6 1 9 9 5 1 9 9 4
----------- ------------ -----------
Net sales $84,680,797 $82,263,202 $79,166,990
Cost of sales 66,959,726 63,901,196 61,843,845
----------- ------------ ------------
GROSS PROFIT 17,721,071 18,362,006 17,323,145
Selling, general and administrative expenses 11,273,491 11,673,686 10,674,043
----------- ------------ ------------
OPERATING PROFIT 6,447,580 6,688,320 6,649,102
----------- ------------ ------------
OTHER INCOME (EXPENSE)
Interest (3,044,398) (2,478,350) (1,321,533)
Other, net (Note 12) 211,775 (473,215) (412,873)
----------- ------------ ------------
OTHER EXPENSE, NET (2,832,623) (2,951,565) (1,734,406)
----------- ------------ ------------
INCOME BEFORE INCOME TAXES 3,614,957 3,736,755 4,914,696
Income taxes (Note 10) 1,230,000 1,274,000 1,663,700
----------- ------------ ------------
NET INCOME $ 2,384,957 $ 2,462,755 $ 3,250,996
=========== =========== ===========
Net income per common and
common equivalent shares $0.50 $0.53 $0.71
===== ===== =====
Weighted average number of common
and common equivalent shares outstanding
(Note 1) 4,752,050 4,657,476 4,608,137
========= ========= =========
See notes to consolidated financial statements.
-29-
30
MCCLAIN INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' INVESTMENT
FOR THE YEARS ENDED SEPTEMBER 30, 1996, 1995 AND 1994
COMMON STOCK AMOUNT
------------------------ RETAINED DUE FROM
SHARES AMOUNT EARNINGS OFFICERS TOTALS
--------- ---------- ----------- ----------- -----------
Balance at October 1, 1993 4,320,967 $4,239,533 $12,058,677 $(504,000) $15,794,210
Proceeds from common
stock issued (Note 14) 124,000 296,450 - - 296,450
Common stock issued in
lieu of cash (Note 14) 2,193 18,053 - - 18,053
Net income - - 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 14) 3,416 8,389 - - 8,389
Common stock issued in
lieu of cash (Note 14) 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
Proceeds from common
stock issued (Note 14) 134,244 359,411 - - 359,411
Common stock issued in
lieu of cash (Note 14) 3,555 18,613 - - 18,613
Redemptions of common
stock (Note 15) (31,627) (147,000) - - (147,000)
Net income - - 2,384,957 - 2,384,957
--------- ---------- ----------- ---------- -----------
Balance at September 30,
1996 4,693,916 $5,803,870 $20,157,385 $(504,000) $25,457,255
========= ========== =========== ========= ===========
See notes to consolidated financial statements.
-30-
31
MCCLAIN INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED SEPTEMBER 30, 1996, 1995 AND 1994
1 9 9 6 1 9 9 5 1 9 9 4
---------- ---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $2,384,957 $2,462,755 $3,250,996
Adjustments to reconcile net income to net cash
provided by (used in) operating activities
Depreciation and amortization 2,550,935 2,179,992 1,936,191
Deferred income taxes 660,000 375,000 709,700
Provision for doubtful accounts 49,400 205,000 276,610
Loss on sale of plant and equipment 3,981 22,067 24,672
Common stock issued for services 18,613 11,510 18,053
Net changes in operating assets and liabilities
which provided (used) cash, net of effects in
1996 and 1995 of business acquisitions:
Accounts receivable (3,987,569) (3,067,591) (1,217,437)
Inventories 6,072,095 (7,721,234) (4,895,119)
Net investment in sales-type leases (2,055,386) (1,684,275) (345,126)
Prepaid expenses and other assets (300,974) (195,718) (234,104)
Accounts payable 1,357,333 (1,909,327) 2,202,094
Accrued expenses (735,656) 277,852 (784,335)
---------- ---------- ----------
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES 6,017,729 (9,043,969) 942,195
---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of plant and equipment (1,991,316) (3,995,109) (3,079,553)
Payments on liabilities assumed upon the
Galion acquisition (1,371,214) (809,902) (1,092,532)
Proceeds from sale of plant and equipment 22,331 30,112 33,869
---------- ---------- ----------
NET CASH USED IN INVESTING ACTIVITIES (3,340,199) (4,774,899) (4,138,216)
---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from long-term borrowings 2,139,126 22,927,180 6,354,350
Repayments of long-term borrowings (5,137,398) (9,639,955) (2,223,270)
Sale of common stock under stock option plan 359,411 8,389 296,450
Redemption of common stock (147,000) (1,089) -
---------- ---------- ----------
Net cash (used in) provided by financing activities (2,785,861) 13,294,525 4,427,530
---------- ---------- ----------
Net (decrease) increase in cash and
cash equivalents (108,331) (524,343) 1,231,509
Cash and cash equivalents, beginning of year 1,173,370 1,697,713 466,204
---------- ---------- ----------
CASH AND CASH EQUIVALENTS, END OF YEAR $1,065,039 $1,173,370 $1,697,713
========== ========== ==========
See notes to consolidated financial statements.
-31-
32
McCLAIN INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED SEPTEMBER 30, 1996, 1995 AND 1994
1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business
McClain Industries, Inc. and its wholly-owned subsidiaries (the
"Company") manufacture and sell a diversified line of dump truck
bodies (assemblies attached to truck frames which are used to carry
and dump solid materials such as dirt, gravel or waste materials) and
solid waste handling equipment (including containers, compactors and
baling equipment, garbage and recycling truck bodies, and transfer
trailers) used for the temporary storage, transportation and
compaction of residential, commercial and industrial waste and
recycling materials. The Company sells its dump truck bodies
primarily to truck equipment dealers and its solid waste handling
equipment primarily to distributors, solid waste handling companies,
government agencies, shopping centers and other large retail outlets
principally within the United States. 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.
Concentration Risks
The Company grants trade credit to its customers in the normal course
of business. No collateral is required. Concentrations of credit
risk with respect to trade receivables are limited due to the
relatively large number of customers comprising the Company's customer
base and its geographic dispersion. The Company maintains reserves
for potential credit losses and such losses have historically been
insignificant and generally within management's expectations.
The Company currently procures all of its extruded aluminum, which is
used in the manufacture of transfer trailers, from one source. The
Company is unaware of other potential providers of extruded aluminum
which meet the Company's production requirements. The loss of this
supplier could adversely affect the Company's short-term operating
results.
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 of Oklahoma, Inc., McClain of Alabama,
Inc., McClain EPCO, Inc., McClain Group Leasing, Inc., McClain Tube
Company, McClain International FSC, Inc., an international sales
corporation, 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 August 1996, McClain of Alabama, Inc. was formed and acquired a
roll-off container manufacturing facility (Note 2).
In July 1995, the Company acquired and began operating a wholly-owned
subsidiary, McClain EPCO, Inc., a business incorporated in the State
of New York (Note 2).
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33
McCLAIN INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED SEPTEMBER 30, 1996, 1995 AND 1994
1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Use of Estimates
The preparation of consolidated financial statements in conformity
with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and
liabilities at the date of the consolidated financial statements and
the reported amounts of income and expenses during the reporting
period. Actual results could differ from those estimates.
Significant estimates include but are not limited to product
liability, goodwill amortization and the allowance for doubtful
receivables.
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 financial reporting 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.
-33-
34
McCLAIN INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED SEPTEMBER 30, 1996, 1995 AND 1994
1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
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 Federal Deposit Insurance Corporation 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 5 to 40 years. Accumulated
amortization as of September 30, 1996 and 1995 was $174,053 and
$116,155, respectively.
A significant portion of goodwill attributable to certain business
combinations has arisen in recent years. While management believes
that these costs will be recovered from the profitable operating of
these businesses in the future, a change in the estimates of the
applicable recovery periods or the development of unfavorable business
conditions pertinent to these operations could adversely affect the
Company's operating results.
-34-
35
McCLAIN INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED SEPTEMBER 30, 1996, 1995 AND 1994
1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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
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 were 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.
Fair Values of Financial Instruments
The carrying amount of cash equivalents, accounts receivable, accounts
payable and accrued expenses approximate their fair values due to the
short-term maturity of these financial instruments. The carrying
amounts of long-term debt approximate their fair values because the
interest rates are representative of, or change with, market rates.
New Accounting Pronouncements
In March 1995, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No 121, "Accounting
for the Impairment of Long-Term Assets and for Long-Lived Assets to be
Disposed Of". The Statement requires that long- lived assets and
certain intangibles to be held and used by the Company be reviewed for
impairment whenever events or changes in circumstances indicate that
the carrying amount of an asset may not be recoverable. The Company
will adopt this pronouncement during the quarter beginning October 1,
1996. Such adoption is not expected to have a material effect on the
Company's consolidated financial position or results of operations.
In October 1995, the FASB issued SFAS No. 123, "Accounting for
Stock-Based Compensation", which encourages, but does not require, a
change in the way compensation cost arising from stock options granted
is measured. The Company plans to continue to apply the existing
accounting policy contained in Accounting Principles Board Opinion No.
25, which requires no recognition of compensation expense for stock
option grants where the exercise price is not less than the market
price on the date of grant. The Company intends to adopt the
disclosure aspects of SFAS No. 123 during the year ending September
30, 1997, if material.
-35-
36
McCLAIN INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED SEPTEMBER 30, 1996, 1995 AND 1994
1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Reclassifications
Certain amounts reported in 1995 and 1994 have been reclassified to
conform to the 1996 presentation.
2. BUSINESS ACQUISITIONS
Container Manufacturing Facility
On August 29, 1996, the Company acquired the Demopolis, Alabama
roll-off container manufacturing facility and related equipment and
properties operated by Waste Management of Alabama, Inc., in a
business combination accounted for as a purchase. The Company paid
approximately $5,700,000 in cash at the closing, which was allocated
to the assets received as follows:
Plant, including land $1,615,000
Machinery and equipment 1,911,250
Inventories 400,000
Goodwill 1,773,750
----------
$5,700,000
==========
Goodwill resulting from this acquisition is expected to be amortized
ratably over the next five years.
In connection with this transaction, the seller has agreed to use
reasonable commercial efforts to purchase annually from the Company,
containers and related other manufactured products in an amount that
is not less than $25,000,000 in sales per year during the five- year
period following the closing. In this event, the Company has agreed
to pay to the seller up to $1,200,000 during each year. If the seller
purchases less than $25,000,000 annually, the $1,200,000 amount is to
be reduced in accordance with the terms of the acquisition agreement.
The Company intends to account for such payments, if any, as sales
discounts when and as earned by the seller.
-36-
37
McCLAIN INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED SEPTEMBER 30, 1996, 1995 AND 1994
2. BUSINESS ACQUISITIONS (CONTINUED)
The accompanying 1996 statement of income includes the results of
operations of the roll-off container manufacturing business for the
one month period since the date of acquisition by the Company.
Unaudited proforma results of operations as if the acquisition had
taken place effective October 1, 1994 are summarized as follows:
(000's omitted)
Year Ended September 30,
-------------------------
1 9 9 6 1 9 9 5
------- -------
Net sales $98,276 $94,839
Net income $ 2,619 $ 2,555
Earnings per share $ 0.55 $ 0.55
These proforma results are not indicative of either future financial
performance or actual results which would have occurred had the
acquisition taken place at the beginning of the previous year.
EPCO
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, which is
being amortized over fifteen years. 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.
Results of operations of EPCO have been included in the Company's
consolidated financial statements since the date of acquisition. EPCO
sales during the year ended September 30, 1996 were approximately
$4,729,000.
-37-
38
McCLAIN INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED SEPTEMBER 30, 1996, 1995 AND 1994
3. SUPPLEMENTAL CASH FLOWS INFORMATION
Non-cash Investing and Financing Activities
During the years ended September 30, 1996, 1995 and 1994, common stock
valued at $18,613, $11,510 and $18,053, respectively, was issued to
non-employee directors in exchange for services rendered.
During the year ended September 30, 1996, the Company financed
$5,700,000 of the Alabama acquisition by taking out a $5,300,000 term
loan and borrowing $400,000 pursuant to the revolving credit
facilities provided by its principal lender (Note 8).
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.
Other Cash Flows Information
Cash paid for interest amounted to $3,044,398 for 1996, $2,482,481 for
1995, and $1,321,533 for 1994. Cash paid for federal income taxes
amounted to $1,198,137 for 1996, $945,314 for 1995, and $835,000 for
1994.
-38-
39
McCLAIN INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED SEPTEMBER 30, 1996, 1995 AND 1994
4. 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,
1996:
1 9 9 6 1 9 9 5 1 9 9 4
------- ------- -------
Balance, beginning of year $600,000 $425,800 $194,733
Add provision charged
against income 49,400 205,000 276,610
Less uncollectible accounts
written off, net of recoveries (49,400) (30,800) (45,543)
-------- -------- --------
Balance, end of year $600,000 $600,000 $425,800
======== ======== ========
5. INVENTORIES
The major components of inventories at September 30, 1996 and 1995
were as follows:
1 9 9 6 1 9 9 5
----------- -----------
Materials and supplies $11,677,000 $17,400,070
Work-in-process 6,776,000 6,255,749
Finished goods 7,124,000 7,573,580
----------- -----------
$25,577,000 $31,229,399
=========== ===========
-39-
40
McCLAIN INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED SEPTEMBER 30, 1996, 1995 AND 1994
6. LEASING OPERATIONS
Sales-Type Leases
The Company provides financing contracts for the sales of various
manufactured products to certain of its customers. Such financing is
principally structured in the form of finance leases, typically for a
five-year term, which are accounted for as sales-type leases. The net
investment in these sales-type leases is comprised of the following
amounts at September 30:
1 9 9 6 1 9 9 5
---------- ----------
Gross minimum lease payments collectible
in monthly installments $7,575,657 $4,727,944
Less advance lease payments and
deposits received 210,705 178,780
---------- ----------
Subtotal 7,364,952 4,549,164
Less unearned finance income 1,748,602 988,200
---------- ----------
Total net investment in sales-type leases 5,616,350 3,560,964
Current portion 1,910,000 1,305,800
---------- ----------
Noncurrent portion $3,706,350 $2,255,164
========== ==========
Gross minimum lease payments are collectible in the following
scheduled annual amounts for the years succeeding September 30, 1996:
YEAR ENDING
SEPTEMBER 30 AMOUNT
------------ ----------
1997 $2,504,084
1998 2,135,836
1999 1,399,340
2000 810,145
2001 515,547
----------
GROSS MINIMUM AMOUNT COLLECTIBLE $7,364,952
==========
-40-
41
McCLAIN INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED SEPTEMBER 30, 1996, 1995 AND 1994
6. LEASING OPERATIONS (CONTINUED)
Sale-Leaseback Transactions
The Company, through McClain Group Leasing, Inc., has TRAC (Terminal
Rental Adjustment Clause) leasing programs in place with two financial
institutions in order to assist customers in obtaining financing for
certain products delivered by guaranteeing a portion of the residual
values of such products. Distribution of the Company's products in
this manner has been accomplished by (i) selling the products to the
independent financial institution leasing company, (ii) leasing the
products back and providing a specified minimum guaranteed residual
value to the leasing company, and (iii) subleasing the product to the
user customer.
The gross profit from the sale of these products is deferred and
recognized to income in proportion to the related gross rental charged
to expense over the term of the lease arrangement. Rental expense
for the leaseback of the products was $316,486 during the year ended
September 30, 1996. As of that date, minimum scheduled rental payments
under these operating lease arrangements in future years are summarized
as follows:
YEAR ENDING
SEPTEMBER 30 AMOUNT
------------ ----------
1997 $555,000
1998 555,000
1999 555,000
2000 555,000
2001 548,981
----------
GROSS MINIMUM RENTAL PAYMENTS $2,768,981
==========
Total residual values guaranteed by the Company under these leasing
arrangements approximates $380,000 as of September 30, 1996.
-41-
42
McCLAIN INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED SEPTEMBER 30, 1996, 1995 AND 1994
7. LINES OF CREDIT
The Company and certain of its subsidiaries are party to the following
line of credit agreements with financial institutions as of September
30, 1996 and 1995:
1 9 9 6 1 9 9 5
----------- -----------
Revolving lines of credit providing for maximum
availability of up to $21,000,000. Borrowings
are limited to 80% of the eligible accounts
receivable and 50% of qualified inventory and
are subject to interest at the bank's prime
rate (8.25% at September 30, 1996). $15,887,347 $20,093,093
Revolving line of credit providing for maximum
availability of up to $1,500,000. Borrowings
are limited to 85% of the cost of demonstrator
units and are subject to interest at the bank's
prime rate. 1,053,000 -
The above agreements are collateralized by
substantially all the assets of the Company and
contain various covenants requiring the Company
to maintain certain financial ratios. The
agreements also prohibit the Company from
incurring additional indebtedness other than
subordinated indebtedness and limit plant and
equipment acquisitions to $4.5 million per
fiscal year. These agreements expire in March
1998, at which time the Company expects to
obtain renewals upon the same or similar terms.
Line of credit providing for maximum
availability of up to $7,500,000. Borrowings
are limited to 80% of eligible lease
receivables and are subject to interest at the
bank's prime rate. The agreement is
collateralized by certain equipment leases held
by the Company's leasing subsidiary. This
agreement expires in March 1998, at which time
the Company expects to obtain a renewal upon
the same or similar terms. 5,149,620 2,908,785
----------- -----------
Total lines of credit borrowings $22,089,967 $23,001,878
=========== ===========
-42-
43
McCLAIN INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED SEPTEMBER 30, 1996, 1995 AND 1994
7. LINES OF CREDIT (CONTINUED)
Information as to borrowings and related interest rates pursuant to
these credit facilities are summarized as follows during the years
ended September 30:
1 9 9 6 1 9 9 5 1 9 9 4
----------- ----------- -----------
Average aggregate borrowings
outstanding during the year $19,607,621 $15,069,445 $ 9,027,614
Maximum amount of borrowings
outstanding during the year $21,573,937 $20,093,093 $10,058,476
Average interest rates on borrowings
outstanding at the end of the year 8.25% 9.00% 8.00%
Average interest rates on borrowings
outstanding during the year, based on
monthly averages 8.36% 8.93% 6.85%
8. LONG-TERM DEBT
Long-term debt as of September 30, 1996 and 1995 consisted of the
following obligations:
1 9 9 6 1 9 9 5
----------- -----------
Promissory notes to a bank, collateralized
by certain assets as disclosed in Note 7.
The notes are payable in monthly
installments of $160,000 plus interest at
rates ranging from prime to prime plus
1/2% as published in the Wall Street
Journal (effective rates of 8.25% to 8.75%
at September 30, 1996), maturing at
various dates through July 2002. $11,425,953 $ 6,820,396
Promissory notes to banks, collateralized
by commercial mortgages on certain real
estate, payable in monthly installments of
$27,578 plus interest ranging from the
bank prime rate to prime plus 1/4%
(effective rates of 8.25% to 8.50% at
September 30, 1996), maturing at various
dates through January 2000. 2,833,430 3,527,462
Lines of credit borrowings (Note 7) 22,089,967 23,001,878
----------- -----------
Total debt 36,349,350 33,349,736
Less current portion 2,132,201 2,179,449
----------- -----------
Long-term portion $34,217,149 $31,170,287
=========== ===========
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44
McCLAIN INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED SEPTEMBER 30, 1996, 1995 AND 1994
8. LONG-TERM DEBT (CONTINUED)
Scheduled aggregate principal maturities of long-term debt for years
succeeding September 30, 1996 are presented below:
YEAR ENDING
SEPTEMBER 30 AMOUNT
------------ -----------
1997 $ 2,132,201
1998 23,811,886
1999 2,940,233
2000 2,887,141
2001 1,464,065
Thereafter 3,113,824
-----------
TOTAL $36,349,350
===========
9. ACCRUED EXPENSES
Accrued expenses included on the accompanying consolidated balance
sheets consist of the following amounts at September 30:
1 9 9 6 1 9 9 5
---------- ----------
Compensation $ 374,385 $ 442,158
Vacation and holiday pay 495,097 513,988
Taxes 221,902 374,558
Insurance 307,822 321,713
Other 766,663 679,392
---------- ----------
TOTAL $2,165,869 $2,331,809
========== ==========
10. INCOME TAXES
The provision for income taxes for each of the three years in the
period ended September 30, 1996 consists of the following components:
1 9 9 6 1 9 9 5 1 9 9 4
---------- ---------- ----------
Current federal provision $ 570,000 $ 899,000 $ 954,000
Deferred provision 660,000 375,000 709,700
---------- ---------- ----------
TOTAL INCOME TAXES $1,230,000 $1,274,000 $1,663,700
========== ========== ==========
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45
MCCLAIN INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED SEPTEMBER 30, 1996, 1995 AND 1994
10. 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 6 1 9 9 5 1 9 9 4
----------------- ------------------ -----------------
Amount % Amount % Amount %
---------- --- ---------- --- ---------- ---
Provision computed at
statutory rate $1,229,000 34 $1,270,000 34 $1,671,000 34
Nondeductible expenses 31,000 1 26,000 1 14,000 -
Alternative minimum tax
credit - - - - (293,000) (6)
Other (30,000) (1) (22,000) (1) 271,700 6
---------- --- ---------- --- ---------- ---
$1,230,000 34 $1,274,000 34 $1,663,700 34
========== === ========== === ========== ===
The components of the deferred income tax provision are as follows:
1 9 9 6 1 9 9 5 1 9 9 4
------- ------- -------
Temporary differences resulting
primarily from differences in
depreciation, inventory, product
liability, bad debts and accrued
liabilities $626,000 $403,000 $399,000
Alternative minimum tax - - 293,000
Other, net 34,000 (28,000) 17,700
-------- -------- --------
$660,000 $375,000 $709,700
======== ======== ========
During the year ended September 30, 1994, the Company utilized its
remaining 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).
-45-
46
McCLAIN INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED SEPTEMBER 30, 1996, 1995 AND 1994
10. INCOME TAXES (CONTINUED)
The balance of the net deferred income tax liability as of September
30, 1996 and 1995 consists of temporary basis differences related to
the following assets and liabilities:
1 9 9 6 1 9 9 5
---------- ----------
Taxable differences:
Property and equipment $2,081,000 $2,138,000
Inventory 1,562,000 1,478,000
---------- ----------
Gross deferred tax liabilities 3,643,000 3,616,000
---------- ----------
Deductible differences:
Product liability 944,000 1,410,000
Accounts receivable 204,000 405,000
Accrued expenses 389,000 351,000
Other 6,000 10,000
---------- ----------
Gross deferred tax assets 1,543,000 2,176,000
---------- ----------
NET DEFERRED INCOME TAX LIABILITY $2,100,000 $1,440,000
========== ==========
The components which comprise gross deferred taxes are predominantly
noncurrent; as such, the entire related net liability is classified as
noncurrent.
11. EMPLOYEE PENSION AND PROFIT SHARING PLANS
The Company and certain subsidiaries have qualified pension and profit
sharing plans covering substantially all union employees.
Contributions to the plans were calculated at an hourly rate as
defined in the various union contracts. The Company also maintains a
defined contribution pension plan qualified pursuant to Section 401(k)
of the Internal Revenue Code for certain union employees and all
eligible non-union employees. The Company makes matching
contributions of specified percentages of participants' compensation.
The cost of all of these plans was $334,924 in 1996, $346,368 in 1995
and $314,249 in 1994.
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, 1996,
1995 and 1994.
-46-
47
McCLAIN INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED SEPTEMBER 30, 1996, 1995 AND 1994
12. SUPPLEMENTARY INCOME STATEMENT INFORMATION
YEAR ENDED SEPTEMBER 30
-------------------------------------------
1 9 9 6 1 9 9 5 1 9 9 4
---------- ---------- ----------
Components of Other, net:
Interest income $ 795,519 $ 410,221 $ 254,553
TRAC leasing operations, net 161,311 - -
Sales discounts (458,987) (603,775) (626,756)
Single business and state income taxes (176,975) (180,893) (96,198)
Amortization of goodwill and
organizational costs (126,514) (80,880) (80,880)
Loss on sale of equipment (3,981) (22,067) (24,672)
Other income, net 21,402 4,179 161,080
---------- ---------- ----------
$ 211,775 $ (473,215) $ (412,873)
========== ========== ==========
Charged to Operating Costs and Expenses:
Depreciation $2,424,421 $2,099,192 $1,855,311
Maintenance and repairs 874,331 1,153,509 728,850
Taxes, other than payroll and 368,186 396,276 388,348
income taxes
Advertising 394,616 212,007 194,133
13. 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 each of the years ended September
30, 1996, 1995 and 1994.
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
years ended September 30, 1996 and 1995.
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48
McCLAIN INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED SEPTEMBER 30, 1996, 1995 AND 1994
13. RELATED PARTY TRANSACTIONS (CONTINUED)
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.
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 $1,200,000,
$1,300,000, and $1,400,000, to the Company during the years ended
September 30, 1996, 1995 and 1994, respectively. These entities
received fees and commissions in connection with these transactions of
approximately $120,000, $129,000, and $118,000, respectively.
Product Sales
The Company had product sales of approximately $660,000, $239,000, and
$232,000 during the years ended September 30, 1996, 1995 and 1994,
respectively, to a business controlled by the President of McClain
Industries, Inc.
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49
McCLAIN INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED SEPTEMBER 30, 1996, 1995 AND 1994
14. 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, 1996, 1995 and 1994 the Company issued 3,555, 1,565, and 2,193
shares, respectively, of its common stock to such directors in
exchange for services rendered.
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.
-49-
50
McCLAIN INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED SEPTEMBER 30, 1996, 1995 AND 1994
14. INCENTIVE STOCK OPTION PLANS (CONTINUED)
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.
The following table presents a summary of stock option activity for
each of the years in the three year period ended September 30, 1996:
Shares Under Option
------------------------------------------
1 9 9 6 1 9 9 5 1 9 9 4
-------- ------- --------
Outstanding, beginning of year 373,251 326,000 384,000
Granted during the year - 50,667 66,000
Canceled during the year (11,111) - -
Exercised during the year (134,244) (3,416) (124,000)
-------- ------- --------
Outstanding, end of year (at
exercise prices ranging from $2.63
to $8.81 per share) 227,896 373,251 326,000
======== ======= ========
Eligible, end of year for exercise
currently (at prices ranging from
$2.63 to $8.81 per share) 172,117 252,166 208,888
======== ======= ========
15. 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.
-50-
51
McCLAIN INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED SEPTEMBER 30, 1996, 1995 AND 1994
15. COMMITMENTS AND CONTINGENCIES (CONTINUED)
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 consolidated balance sheet at September 30, 1996.
Environmental Matters
The Company's operations are subject to extensive federal, state and
local regulation under environmental laws and regulations concerning,
among other things, emissions into the air, discharges into the waters
and the generation, handling, storage, transportation, treatment and
disposal of waste and other materials. Inherent in manufacturing
operations and in owning real estate is the risk of environmental
liabilities as a result of both current and past operations, which
cannot be predicted with certainty. The Company has incurred and will
continue to incur costs, on an ongoing basis, associated with
environmental regulatory compliance in its business.
Labor Union Matters
Certain of the Company's hourly employees are represented by various
labor unions pursuant to collective bargaining agreements which expire
between June 1997 and November 1999.
On February 23, 1995, the National Labor Relations Board (NLRB)
conducted an election in response to a petition filed by a local union
(Union) to represent the hourly employees at the Company's Macon,
Georgia plant. The ballots of certain employees were challenged as
ineligible. The Union filed charges asserting that the Company
committed various unfair labor practices which affected the election
results and that the challenged ballots should be counted. On October
17, 1996 the NLRB upheld the unfair labor practice charges and on
November 5, 1996 the NLRB determined that the results of the election
were in favor of the Union. Management, based upon the opinion of
counsel, does not believe a final decision upholding the Union
certification or the unfair labor practice charges would have a
material adverse effect on the Company.
Other Legal Matters
The Company is also involved in routine litigation incidental to its
business. Management believes that the resolution of these matters
will not materially affect the consolidated financial statements.
-51-
52
McCLAIN INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED SEPTEMBER 30, 1996, 1995 AND 1994
15. COMMITMENTS AND CONTINGENCIES (CONTINUED)
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.
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, 1996 amount to approximately $223,000.
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. During the year ended September 30,
1996, the Company redeemed 31,627 shares at prices ranging from $4.25
to $4.75 per share.
Equipment Acquisition
In May 1996, the Company entered into a $1,220,000 commitment to
increase the capacity of an existing cut-to-length steel processing
equipment line in its Shelby Steel plant. Payments made by the
Company towards the completion of this contract were approximately
$366,000 as of September 30, 1996.
16. 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).
* * * * * *
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53
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 Manufacture and License Agreement dated as of November 2, 1992,
between Galion Dump Bodies, as Licensor, and the Company, as
Licensee (6)
10.6 Loan documents dated as of March 1, 1993, between the Company
and Galion Dump Bodies and E-Z Pack (6)
10.7 Guaranty Fee Agreement dated as of March 2, 1993, between
Galion Holding and the Company (6)
10.8 Loan documents dated June 29, 1993, between Standard Federal
Bank and Galion Holding, E-Z Pack and Galion Dump Bodies (6)
10.9 Term Note dated January 18, 1994 between Trust Company Bank of
Middle Georgia, N.A. and the Company (7)
10.10 Loan Agreement, dated September 15, 1994, between Standard
Federal Bank and the Company, McClain-Georgia, Shelby Steel,
Quality Tube and McClain-Ohio (7)
10.11 Loan Agreement, dated September 15, 1994, between Standard
Federal Bank and Galion Holding, E-Z Pack and Galion Dump Bodies (7)
53
54
10.12 Promissory Note (Term Loan), dated September 15, 1994, between
Standard Federal Bank, Galion Holding, E-Z Pack and Galion Dump
Bodies (7)
10.13 Promissory Note (Line of Credit), dated September 15, 1994,
between Standard Federal Bank, Galion Holding, E-Z Pack and
Galion Dump Bodies (7)
10.14 Purchase Agreement, dated as of March 30, 1993, between the
Company and Group Properties III (7)
10.15 Purchase Agreement, dated as of March 30, 1993, between the
Company and Group Properties (7)
10.16 Purchase Agreement, dated as of March 30, 1993, between the
Company and Group Properties of Georgia (7)
10.17 Letter Agreement, dated November 17, 1994, among the Company,
Kenneth D. McClain and Robert W. McClain (7)
10.18 Commercial Mortgage, Assignment of Leases and Rents, Security
Agreement and Financing Statement Dated February 6, 1995,
between Standard Federal Bank and the Company (8)
10.19 Commercial Mortgage, Assignment of Leases and Rents, Security
Agreement and Financing Statement Dated February 6, 1995,
between Standard Federal Bank and the Company (8)
10.20 Loan Agreement Between Standard Federal Bank and the Company,
McClain-Georgia, Shelby Steel, Quality Tubing and McClain-Ohio
dated February 6, 1995 (8)
10.21 Loan Agreement between Standard Federal Bank and Galion
Holding, E-Z Pack and Galion Dump Bodies dated February 6, 1995 (8)
10.22 Promissory Note (Line of Credit with Term Provisions) (First
Line of Credit) dated February 6, 1995 between Standard Federal
Bank, Galion Holding, E-Z Pack and Galion Dump Bodies (8)
10.23 Promissory Note (Line of Credit with Term Provisions) (Second
Line of Credit) dated February 6, 1995, between Standard Federal
Bank, Galion Holding, E-Z Pack and Galion Dump Bodies (8)
10.24 Second Amendment to Open-End Commercial Mortgage and
Assignment of Lease and Rentals (Secures Future Advances)
54
55
dated February 6, 1995, between Standard Federal Bank and E-Z Pack (8)
10.25 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)
10.26 First Amendment to Loan Agreement Between Standard Federal
Bank, the Company, McClain-Georgia, Shelby Steel, Quality Tubing
and McClain-Ohio Dated February 16, 1995 (8)
10.27 Amended and Restated Promissory Note (Line of Credit) dated
February 16, 1995, between Standard Federal Bank, Galion
Holding, E-Z Pack and Galion Dump Bodies (8)
10.28 First Amendment to Loan Agreement between Standard Federal
Bank, Galion Holding, E-Z Pack and Galion Dump Bodies dated
February 16, 1995. (8)
10.29 Amended and Restated Promissory Note (Line of Credit) dated
May 5, 1995, between Standard Federal Bank, Galion Holding, E-Z
Pack and Galion Dump Bodies (8)
10.30 Second Amendment to Loan Agreement between Standard Federal
Bank, Galion Holding, E-Z Pack and Galion Dump Bodies dated May
5, 1995 (8)
10.31 Second Amendment to Loan Agreement between Standard Federal
Bank, the Company, McClain-Georgia, Shelby Steel, Quality
Tubing, McClain-Ohio and EPCO dated June 22, 1995 (8)
10.32 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)
10.33 Third Amendment to Loan Agreement between Standard Federal
Bank, Galion Holding, E-Z Pack, Galion Dump Bodies and McClain
Group Sales of Florida dated June 22, 1995. (8)
10.34 Third Amended and Restated Promissory Note (Line of Credit)
dated June 22, 1995, between Standard Federal Bank, Galion
Holding, E-Z Pack, Galion Dump Bodies and McClain Group Sales of Florida (8)
55
56
10.35 Security Agreement dated June 22, 1995, between Standard
Federal Bank and McClain Group Sales of Florida (8)
10.36 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 E-Z Pack (8)
10.37 Certification of Resolution of Corporation Authority to Borrow
and Pledge Collateral dated June 22, 1995, between Standard
Federal Bank and McClain Group Sales of Florida (8)
10.39 Certification of Resolution of Corporation Authority to Borrow
and Pledge Collateral dated July 18, 1995, between Standard
Federal Bank and EPCO (8)
10.40 Security Agreement dated July 18, 1995, between Standard
Federal Bank and EPCO (8)
10.41 Amendment Agreement Promissory Note (Line of Credit) dated
September 25, 1995, between Standard Federal Bank, Galion
Holding, E-Z Pack, Galion Dump Bodies and McClain Group Sales of
Florida (8)
10.42 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, E-Z Pack,
and Galion Dump Bodies (8)
10.43 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, E-Z Pack,
and Galion Dump Bodies (8)
10.44 Amendment Agreement Promissory Note (Term Loan) dated
September 25, 1995, between Standard Federal Bank, Galion
Holding, E-Z Pack, Galion Dump Bodies and McClain Group Sales of
Florida (8)
10.45 First Amended and Restated Loan Agreement Between Standard
Federal Bank, Galion Holding, E-Z Pack, Galion Dump Bodies and
McClain Group Sales of Florida dated October 2, 1995 (8)
10.46 Amended and Restated Loan Agreement dated July 17, 1996,
between Standard Federal Bank and the Company, McClain-Georgia,
Shelby Steel, Tube, McClain-Ohio and EPCO. 59
56
57
10.47 Promissory Note (Line of Credit) dated July 17, 1996, between
Standard Federal Bank and the Company, McClain-Georgia, Shelby
Steel, Tubing, McClain-Ohio and EPCO. 83
10.48 Promissory Note (Term Loan) dated July 17, 1996, between
Standard Federal Bank and the Company, McClain-Georgia, Shelby
Steel, Tubing, McClain-Ohio and EPCO. 88
10.49 Promissory Note (Line of Credit with Term Provisions) dated
July 17, 1996, between Standard Federal Bank and the Company,
McClain-Georgia, Shelby Steel, Tubing, McClain-Ohio and EPCO. 93
10.50 Third Amended and Restated Promissory Note (Line of Credit(
between Standard Federal Bank, Galion Holding, E-Z Pack, Galion
Dump Bodies and McClain Group Sales of Florida. 98
10.51 Promissory Note (Line of Credit) between Standard Federal
Bank, Galion Holding, E-Z Pack, Galion Dump Bodies and McClain
Group Sales of Florida. 104
10.52 Loan Agreement dated July 17, 1996, between Standard Federal
Bank and Leasing 110
10.53 Promissory Note (Line of Credit) dated July 17, 1996, between
Standard Federal Bank and Leasing 126
10.54 Loan Agreement dated August 29, 1996, between Standard Federal
Bank and the Company, McClain-Georgia, Shelby Steel, Tubing,
McClain-Ohio, EPCO and McClain-Alabama. . 130
10.55 Promissory Note (Term Loan) dated July 17, 1996, between
Standard Federal Bank and the Company, McClain-Georgia, Shelby
Steel, Tubing, McClain-Ohio and EPCO. 151
10.56 Commercial Mortgage, Assignment of Leases and Rents, Security
Agreement and Financing Statement dated August 29, 1996, between
Standard Federal Bank and McClain-Alabama. 157
10.57 Security Agreement dated August 29, 1996, between Standard
Federal Bank and McClain-Alabama. 182
10.58 Master Lease Agreement dated July 15, 1995 between Fifth Third
Leasing Company and Leasing 194
10.59 Master Lease Agreement dated May 17, 1996 between NBD Bank and
Leasing 202
57
58
21 List of Subsidiaries 208
EXHIBIT 27 Financial Data Schedule
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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
58