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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, 1997
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
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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 11, 1997, the aggregate market value of the Registrant's
voting stock held by nonaffiliates of the Registrant was $8,509,392 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 11, 1997, there were 4,751,373 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-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 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
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equipment accounted for approximately 75%, of the Company's consolidated net
sales for the fiscal year ended September 30, 1997.
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 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
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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, 1997, the Company's consolidated
net sales were divided approximately 47% to distributors, 46% to solid waste
handling companies, and 7% to other entities.
During the fiscal year ended September 30, 1997, approximately 14.1% of
the Company's total sales were made to Waste Management, Inc. No other single
customer accounted for more than 10% of the Company's net sales for the fiscal
years ended September 30, 1996 or 1995. 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.
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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, 1997, there were
approximately 277 authorized Company dealers located in numerous states and 19
authorized Company dealers, licensees and commissioned district managers in 10
foreign countries, each of which is independently owned. The Company is
dependent on such dealers for a significant portion of its revenues. These
dealers typically specialize in specific products and areas and, accordingly,
have specific knowledge of and contacts in particular markets. The Company
believes that its dealers have enhanced and will continue to enhance the scope
of the Company's marketing and sales efforts and have, to a certain extent,
also enabled the Company to avoid certain significant costs associated with
creating a more extensive direct sales network.
The Company advertises its products under trade names and under its name
in trade journals and brochures. Other marketing efforts include articles in
trade publications, attendance at trade shows and presentations by the
Company's personnel at industry trade conferences.
The Company, through Leasing, also provides both sales-type financing and
operating leases. At September 30, 1997, Leasing held net lease receivables of
approximately $8.2 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
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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 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 91.8%, 89%, and 78.6% 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, 1997, 1996 and 1995,
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.
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,
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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 $16.7
million and $11.5 million at September 30, 1997 and 1996, 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, 1997, 1996 and 1995, the Company had inventory
of $31.0 million, $25.6 million and $31.2 million, respectively.
EMPLOYEES
The Company had approximately 740 employees as of December 12, 1997.
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, 2000. 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 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
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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:
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.
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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. This facility was
reorganized, during Fiscal 1997 to manufacture dump bodies, and roll-off hoists
to sell principally in the Southeast.
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 30% of capacity. The Alabama facility is
currently operating at 60% 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 60% 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 8
and 9 of Notes to Consolidated Financial Statements.
ITEM 3. LEGAL PROCEEDINGS
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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 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
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HIGH LOW
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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 6.5 4.875
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FISCAL YEAR ENDED SEPTEMBER 30, 1997
First Quarter 7.25 4.75
Second Quarter 6.75 4.625
Third Quarter 5.50 4.25
Fourth Quarter 5.0 4.25
On December 11, 1997, the last reported sales price for the Common Stock
as reported by Nasdaq/NMS was $4.25. As of such date there were approximately
241 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:
================================================================================================
1997 1996 1995 1994 1993
------------ ----------- ----------- ----------- -----------
Gross Sales $91,329,737 $84,680,797 $82,263,202 $79,166,990 $61,794,822
Sales Net of
Customer Discounts $90,061,170 $84,221,810 $81,569,427 $78,540,233 $61,536,111
Net Income $(1,703,780) $2,384,957 $2,462,755 $3,250,996 $2,110,838
Net Earnings Per
Common and Common
Equivalent Share,(1), (2) $(.36) $.50 $.53 $.71 $.51
AS OF SEPTEMBER 30,
Working Capital ----------------------------------------------------------------
Total Assets $33,520,003 $32,371,639 $33,868,556 $21,997,601 $10,664,115
Long-Term Debt $87,185,567 $79,425,255 $73,899,197 $58,189,747 $49,562,268
Stockholders' $38,513,490 $34,217,149 $31,170,287 $18,039,869 $7,022,215
Investment $23,804,091 $25,457,255 $22,841,274 $19,359,709 $15,794,210
Weighted Average
Number of Common
Equivalent Shares
Outstanding(1), (2) 4,729,281 4,752,050 4,657,476 4,608,137 4,104,076
Current Ratio 2.63:1 3.18:1 3.37:1 2.49:1 1.55:1
Long Term Debt to
Equity 1.62:1 1.34:1 1.36:1 0.93:1 0.44:1
================================================================================================
(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.
11
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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,
-------------------------------------------
1997 1996 1995 1994 1993
------- ------- ------- ------- -------
Net Sales 100.00% 100.00% 100.00% 100.00% 100.00%
Cost of Sales 82.74 79.65 78.35 78.12 78.13
------ ------ ------ ------ ------
Gross Profit 17.26 20.35 21.65 21.88 21.87
Selling, General &
Administrative
Expenses 15.15 13.60 14.52 13.48 15.00
Restructuring and
Impairment Charge 1.95 -- -- -- --
------ ------ ------ ------ ------
Operating Profit .16 6.75 7.13 8.40 6.87
Other Expense 2.37 2.48 2.59 2.19 2.18
------ ------ ------ ------ ------
Income (Loss) Before
Income Taxes (2.21) 4.27 4.54 6.21 4.69
Income Taxes (Benefit) (.32) 1.45 1.55 2.09 1.27
------ ------ ------ ------ ------
Net Income (Loss) (1.89)% 2.82% 2.99% 4.12% 3.42%
====== ====== ====== ====== ======
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, 1997 to year ended September 30, 1996
Net sales for the fiscal year ended September 30, 1997 increased 6.93% to
$90.1 million compared to $84.2 million for the fiscal year ended September 30,
1996. This increase was primarily due to the acquisition of the Alabama
facility in late fiscal 1996 which resulted in an increase in container sales
of approximately $10.0 million. Sales of the Company's other products, with
the exception of balers which declined approximately $1.8 million, remained
essentially stable during Fiscal 1997.
Gross profit as a percentage of sales declined to 17.26% for fiscal 1997
from 20.35% for Fiscal 1996, and a net loss from operations of approximately
$1.7 million was generated. The decline in gross profit and the net loss from
operations were due in large part to a change in the products produced at the
Company's Georgia facility, the decision to close the Epco facility as a result
of slumping baler sales, certain errors in the Company's pricing models which
resulted in the Company setting inadequate prices for its products, and a
slowdown in the capital expenditures of many of the national and regional
hauling companies.
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In Fiscal 1997, the Company transferred the production of its roll off
containers from Georgia to Alabama and the production of its roll-off hoists
from Michigan to Georgia. In addition, the Company completely redesigned its
roll-off hoists. The time spent by the Company in implementing these changes
combined to create a significant loss in production time at Georgia, causing a
pretax loss of approximately $1.7 million at that facility. These shifts in
production also created certain temporary losses in production time at both the
Alabama and Michigan facilities further reducing margins.
The recycled paper market remained soft throughout the year causing baler
sales to slump. As a result, the Company had a pretax operating loss of
approximately $0.6 million. Because of this slump in baler sales and
management's projection of continued depressed future baler sales, management
determined that it would be unable to profitably produce balers at the Epco
facility. The Company has decided to close the Epco facility and move the baler
production to one of its Ohio facilities which has excess capacity, thereby
eliminating the overhead expenses related to the Epco facility. As a result of
this decision, the Company recognized in Fiscal 1997 a pretax restructuring and
impairment charge of approximately $1.75 million, which consisted of goodwill of
$1.15 million, the write-down of leasehold improvements and other assets of $0.3
million, and costs associated with the closing of the leased facility of $0.3
million.
In Fiscal 1993, Company-wide accounting and manufacturing software was
installed. Initially, the Company focused on utilizing the accounting modules
of the software. It was not until Fiscal 1995 that the Company began to
incorporate the manufacturing modules of the software. During the phase-in of
these manufacturing modules, certain cost factors related primarily to scrap and
other safety margins which the Company historically used in its pricing models
were overlooked causing the Company to set the prices of its goods too low.
This error went undetected until the end of Fiscal 1997, at which time
management performed a detailed evaluation of all pricing models and product
costs, which prompted an increase in the selling prices of most of the
Company's products in the range of 2% to 4%, effective December 1, 1997.
The solid waste hauling industry is currently going through a period of
consolidations and reorganizations. Certain regional companies have merged or
acquired smaller local haulers, and the two largest hauling companies in the
United States are currently undergoing reorganizations after years of rapid
growth. Because of these consolidations and reorganizations, many of the
national and larger regional hauling companies have reduced their capital
expenditures, creating significant downward pressure on the Company's selling
prices and lower margins.
The Company's inventory levels increased to $31.0 million at the end of
Fiscal 1997 from $25.6 million at the end of Fiscal 1996. This increase was
primarily due to the Company's inability to adequately adjust its purchasing
plan in response to the slowdown in capital purchases by certain national
hauling companies discussed above.
Selling, general and administrative expenses increased to 15.15% as a
percentage of net sales during Fiscal 1997 compared to 13.60% for Fiscal 1996.
This increase was attributed primarily to increased selling expenses, increased
bad debt write-offs, and a more conservative product liability accrual. To
strengthen its position in the market as a provider of a complete line of solid
waste hauling equipment, the Company decided to increase its advertising,
expand its trade show activity and hire additional sales people. The Company
believes that this approach will have positive long term effects on the
Company's sales as the consolidations in the solid waste hauling industry
continue. The Company suffered a significant bad debt write-off related to the
failure of a national trailer manufacturer and experienced certain collection
problems with some of the companies involved in the consolidations in the solid
waste hauling industry. The Company does not anticipate further collection
problems related to these consolidations.
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 $84.2
million compared to sales of $81.7 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 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
13
14
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.
LIQUIDITY AND CAPITAL RESOURCES
The Company's required level of working capital during Fiscal 1997 was
consistent with that of Fiscal 1996, 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 $33.5 million at
September 30, 1997, compared to $32.4 million at September 30, 1996. The ratio
of the Company's current assets to its current liabilities was 2.63:1 at
September 30, 1997 compared to 3.18:1 at September 30, 1996. The Company's
cash and short term investments totaled $2.4 million at September 30, 1997.
Cash flows provided by operating activities were $1.1 million during Fiscal
1997. The Company also invested approximately $4.0 million in new machinery
and equipment during Fiscal 1997. The Company's leasing subsidiary financed
approximately $2.6 million of new leases in Fiscal 1997.
The Company has begun preliminary negotiations with its primary lender to
reduce the interest rate currently charged on its borrowed funds and to
restructure the covenants in its various debt agreements. There can be no
assurance that negotiations will result in more favorable debt terms to the
Company. Additionally, the Company currently has set its budget for capital
expenditures in Fiscal 1998 to approximately $2.0 million as compared to $4.1
million in Fiscal 1997. Despite the reduction in the Company's net income
during 1997, management believes that the Company cash flow, together with the
credit available to it under existing, or revised, debt facilities, will
provide it with adequate cash for its working capital needs for the next 12
months.
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, 1997, the Company had borrowed approximately $19.4
million under the working capital line and $0.8 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 $10.0 million with borrowings limited to 80% of eligible lease
receivables. At September 30, 1997 approximately $6.3 million had been drawn
on this facility.
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 Company has obtained
waivers from Standard for the Company's non-compliance with certain of such
covenants as of September 30, 1997. The revolving credit agreements bear
interest at prime and expire in March 1999, 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, 1997, approximately $5.0 million
had been drawn on this facility.
14
15
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.
15
16
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) 56 Chairman of the Board, Chief
Executive Officer and President 3/68
Robert W. McClain(1) 61 Senior Vice President, Assistant
Secretary and Director 3/68
Raymond Elliott 63 Director 8/90
Walter J. Kirchberger 62 Director 11/95
Carl Jaworski 54 Secretary 10/72
Mark S. Mikelait 37 Treasurer 9/94
(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 a Vice President of First of America Insurance Group since October
1996. Prior to that he was President and a director of Elliott & Sons
Insurance Agency, Inc. and Michigan Benefit Plans Insurance Agency, Inc. since
1967. Mr. Elliott also serves as a director of the Boys and Girls Club of
Troy, a charitable organization located in Troy, Michigan.
WALTER J. KIRCHBERGER was elected to the Board of Directors in November
1995. Mr. Kirchberger is 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 has served as Secretary since October 1972. Mr. Jaworski
was also a director and the Treasurer of the Company from October 1972 until
April 1992. Mr. Jaworski also serves as Secretary and a director of Shelby
Steel and Secretary of McClain-Georgia. Mr. Jaworski is the Secretary of E-Z
Pack and a Vice President and Secretary of Sales.
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17
MARK S. MIKELAIT was elected Treasurer of the Company in May 1997 and
joined the company in September 1994. Prior to that time Mr. Mikelait, a CPA,
was employed as a Senior Manager by Rehmann Robson, the company's independent
auditors, beginning in November 1985.
The Company is required to identify each person who was an officer,
director or beneficial owner of more than 10% of the Company's registered
equity securities during the Company's most recent fiscal year and who failed
to file on a timely basis reports required by Section 16(a) of the Securities
Exchange Act of 1934. Based solely upon its review of copies of such reports
received by it during or with respect to the fiscal year ended September 30,
1997, the Company believes that all officers, directors and beneficial owners
of more than 10% of the Company's registered equity securities timely filed all
required reports.
ITEM 11. EXECUTIVE COMPENSATION
COMPENSATION OF EXECUTIVE OFFICERS
The following tables set forth all cash compensation paid to the Chief
Executive Officer of the Company and the only other executive officers whose
total annual salary and bonus from the Company exceeded $100,000 during the
fiscal year ended September 30, 1997.
SUMMARY COMPENSATION TABLE
Annual Compensation Long Term Compensation
- ---------------------------------------- ----------------------
Name and Fiscal Salary Options/
Principal Position Year Amount($) SARs(#)
- -------------------- ------- --------- ----------
Kenneth D. McClain, 1997 $226,885 ---
President/ CEO
1996 275,000 ---
1995 219,675 13.333
Robert W. McClain, 1997 $183,335 ---
Senior Vice President
1996 246,832 ---
1995 216,582 6,666
Carl Jaworski 1997 $107,207 ---
Secretary
1996 --- ---
1995 --- ---
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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 1997 Realized Fiscal Year-End Fiscal Year-End(2)
--------------------------- ---------------------------
Not Not
Exercisable Exercisable(1) Exercisable Exercisable
----------- -------- ----------- -------------- ----------- -----------
Kenneth D. McClain -0- -0- 26,975 8,879 $ -0- $ -0-
Robert W. McClain -0- -0- 22,824 4,444 $ -0- $ -0-
(1) Stock options granted November 16, 1995 pursuant to the Company's 1989
Incentive Stock Plan (the "Incentive Plan"). Options must be exercised
by November 15, 2000. Exercise price is $7.31 per share.
(2) Value based on the average of the September 30, 1997 closing bid high and
low price which was $4.63 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, 1997, 5,466 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
18
19
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 1,464,339(3) 30.82%
Robert W. McClain
6200 Elmridge Road
Sterling Heights, MI 48310 1,131,246(4) 23.81%
June McClain
6200 Elmridge Road
Sterling Heights, MI 48310 337,178 7.10%
Lisa McClain Pfeil
6200 Elmridge Road
Sterling Heights, MI 48310 310,474(5) 6.53%
Raymond Elliott
290 Town Center
P.O. Box 890
Troy, Michigan 48084 13,182 0.28%
Walter Kirchberger
2301 West Big Beaver Rd., Suite 800
Troy, Michigan 48084 3,570 0.08%
All current executive officers and
directors as a group (6 persons) 2,749,163(6) 57.86%
(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 4,751,373 shares of Common Stock issued and outstanding as of
December 11, 1997. 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 80,465 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
19
20
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 $560,000 in Fiscal 1997 to McClain
Leasing Corporation, an entity controlled by certain officers and directors of
the Company.
First of America Insurance Group, Inc., an entity that employs Raymond
Elliott, a director of the Company, provided insurance to the Company during
Fiscal 1997. Sales from this entity to the Company aggregated approximately
$1.1 million during Fiscal 1997, for which this entity 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.
(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.
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21
The Company filed a report on Form 8-K during September 1996 regarding
its acquisition of the Demopolis, Alabama facility.
21
22
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
Dated: December 29, 1997 McCLAIN INDUSTRIES, INC.
By:/s/ Kenneth D. McClain
----------------------------------
Kenneth D. McClain, President
(Principal Executive Officer)
And By:/s/ Mark S. Mikelait
------------------------------
Mark S. Mikelait, Treasurer
(Principal Financial Officer and
Principal Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Dated: December 29, 1997 /s/ Kenneth D. McClain
-------------------------------
Kenneth D. McClain, Director
Dated: December 29, 1997 /s/ Robert W. McClain
-------------------------------
Robert W. McClain, Director
Dated: December 29, 1997 /s/ Raymond Elliott
-------------------------------
Raymond Elliott, Director
Dated: December 29, 1997 /s/ Walter J. Kirchberger
-------------------------------
Walter J. Kirchberger, Director
22
23
SECURITIES AND EXCHANGE COMMISSION
- --------------------------------------------------------------------------------
Washington, D. C.
Form 10-K
For Corporations
ANNUAL REPORT
FOR THE YEARS ENDED SEPTEMBER 30, 1997, 1996 and 1995
MCCLAIN INDUSTRIES, INC. AND SUBSIDIARIES
(NAME OF REGISTRANT)
CONSOLIDATED FINANCIAL STATEMENTS
AND
INDEPENDENT AUDITORS' REPORT
24
MCCLAIN INDUSTRIES, INC. AND SUBSIDIARIES
INDEX TO THE CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES
- --------------------------------------------------------------------------------
CONSOLIDATED FINANCIAL STATEMENTS
Independent Auditors' Report
Consolidated Balance Sheets - September 30, 1997 and 1996
Consolidated Statements of Operations for the years ended September 30, 1997,
1996 and 1995
Consolidated Statements of Stockholders' Investment for the years ended
September 30, 1997, 1996 and 1995
Consolidated Statements of Cash Flows for the years ended September 30, 1997,
1996 and 1995
Notes to Consolidated Financial Statements
SCHEDULES
The information required to be submitted in Schedule II - Valuation and
Qualifying Accounts is included in the consolidated financial statements and
notes thereto.
The following schedules are omitted as not required or not applicable:
I, III, IV and V
25
INDEPENDENT AUDITORS' REPORT
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, 1997 and 1996, and the
related consolidated statements of operations, stockholders' investment, and
cash flows for each of the three years in the period ended September 30, 1997.
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, 1997 and 1996, and the results of
their operations and their cash flows for each of the three years in the period
ended September 30, 1997 in conformity with generally accepted accounting
principles.
Farmington Hills, Michigan
December 19, 1997
26
MCCLAIN INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1997 AND 1996
- --------------------------------------------------------------------------------
ASSETS (NOTES 8 AND 9) 1 9 9 7 1 9 9 6
---------------- ----------------
CURRENT ASSETS
Cash and cash equivalents $ 2,402,421 $ 1,065,039
Accounts receivable, net of allowance for doubtful accounts
of $500,000 ($600,000 in 1996) (NOTE 4) 16,589,263 18,502,950
Inventories (NOTE 5) 31,011,766 25,577,000
Net investment in sales-type leases, current portion 2,900,000 1,910,000
Prepaid expenses 362,029 191,645
Refundable federal and state income taxes 837,638 -
---------------- ----------------
TOTAL CURRENT ASSETS 54,103,117 47,246,634
---------------- ----------------
PROPERTY, PLANT AND EQUIPMENT, NET (NOTE 7) 25,240,624 24,247,933
---------------- ----------------
OTHER ASSETS
Net investment in sales-type leases, net of
current portion (NOTE 6) 5,348,773 3,706,350
Goodwill, net of amortization (NOTE 2) 1,704,132 3,453,772
Other 752,878 390,141
Equipment under construction 36,043 380,425
---------------- ----------------
TOTAL OTHER ASSETS 7,841,826 7,930,688
---------------- ----------------
TOTAL ASSETS $ 87,185,567 $ 79,425,255
================ ================
The accompanying notes are an integral part of these consolidated financial
statements.
27
- --------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' INVESTMENT 1 9 9 7 1 9 9 6
---------------- ----------------
CURRENT LIABILITIES
Accounts payable $ 14,132,646 $ 10,547,642
Current portion of long-term debt 2,800,000 2,132,201
Accrued expenses (NOTE 10) 2,790,468 2,165,869
Accrued restructuring costs (NOTE 2) 610,000 -
Deferred income (NOTE 6) 250,000 -
Federal and state income taxes - 29,283
---------------- ----------------
TOTAL CURRENT LIABILITIES 20,583,114 14,874,995
Long-term debt, net of current portion (NOTE 9) 38,513,490 34,217,149
Product liability (NOTE 16) 2,151,872 2,775,856
Deferred income taxes (NOTE 11) 2,100,000 2,100,000
---------------- ----------------
TOTAL LIABILITIES 63,348,476 53,968,000
---------------- ----------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' INVESTMENT
Common stock, no par value, authorized 10,000,000 shares;
issued and outstanding, 4,737,622 shares
(4,693,916 shares in 1996) (NOTE 15) 5,887,486 5,803,870
Retained earnings 18,453,605 20,157,385
Less amount due from officers (NOTE 13) (504,000) (504,000)
---------------- ----------------
TOTAL STOCKHOLDERS' INVESTMENT 23,837,091 25,457,255
---------------- ----------------
$ 87,185,567 $ 79,425,255
TOTAL LIABILITIES AND STOCKHOLDERS' INVESTMENT ================ ================
28
MCCLAIN INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED SEPTEMBER 30, 1997, 1996 AND 1995
- --------------------------------------------------------------------------------
1 9 9 7 1 9 9 6 1 9 9 5
------------ ------------ ------------
Net sales $ 90,061,170 $ 84,221,810 $ 81,659,427
Cost of sales 74,517,303 67,086,240 63,982,076
------------ ------------ ------------
GROSS PROFIT 15,543,867 17,135,570 17,677,351
Selling, general and administrative expenses 13,647,757 11,450,466 11,854,579
Restructuring and impairment charges (NOTE 2) 1,755,000 - -
------------ ------------ ------------
INCOME FROM OPERATIONS 141,110 5,685,104 5,822,772
------------ ------------ ------------
OTHER INCOME (EXPENSE)
Interest expense (3,448,867) (3,044,398) (2,478,350)
Interest income 1,215,877 795,519 410,221
Other, net 101,100 178,732 (17,888)
------------ ------------ ------------
OTHER EXPENSE, NET (2,131,890) (2,070,147) (2,086,017)
------------ ------------ ------------
INCOME (LOSS) BEFORE INCOME TAXES (1,990,780) 3,614,957 3,736,755
Income taxes (benefit) (NOTE 11) (287,000) 1,230,000 1,274,000
------------ ------------ ------------
NET INCOME (LOSS) $ (1,703,780) $ 2,384,957 $ 2,462,755
============ ============ ============
Net income (loss) per common and
common equivalent shares ($0.36) $0.50 $0.53
============ ============ ============
Weighted average common
and common equivalent shares outstanding 4,729,281 4,752,050 4,657,476
============ ============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
29
MCCLAIN INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' INVESTMENT
FOR THE YEARS ENDED SEPTEMBER 30, 1997, 1996 AND 1995
- --------------------------------------------------------------------------------
COMMON STOCK AMOUNT
---------------------------- RETAINED DUE FROM
SHARES AMOUNT EARNINGS OFFICERS TOTALS
------------- ------------- --------------- ---------------- ---------------
Balance at October 1,
1994 4,447,160 $ 4,554,036 $ 15,309,673 $ (504,000) $ 19,359,709
Shares issued 4,981 19,899 - - 19,899
Shares repurchased (98) (1,089) - - (1,089)
Common stock issued in
connection with EPCO
acquisition 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
Shares issued 137,799 378,024 - - 378,024
Shares repurchased (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
Shares issued 56,971 157,695 - - 157,695
Shares repurchased (24,467) (136,968) - - (136,968)
Common stock issued in
connection with EPCO
acquisition 11,202 62,889 - - 62,889
Net loss - - (1,703,780) - (1,703,780)
------------- ------------- --------------- ---------------- ---------------
Balance at September 30,
1997 4,737,622 $ 5,887,486 $ 18,453,605 $ (504,000) $ 23,837,091
============= ============= =============== ================ ===============
The accompanying notes are an integral part of these consolidated financial
statements.
30
MCCLAIN INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED SEPTEMBER 30, 1997, 1996 AND 1995
- --------------------------------------------------------------------------------
1 9 9 7 1 9 9 6 1 9 9 5
-------------- --------------- ---------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ (1,703,780) $ 2,384,957 $ 2,462,755
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities
Depreciation and amortization 4,893,701 2,550,935 2,179,992
Deferred income taxes - 660,000 375,000
Provision for doubtful accounts 432,511 49,400 205,000
Loss or disposal of plant and equipment 4,032 3,981 22,067
Common stock issued to directors for services 28,494 18,613 11,510
Common stock issued in connection
with EPCO acquisition 62,889 - -
Net changes in operating assets and liabilities
which provided (used) cash, net of effects in
1996 and 1995 of business acquisitions:
Accounts receivable 1,481,176 (3,987,569) (3,067,591)
Inventories (5,434,766) 6,072,095 (7,721,234)
Net investment in sales-type leases (2,632,423) (2,055,386) (1,684,275)
Prepaid expenses and other assets (1,086,661) (300,974) (195,718)
Accounts payable 3,585,004 1,357,333 (1,909,327)
Accrued expenses 1,455,314 (735,656) 277,852
--------------- --------------- ---------------
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES 1,085,491 6,017,729 (9,043,969)
--------------- --------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of plant and equipment (4,080,499) (1,991,316) (3,995,109)
Payments on liabilities assumed upon the
Galion acquisition (623,984) (1,371,214) (809,902)
Proceeds from sale of plant and equipment - 22,331 30,112
--------------- --------------- ---------------
NET CASH USED IN INVESTING ACTIVITIES (4,704,483) (3,340,199) (4,774,899)
--------------- --------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from long-term debt 10,078,495 2,139,126 22,927,180
Repayments of long-term debt (5,114,354) (5,137,398) (9,639,955)
Sale of common stock under stock option plan 129,201 359,411 8,389
Repurchase of common stock (136,968) (147,000) (1,089)
--------------- --------------- ---------------
Net cash provided by (used in) financing activities 4,956,374 (2,785,861) 13,294,525
--------------- --------------- ---------------
Net increase (decrease) in cash and
cash equivalents 1,337,382 (108,331) (524,343)
Cash and cash equivalents, beginning of year 1,065,039 1,173,370 1,697,713
--------------- --------------- ---------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 2,402,421 $ 1,065,039 $ 1,173,370
=============== =============== ===============
The accompanying notes are an integral part of these consolidated financial
statements.
31
MCCLAIN INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED SEPTEMBER 30, 1997, 1996 AND 1995
- --------------------------------------------------------------------------------
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.
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). 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). In August 1996, McClain of Alabama,
Inc. was formed and acquired a roll-off container manufacturing
facility (Note 2). All significant intercompany accounts and
transactions have been eliminated.
Concentration Risks
The Company grants trade credit to its customers in the normal course
of business. No collateral is required. Concentrations of credit risk
with respect to trade receivables generally are limited due to the
relatively large number of customers comprising the Company's customer
base and its geographic dispersion. The Company maintains reserves for
potential credit losses and such losses have historically been
insignificant and generally within management's expectations.
Sales to a major customer aggregated $12,896,000 or approximately 14.1%
of total net sales for the year ended September 30, 1997.
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.
32
MCCLAIN INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED SEPTEMBER 30, 1997, 1996 AND 1995
- --------------------------------------------------------------------------------
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.
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
The Company considers all highly liquid investments with an original
maturity of three months or less when purchased to be cash equivalents.
Cash in the amount of $1,046,193 at September 30, 1997 is restricted in
accordance with the terms of debt agreements as further discussed in
Note 9.
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, whereby sales and gross profit are
recognized at the inception of the lease. Accordingly, an investment is
reflected on the accompanying balance sheets in an amount equal to the
gross minimum lease payments receivable less 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.
33
MCCLAIN INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED SEPTEMBER 30, 1997, 1996 AND 1995
- --------------------------------------------------------------------------------
1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Goodwill
Goodwill representing the purchase price in excess of the fair values
of net assets acquired is amortized on a straight line basis. The
amortization period is estimated based upon management's judgements and
generally ranges from 5 to 40 years. Accumulated amortization as of
September 30, 1997 and 1996 was $440,350 and $174,053, 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 (see Note 2).
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 and
accounts payable approximate their fair values due to the short-term
maturity of these financial instruments. The carrying amounts of
long-term debt approximate their fair values because the interest rates
are representative of, or change with, market rates.
New Accounting Pronouncements
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings
Per Share", which established new standards for computing and
presenting earnings per share ("EPS"). SFAS No. 128 is effective for
financial statements issued for periods ending after December 15, 1997,
including interim periods. Early adoption is not permitted, and upon
initial application, all prior period EPS data is required to be
restated. The adoption of SFAS No. 128 is not expected to have a
material effect on the Company's EPS amounts.
34
MCCLAIN INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED SEPTEMBER 30, 1997, 1996 AND 1995
- --------------------------------------------------------------------------------
1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Common Stock Issued to Directors for Services
Common stock is issued from time to time in lieu of cash for services
provided to the Company by Directors of the Company and is recorded as
compensation expense generally at the fair value on the date of
issuance.
Revenue Recognition
Sales are recorded by the Company when the products are delivered to
independent distributors or other customers.
Reclassifications
Certain amounts reported in 1996 and 1995 have been reclassified to
conform to the 1997 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. (Waste), 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 being amortized over five
years.
In connection with this transaction, Waste 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 calendar years
following the closing. In this event, the Company has agreed to pay to
Waste up to $1,200,000 during each year. If Waste 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
accounts for such payments as sales discounts when and as earned by
Waste. For the year ended September 30, 1997 $400,480 has been
recorded as sales discounts in connection with post-acquisition sales
of $11,613,993 made to Waste pursuant to the agreement.
35
MCCLAIN INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED SEPTEMBER 30, 1997, 1996 AND 1995
- --------------------------------------------------------------------------------
2. BUSINESS ACQUISITIONS (CONTINUED)
McClain of Alabama, Inc. sales amounted to $9,300,000 during the year
ended September 30, 1997.
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 per share, 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 years ended September 30, 1997 and 1996 were
approximately $3,200,000 and $4,729,000, respectively.
Restructuring and Impairment Charges
In September 1997, the Company decided to restructure its baler
operations based upon an evaluation of sales levels to date,
anticipated levels of business in 1998 and beyond, and unsatisfactory
operating results. The plan involves the shift of all baler production
from the Company's facility in Buffalo, New York to its Winesburg, Ohio
plant, the abandonment of the leased premises in Buffalo, and the
transfer of moveable property and equipment to other locations. The
related restructuring and impairment charge of $1,755,000 consists
principally of a writeoff of goodwill of $1,145,000, the writedown of
leasehold improvements and other assets of $310,000, and costs
associated with the abandoned leased facilities of $300,000. After an
income tax benefit of $207,000, which excludes the writeoff of
goodwill not considered to be deductible, these actions reduced
reported operating results by $1,548,000 or $0.33 per share.
36
MCCLAIN INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED SEPTEMBER 30, 1997, 1996 AND 1995
- --------------------------------------------------------------------------------
3. SUPPLEMENTAL CASH FLOWS INFORMATION
Non-cash Investing and Financing Activities
During the years ended September 30, 1997, 1996 and 1995, common stock
valued at $28,494, $18,613 and $11,510, respectively, was issued to
non-employee directors in exchange for services rendered.
During the year ended September 30, 1997, common stock valued at
$62,889 was issued in accordance with the EPCO purchase agreement (Note
2).
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 9).
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
==============
Other Cash Flows Information
Cash paid for interest amounted to $3,223,867 for 1997, $3,044,398 for
1996, and, $2,482,481 for 1995. Cash paid for federal income taxes
amounted to $350,000 for 1997, $1,198,137 for 1996, and $945,314 for
1995.
37
MCCLAIN INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED SEPTEMBER 30, 1997, 1996 AND 1995
- --------------------------------------------------------------------------------
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,
1997:
1 9 9 7 1 9 9 6 1 9 9 5
------------- -------------- -------------
Balance, beginning of year $ 600,000 $ 600,000 $ 425,800
Add provision charged
against income 432,500 49,400 205,000
Less uncollectible accounts
written off, net of recoveries (532,500) (49,400) (30,800)
------------- -------------- -------------
Balance, end of year $ 500,000 $ 600,000 $ 600,000
============= ============== =============
5. INVENTORIES
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. The major components of inventories were as follows
at September 30:
1 9 9 7 1 9 9 6
---------------- ----------------
Materials and chassis $ 17,221,766 $ 14,331,000
Work-in-process 6,664,000 6,776,000
Finished goods 7,126,000 4,470,000
---------------- ----------------
$ 31,011,766 $ 25,577,000
================ ================
38
MCCLAIN INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED SEPTEMBER 30, 1997, 1996 AND 1995
- --------------------------------------------------------------------------------
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 7 1 9 9 6
---------------- ----------------
Gross minimum lease payments collectible
in monthly installments $ 10,825,166 $ 7,575,657
Less advance lease payments and
deposits received 249,737 210,705
---------------- ----------------
Subtotal 10,575,429 7,364,952
Less unearned finance income 2,326,656 1,748,602
---------------- ----------------
Total net investment in sales-type leases 8,248,773 5,616,350
Current portion 2,900,000 1,910,000
---------------- ----------------
Noncurrent portion $ 5,348,773 $ 3,706,350
================ ================
Gross minimum lease payments are collectible in the following scheduled
annual amounts for the years succeeding September 30, 1997:
YEAR ENDING
SEPTEMBER 30 AMOUNT
------------ ---------------
1998 $ 3,595,645
1999 3,066,874
2000 2,009,331
2001 1,163,297
2002 740,282
---------------
GROSS MINIMUM AMOUNT COLLECTIBLE $ 10,575,429
===============
39
MCCLAIN INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED SEPTEMBER 30, 1997, 1996 AND 1995
- --------------------------------------------------------------------------------
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 $1,212,392 and $316,486 during the
years ended September 30, 1997 and 1996, respectively. 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
------------ --------------
1998 $ 1,175,000
1999 1,175,000
2000 1,175,000
2001 1,175,000
2002 1,173,660
--------------
GROSS MINIMUM RENTAL PAYMENTS $ 5,873,660
==============
Total residual values guaranteed by the Company under these leasing
arrangements approximates $750,000 as of September 30, 1997.
40
MCCLAIN INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED SEPTEMBER 30, 1997, 1996 AND 1995
- --------------------------------------------------------------------------------
7. PROPERTY, PLANT AND EQUIPMENT
Property, plant, and equipment are recorded at cost. Depreciation for
financial reporting purposes is provided primarily using the
straight-line method over the estimated useful lives of the assets.
Accelerated depreciation methods are used for income tax purposes.
Estimated useful lives range from 20 to 40 years for buildings and
improvements, and 3 to 30 years for machinery and equipment and
furniture, fixtures, and vehicles. Expenditures for maintenance and
repairs are charged to expense are incurred, and significant
betterments are capitalized.
Property, plant and equipment consisted of the following amounts as of
September 30:
1 9 9 7 1 9 9 6
---------------- ----------------
Land $ 2,281,480 $ 2,233,906
Buildings and improvements 13,673,209 13,447,349
Machinery and equipment 21,584,020 18,835,127
Furniture, fixtures and vehicles 3,931,764 3,631,140
---------------- ----------------
41,470,473 38,147,522
Less accumulated depreciation 16,229,849 13,899,589
---------------- ----------------
Property, plant and equipment, net $ 25,240,624 $ 24,247,933
================ ================
41
MCCLAIN INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED SEPTEMBER 30, 1997, 1996 AND 1995
- --------------------------------------------------------------------------------
8. 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:
1 9 9 7 1 9 9 6
---------------- ---------------
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 (8.50% at September 30, 1997). $ 19,372,244 $ 15,887,347
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. 767,530 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 1999, 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 $10,000,000 and $7,500,000 in 1997 and 1996,
respectively. 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 1999, at which
time the Company expects to obtain a renewal upon the
same or similar terms. 6,249,290 5,149,620
---------------- ---------------
Total lines of credit borrowings (NOTE 9) $ 26,389,064 $ 22,089,967
================ ===============
42
MCCLAIN INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED SEPTEMBER 30, 1997, 1996 AND 1995
- --------------------------------------------------------------------------------
9. LONG-TERM DEBT
Long-term debt consisted of the following obligations as of September
30:
1 9 9 7 1 9 9 6
--------------- ---------------
Promissory notes to a bank, collateralized by certain
assets as disclosed in Note 8. The notes are payable in
monthly installments of $160,000 plus interest at rates
ranging from prime to prime plus 1/8% as published
in the Wall Street Journal (effective rates of 8.50% to
8.625% at September 30, 1997), maturing at various
dates through May 2002. $ 7,348,253 $ 11,425,953
Promissory notes to banks, collateralized by
commercial mortgages on certain real estate, payable
in monthly installments of $28,300 plus interest
ranging from the bank prime rate to prime plus 1/4%
(effective rates of 8.50% to 8.75% at September 30,
1997), maturing at various dates through January
2000. 2,351,173 2,833,430
43
MCCLAIN INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED SEPTEMBER 30, 1997, 1996 AND 1995
- --------------------------------------------------------------------------------
9. LONG-TERM DEBT (Continued)
Industrial Revenue Bonds, collateralized by a bank
letter of credit. The bonds are payable in
annual installments of $525,000 through April 2007.
The bonds bear interest, payable monthly, at either
a fixed term, or a variable rate (effective rate of
4.2% at September 30, 1997) as determined by the
bond holder. $ 5,225,000 $ -
Lines of credit borrowings (Note 8) 26,389,064 22,089,967
--------------- ---------------
Total debt 41,313,490 36,349,350
Less current portion 2,800,000 2,132,201
--------------- ---------------
Long-term portion $ 38,513,490 $ 34,217,149
=============== ===============
Scheduled aggregate principal maturities of long-term debt for years
succeeding September 30, 1997 are presented below:
YEAR ENDING
SEPTEMBER 30 AMOUNT
------------ ----------------
1998 $ 2,800,000
1999 29,328,243
2000 3,769,419
2001 1,853,330
2002 908,853
Thereafter 2,653,645
----------------
TOTAL $ 41,313,490
================
As of September 30, 1997, the Company was in violation of certain
financial covenants contained in the debt agreements. In December 1997
the Company obtained from its principal lender a written waiver of the
lender's rights to accelerate repayment of the debt arising from these
instances of covenant noncompliance and intends to negotiate revised
covenants which are considered more compatible with current operations.
Accordingly, these obligations are classified on the accompanying
consolidated balance sheets based on their terms.
44
MCCLAIN INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED SEPTEMBER 30, 1997, 1996 AND 1995
- --------------------------------------------------------------------------------
10. ACCRUED EXPENSES
Accrued expenses included on the accompanying consolidated balance
sheets consist of the following amounts at September 30:
1 9 9 7 1 9 9 6
---------------- ----------------
Compensation $ 577,772 $ 374,385
Vacation and holiday pay 534,953 495,097
Taxes - 221,902
Insurance 514,040 307,822
Commission 622,685 159,755
Other 541,018 606,908
---------------- ----------------
TOTAL $ 2,790,468 $ 2,165,869
================ ================
11. INCOME TAXES
The provision (benefit) for income taxes for each of the three years in
the period ended September 30, 1997 consists of the following
components:
1 9 9 7 1 9 9 6 1 9 9 5
------------- --------------- --------------
Current federal provision (benefit) $ (287,000) $ 570,000 $ 899,000
Deferred provision - 660,000 375,000
------------- --------------- --------------
TOTAL INCOME TAXES (BENEFIT) $ (287,000) $ 1,230,000 $ 1,274,000
============= =============== ==============
The effective income tax rate on consolidated pre-tax income differs
from the federal statutory rate for the following reasons:
1 9 9 7 1 9 9 6 1 9 9 5
------------------- -------------------- --------------------
AMOUNT % AMOUNT % AMOUNT %
------------ ----- ------------- ----- -------------- -----
Provision (benefit) computed
at statutory rate $ (677,000) (34) $ 1,229,000 34 $ 1,270,000 34
Nondeductible expenses 389,000 19 31,000 1 26,000 1
Other 1,000 - (30,000) (1) (22,000) (1)
------------ ----- ------------- ----- -------------- -----
$ (287,000) (15) $ 1,230,000 34 $ 1,274,000 34
============ ===== ============= ===== ============== =====
45
MCCLAIN INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED SEPTEMBER 30, 1997, 1996 AND 1995
- --------------------------------------------------------------------------------
11. INCOME TAXES (Continued)
The balance of the net deferred income tax liability consists of
temporary basis differences related to the following assets and
liabilities as of September 30:
1 9 9 7 1 9 9 6
---------------- ----------------
Taxable differences:
Property and equipment $ 2,651,000 $ 2,081,000
Inventory 1,226,000 1,562,000
---------------- ----------------
Gross deferred tax liabilities 3,877,000 3,643,000
---------------- ----------------
Deductible differences:
Product liability 740,000 944,000
Accounts receivable 171,000 204,000
Accrued expenses 727,000 389,000
Goodwill 82,000 -
Alternative minimum tax credit 50,000 -
Other 7,000 6,000
---------------- ----------------
Gross deferred tax assets 1,777,000 1,543,000
---------------- ----------------
NET DEFERRED INCOME TAX LIABILITY $ 2,100,000 $ 2,100,000
================ ================
The components which comprise gross deferred taxes are predominantly
noncurrent; as such, the entire related net liability is classified as
noncurrent.
12. 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 $407,739 in 1997, $334,924 in 1996, and $346,368 in
1995.
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, 1997, 1996
and 1995.
46
MCCLAIN INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED SEPTEMBER 30, 1997, 1996 AND 1995
- --------------------------------------------------------------------------------
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, 1997, 1996 and 1995.
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, 1997, 1996 and 1995.
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
revaluation gave 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 was 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
Raymond Elliott, a director of the Company, serves as a Vice-President
of First of America Insurance Group, Inc. This entity provided
insurance at a cost of approximately $1,093,000, $1,200,000 and
$1,300,000 to the Company during the years ended September 30, 1997,
1996 and 1995, respectively. These entities received fees and
commissions in connection with these transactions of approximately
$117,000, $120,000 and $129,000, respectively.
47
MCCLAIN INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED SEPTEMBER 30, 1997, 1996 AND 1995
- --------------------------------------------------------------------------------
13. RELATED PARTY TRANSACTIONS (Continued)
Product Sales
The Company had product sales of approximately $560,000, $660,000 and
$239,000, during the years ended September 30, 1997, 1996 and 1995,
respectively, to a business controlled by the President of McClain
Industries, Inc.
14. STOCK BASED COMPENSATION 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 133,333 shares
of the Company's no par common stock and allows non-employee directors
the option to receive payment of all or a portion of their directors
fees in the form of shares of common stock at the fair market value of
such shares on the date of issuance. For the years ended September 30,
1997, 1996 and 1995 the Company issued 5,466, 3,555 and 1,565, 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 1,333,333
shares of the Company's no par common stock for the granting of stock
awards to officers and key management personnel. The awards consist of
incentive stock option (ISO) or non-qualified options, stock
appreciation rights (SARs) and restricted share rights, and may be
granted at the following prices at the date of grant: incentive stock
options must be equal to or greater than the fair market value of
common stock; stock appreciation rights and restricted share rights may
be issued at a price which may not be less than 50% of the price of the
common stock. Shares which have been issued under this plan vest in
annual installments from the date of grant, over a three year period,
and expire within 5 years from the date of grant.
48
MCCLAIN INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED SEPTEMBER 30, 1997, 1996 AND 1995
- --------------------------------------------------------------------------------
14. STOCK BASED COMPENSATION PLANS (Continued)
The following table presents a summary of stock option activity for
each of the years in the three year period ended September 30, 1997:
SHARES UNDER OPTION
----------------------------------------------
1 9 9 7 1 9 9 6 1 9 9 5
------------- ------------ ------------
Outstanding, beginning of year 227,896 373,251 326,000
Weighted average excercise price $ 3.67 $ 4.06 $ 3.72
Granted during the year 15,000 - 50,667
Weighted average excercise price $ 5.75 - $ 7.33
Canceled during the year - (11,111) -
Weighted average excercise price - $ 2.69 -
Exercised during the year (51,505) (134,244) (3,416)
Weighted average excercise price $ 2.63 $ 2.68 $ 2.54
Outstanding, end of year 191,391 227,896 373,251
Weighted average excercise price $ 5.59 $ 3.67 $ 4.06
Eligible, end of year 69,915 172,117 252,166
Weighted average excercise price $ 3.24 $ 3.33 $ 2.92
The Company has elected to continue to apply the provisions of
Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees" and related interpretations in accounting for its
employee stock options issued pursuant to the 1989 Incentive Stock
Plan. Under APB 25, because the exercise price of employee stock
options equals the market price of the underlying common stock on the
date of grant, no compensation expense is recorded in the accompanying
consolidated statements of operations. Had stock option compensation
expense been determined pursuant to the methodology provided in
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation", the proforma effect on results of
operations for the year ended September 30, 1997 would have been an
increase in the Company's loss per share of less than one cent per
share.
15. COMMON STOCK REPURCHASES
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, 1997,
the Company repurchased 24,467 shares at prices ranging from $5.32 to
$5.75 per share. During the year ended September 30, 1996, the Company
repurchased 31,627 shares at prices ranging from $4.24 to $4.75 per
share.
49
MCCLAIN INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED SEPTEMBER 30, 1997, 1996 AND 1995
- --------------------------------------------------------------------------------
16. COMMITMENTS AND CONTINGENCIES
Product Liability
As a manufacturer of industrial products, the Company is occasionally
subjected to various product liability claims. Such claims typically
involve personal injury or wrongful death associated with the use or
misuse of the Company's products. The Company is currently defending
certain legal proceedings involving allegations of product liability
relating to products manufactured and sold by the Company.
Historically, such claims have not resulted in material losses to the
Company in any one year, and the Company maintains product liability
insurance in amounts believed by management to be adequate.
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, 1997.
Environmental Matters
The Company's operations are subject to extensive federal, state and
local regulation under environmental laws and regulations concerning,
among other things, emissions into the air, discharges into the waters
and the generation, handling, storage, transportation, treatment and
disposal of waste and other materials. Inherent in manufacturing
operations and in owning real estate is the risk of environmental
liabilities as a result of both current and past operations, which
cannot be predicted with certainty. The Company has incurred and will
continue to incur costs, on an ongoing basis, associated with
environmental regulatory compliance in its business.
Labor Union Matters
Certain of the Company's hourly employees are represented by various
labor unions pursuant to collective bargaining agreements which expire
between September 1999 and June 2000.
50
MCCLAIN INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED SEPTEMBER 30, 1997, 1996 AND 1995
- --------------------------------------------------------------------------------
16. COMMITMENTS AND CONTINGENCIES (Continued)
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.
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.
17. FOURTH QUARTER ADJUSTMENTS
During the quarter ended September 30, 1997, the Company recorded
various adjustments of approximately $2,500,000 principally related to
the valuation of inventories and lease accounting. The aggregate effect
of such adjustments was to decrease net income for the fourth quarter
by approximately $1,650,000 ($0.35 per share). 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 ($0.15 per share).
* * * * * *
51
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)
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)
50
52
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) 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)
51
53
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)
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)
52
54
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. (9)
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. (9)
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. (9)
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. (9)
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. (9)
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. (9)
10.52 Loan Agreement dated July 17, 1996, between Standard Federal Bank and Leasing (9)
10.53 Promissory Note (Line of Credit) dated July 17, 1996, between Standard Federal Bank
and Leasing (9)
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. (9)
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55
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. (9)
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. (9)
10.57 Security Agreement dated August 29, 1996, between Standard Federal Bank and McClain-Alabama. (9)
10.58 Master Lease Agreement dated July 15, 1995 between Fifth Third Leasing Company and Leasing. (9)
10.59 Master Lease Agreement dated May 17, 1996 between NBD Bank and Leasing. (9)
10.60 Term Note dated January 17, 1997 between Trust Company Bank of Middle Georgia and the
Company 56
10.61 Amended Loan Agreement dated April 28, 1997 between Standard Federal Bank and
the Company, McClain-Georgia, Shelby Steel, Tube, McClain-Ohio, Epco and Alabama 57
10.62 Promissory Note (Line of Credit) dated April 28, 1997 between Standard Federal Bank
and the Company, McClain-Georgia, Shelby Steel, Tube, McClain-Ohio, Epco and Alabama 63
10.63 Promissory Note (Line of Credit with Term Provisions, Second Equipment Line of Credit)
dated April 28, 1997 between Standard Federal Bank and the Company, McClain-Georgia,
Shelby Steel, Tube, McClain-Ohio, Epco and Alabama 69
10.64 Third Amended and Restated Promissory Note (Line of Credit) dated April 28, 1997
between Standard Federal Bank and Galion Holding, E-Z Pack, Galion Dump Bodies and McClain Group
Sales of Florida 76
10.65 Promissory Note (Line of Credit) dated April 28, 1997 between Standard Federal Bank and Galion
Holding, E-Z Pack, Galion Dump Bodies and McClain Group Sales of Florida 83
10.66 Preliminary Placement Memorandum dated April 17, 1997 - The Industrial Development Board of
the City of Demopolis Industrial Development Revenue Bonds Series 1997 (McClain of Alabama,
Inc. Project) 90
10.67 Lease Agreement dated April 1, 1997 between the Industrial Development Board of the City
of Demopolis and McClain of Alabama 139
10.68 Trust Indenture Agreement dated April 1, 1997 between the Industrial Development Board of
the City of Demopolis and LaSalle National Bank 190
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56
10.69 Bond Guaranty Agreement dated April 1, 1997 between LaSalle National Bank and
McClain-Alabama 291
10.70 Mortgage, Assignment of Leases and Security Agreement dated April 1, 1997
from the Industrial Development Board of the City of Demopolis and McClain-Alabama to
Standard Federal Bank 302
10.71 Standard Federal Bank Irrevocable Letter of Credit dated April 23, 1997 345
10.72 Placement Agency Agreement dated April 23, 1997 - The Industrial Development Board of
the City of Demopolis Industrial Development Revenue Bond Series 1997 (McClain of Alabama,
Inc. Project) 394
10.73 Remarketing Agreement dated April 23, 1997 among LaSalle National Bank, The Industrial
Development Board of the City of Demopolis and McClain of Alabama, Inc. 427
21 List of Subsidiaries (9)
27 Financial Data Schedule
(1) Incorporated by reference to the Company's Form 10-K f/y/e 9/30/89
(2) Incorporated by reference to the Company's Registration Statement
(33-29613)
(3) Incorporated by reference to the Company's Form 10-K f/y/e 9/30/91
(4) Incorporated by reference to the Company's Form 8-K dated 7/27/92
(5) Incorporated by reference to the Company's Form 10-K f/y/e 9/30/92
(6) Incorporated by reference to the Company's Form 10-K f/y/e 9/30/93
(7) Incorporated by reference to the Company's Registration Statement on
Form S-2 (33-84562)
(8) Incorporated by reference to the Company's Form 10-K f/y/e 9/30/95
(9) Incorporated by reference to the Company's Form 10-K f/y/e 9/30/96
55