1 FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 Quarterly Report Under Section 13 or 15(d) of The Securities Exchange Act of 1934 (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended December 31, 1996 [ ] TRANSITION REPORT PURSUANT OR SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to ------------ ----------- Commission File No. 0-7770 MCCLAIN INDUSTRIES, INC. (Exact name of registrant as specified in its charter) 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) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X . No . --- --- Indicate the number of shares outstanding of each of the issuer's classes of common stock as of February 3, 1997. Common Stock, No Par Value 4,695,702 - -------------------------- ---------------- Class Number of Shares 1 of 11 2 PART I. FINANCIAL INFORMATION Item 1. Financial Statements MCCLAIN INDUSTRIES, INC. CONDENSED CONSOLIDATED BALANCE SHEETS DECEMBER 31, SEPTEMBER 30, 1996 1996 (unaudited) ------------ ------------- ASSETS ------ CURRENT ASSETS - -------------- Cash and Cash Equivalents $ 1,247,284 $ 1,065,039 Accounts Receivable (Net) 15,760,321 20,412,950 Inventories 28,476,742 25,577,000 Net Investment in Sales Type Leases - Current Portion 2,370,000 1,878,000 Prepaid Expenses 540,373 191,645 ----------- ------------ Total Current Assets 48,394,720 47,246,634 ---------- ------------ Property and Equipment 39,393,928 38,147,522 Accumulated Depreciation (14,592,179) (13,899,589) ----------- ------------ Net Property and Equipment 24,801,749 24,247,933 ----------- ------------ Net Investment in Sales Type Leases - Less Current Portion 4,604,762 3,645,975 ----------- ------------ Other Assets 3,734,120 4,284,713 ----------- ------------ Total Assets $81,535,351 $79,425,255 =========== ============ LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Current Portion of Long-Term Debt 2,150,000 2,132,201 Accounts Payable 12,584,729 10,547,642 Accrued Liabilities 1,720,339 2,165,869 Federal and State Income Taxes 66,576 29,283 ----------- ------------ Total Current Liabilities 16,521,644 14,874,995 ----------- ---------- Deferred Income Taxes 2,100,000 2,100,000 ----------- ------------ Long Term Debt - Less Current Portion 34,608,304 34,217,149 ----------- ------------ Other Liabilities 2,811,080 2,775,856 ----------- ------------ Stockholders' Equity 25,494,323 25,457,255 ----------- ------------ Total Liabilities and Stockholders' equity $81,535,351 $79,425,255 =========== ============ See notes to condensed consolidated financial statements. 2 of 11 3 MCCLAIN INDUSTRIES, INC. CONDENSED STATEMENTS OF CONSOLIDATED OPERATIONS UNAUDITED Three Months Ended December 31 1996 1995 --------------------------- Net Sales $18,850,414 $16,394,682 Cost of Sales 14,980,170 12,957,066 ----------- ----------- Gross Profit 3,870,244 3,437,616 Selling General and Administrative Expenses 3,170,269 3,258,575 ----------- ----------- Operating Income 699,975 179,041 ----------- ----------- Other Income Interest Expense (724,161) (663,850) Other Income (Expense) 80,254 80,780 ----------- ----------- Total Other Income (Expense) (643,907) (583,070) Income (Loss) Before Income Taxes 56,068 (404,029) (Provision) Credit for Income Taxes (19,000) 137,000 ----------- ----------- Net Income $ 37,068 $ (267,029) =========== =========== Net income per common and common equivalent shares $ .01 $ (.06) =========== =========== Weighted average number of common and common equivalent shares outstanding 4,753,836 4,584,369 =========== =========== See notes to condensed consolidated financial statements 3 of 11 4 MCCLAIN INDUSTRIES, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS UNAUDITED THREE MONTHS ENDED DECEMBER 31, ----------------------- 1 9 9 6 1 9 9 5 -------- --------- Net income (loss) $ 37,068 $ (267,029) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities Depreciation and amortization 843,596 584,195 Changes in assets and liabilities which provided (used) cash Current assets excluding cash & equivalents 912,159 (107,335) Other assets (2,438,750) (851,827) Accounts payable 2,037,087 (1,270,423) Accrued expenses (445,530) (274,289) Federal income taxes 37,293 (312,597) Other liabilities 35,224 346,253 ---------- ---------- TOTAL ADJUSTMENTS 981,079 (1,886,023) ---------- ---------- NET CASH (PROVIDED BY) USED IN OPERATING ACTIVITIES 1,018,147 (2,153,052) ---------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES: Additions to property and equipment (1,244,856) (396,964) ---------- ---------- NET CASH USED IN INVESTING ACTIVITIES (1,244,856) (396,964) ---------- ---------- CASH FLOWS FROM FINANCING ACTIVITIES: Principal additions of long term debt 953,954 2,662,958 Principal reductions of long term debt (545,000) (450,250) Sale of common stock 0 263,945 ----------- ---------- NET CASH PROVIDED BY FINANCING ACTIVITIES 408,954 2,476,653 ----------- ---------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 182,245 (73,363) CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 1,065,039 1,173,370 ---------- ---------- CASH AND CASH EQUIVALENTS, END OF PERIOD $1,247,284 $1,100,007 ========== ========== See notes to condensed consolidated financial statements. 4 of 11 5 MCCLAIN INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) THREE MONTHS ENDED DECEMBER 31, 1996 1. Basis of Presentation The accompanying unaudited Consolidated Financial Statements of McClain Industries, Inc. and subsidiaries (the "Company") have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, such Statements do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation have been included. Operating results for the three month period ending December 31, 1996, are not necessarily indicative of the results that may be expected for any other period of for the year ending September 30, 1997. For further information, refer to the Consolidated Financial Statements and footnotes thereto included in the Company's annual report on Form 10-K for the year ended September 30, 1996. 2. Inventories Inventories at December 31, 1996 and September 30, 1996 are summarized as follows: (Unaudited) December 31, 1996 September 30, 1996 ----------------- ------------------ Material and Supplies $16,801,742 $11,677,000 Work in Process 4,270,000 6,776,000 Finished Goods 7,405,000 7,124,000 ----------- ----------- $28,476,742 $25,577,000 =========== =========== 3. Earnings per Common Share and Common Equivalent Share: Earnings per common share and common equivalent share were calculated using the weighted average number of common shares and common stock equivalents outstanding during the year. The weighted average number of common shares actually outstanding was increased by the number of shares issuable on the exercise of the dilutive stock options when the market price of the common shares exceeds the option price granted. This increase in the number of common shares was reduced by the number of common shares that are assumed to have been purchased with the proceeds from the exercise of the stock options; those purchases were assumed to have been made at the average price of the common stock during the period. 4. Depreciation For the three months ended December 31, 1996 and 1995, depreciation charges were $691,040 and $561,499, respectively. 5 of 11 6 MCCLAIN INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) THREE MONTHS ENDED DECEMBER 31, 1996 5. Contingencies Legal Proceedings The Company is from time to time subject to various claims from existing or former employees alleging gender, age or racial discrimination and anti-union activity, none of which are expected to have a material adverse affect on the Company. In addition, as a manufacturer of industrial products, the Company is, from time to time, subjected to various product liability claims. Such claims typically involve personal injury or wrongful death associated with the use or misuse of the Company's products. While such claims have not been material to the Company in any year and the Company believes that it maintains adequate product liability insurance, there can be no assurance that such insurance will continue to be available on terms acceptable to the Company. Any product liability claim not fully covered by insurance, as well as any adverse publicity from a product liability claim, could have a material adverse effect on the Company. The Company is currently defending a few legal proceedings involving product liability claims relating to McClain, Galion Dump and E-Z Pack brand products. Galion Holding, pursuant to an indemnification it provided Peabody Galion Division of Peabody International Corporation ("Peabody") in connection with the Galion Acquisition, is currently defending a number of legal proceedings involving product liability claims arising out of products manufactured by Peabody prior to the date of the Galion Acquisition. These claims are also covered by insurance. Although the Company has already settled many of these cases and the Company believes that it can continue to successfully resolve these product liability claims, there can be no assurance that the Company can continue to do so. The Company is not presently a party to any material legal proceedings except as described above. 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 (continued) 6 of 11 7 MCCLAIN INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) THREE MONTHS ENDED DECEMBER 31, 1996 5. Contingencies - (continued) 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 Comapany's future environmental costs. In particular, properties under federal and state scrutiny frequently result in significant clean-up costs and litigation expenses related to a party's clean-up obligation. However, the Company believes that the ever-increasing waste stream and the continuing initiatives of government authorities relating to environmental and waste disposal problems, including restrictions on landfill locations and operations and extensive regulation relating to the disposal of waste, create significant opportunities for companies in the solid waste handling equipment industry. In addition, the trend towards classifying more materials as "semi-hazardous" or "hazardous" waste may be expected to continue to make handling such materials more complex, thereby further facilitating the market for solid waste handling products. 7 of 11 8 MCCLAIN INDUSTRIES, INC. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. Overview The following discussion should be read in conjunction with the condensed consolidated financial statements, including the notes thereto, appearing elsewhere in this report. Selected financial data for the Company for the periods indicated: (Unaudited) Three Months Ended DECEMBER 31, ---------------------- 1996 1995 ---- ---- Net Sales $18,850,414 $16,394,682 Net Income (Loss) 37,068 (267,029) Net Earnings (Loss) Per Common and Common Equivalent Share $ .01 $ (.06) (Unaudited) As of As of December 31, September 30, 1996 1996 ---------------- ---------------- Working Capital $ 31,873,076 $ 32,371,639 Total Assets 81,535,351 79,425,255 Long-Term Debt 34,608,304 34,217,149 Stockholder's Investment 25,494,323 25,427,255 Weighted Average Number of Common and Common Equivalent Shares Outstanding 4,753,836 4,752,050 Current Ratio 2.92:1 3.18:1 Long-Term Debt to Equity 1.36:1 1.34:1 8 of 11 9 MCCLAIN INDUSTRIES, INC. The following table presents, as a percentage of net sales, certain selected financial data for the Company for the periods indicated: (Unaudited) Three Months Ended December 31, ------------------ 1996 1995 ---- ---- Net Sales 100.00% 100.00% Cost of Sales 79.47 79.03 ------ ------ Gross Profit 20.53 20.97 Selling, General & Administrative Expenses 16.82 19.88 ------ ------ Operating Income 3.71 1.09 Other Expenses (3.41) (3.56) ------ ------ Income Before Income Taxes .30 (2.47) Provision for Income Taxes .10 (.83) ------ ------- Net Income .20% (1.64)% ======= ======= 9 of 11 10 McCLAIN INDUSTRIES, INC. Net sales increased 15.00% to $18.9 million for the quarter ended December 31, 1996 (Quarter 1996) from $16.4 million for the quarter ended December 31, 1995 (Quarter 1995). The increase in sales is attributable to increased volume resulting from the acquisition of the Demopolis, Alabama container manufacturing facility in August 1996 (See the annual report on Form 10-K for the year ended September 30, 1996). Cost of sales as a percentage of net sales increased to 79.47% for the Quarter 1996 from 79.03% for the Quarter 1995, due primarily to certain costs incurred in the continuing reorganization of the Georgia plant. Selling, General and Administrative expenses decreased to 16.82% of net sales for the Quarter 1996 as a result of the increased sales volume and the restructing of certain administrative processes. DISCUSSION FINANCIAL CONDITION The Company had working capital of $31.9 million at December 31, 1996 compared to $32.4 million at September 30, 1996. The ratio of current assets to current liabilities was 2.92 to 1 at December 31, 1996 compared to 3.18 to 1 at September 30, 1996. The Company's cash and cash equivalents totaled $1.25 million at December 31, 1996. Cash flows from operations were $1.0 million for the quarter ended December 31, 1996, primarily as a result of increased receivable collections. 10 of 11 11 SIGNATURES Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorizd. McCLAIN INDUSTRIES, INC. Date: FEBRUARY 3, 1997 By: /s/ Carl Jaworski -------------------- ------------------------ Carl Jaworski, Treasurer Date: FEBRUARY 3, 1997 By: /s/ Kenneth D. McClain -------------------- ------------------------- Kenneth D. McClain, President 11 of 11 12 EXHIBIT INDEX Exhibit No. Description - ------- ----------- 27 Financial Data Schedule