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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, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
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Commission File No. 0-7770
MCCLAIN INDUSTRIES, INC.
(Exact name of Registrant as specified in its charter)
STATE OF MICHIGAN 38-1867649
State of Incorporation I.R.S. Employer I.D. No.
6200 ELMRIDGE ROAD
STERLING HEIGHTS, MICHIGAN 48310
(810) 264-3611
(Address of principal executive offices and telephone number)
Securities Registered Pursuant to Section 12(b) of the Act:
NONE
Securities Registered Pursuant to Section 12(g) of the Act:
COMMON STOCK, NO PAR VALUE
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934, as amended, during the preceding 12 months (or for such shorter period
that the Registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days.
Yes X No
--
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.
[ X ]
As of November 23, 1998, the aggregate market value of the Registrant's
voting stock held by nonaffiliates of the Registrant was $18,694,280 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 November 23, 1998, there were 4,673,570 shares of the
Registrant's common stock issued and outstanding.
The Exhibit Index Begins on Page 50
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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. The Company also sells truck chassis at the retail level. 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
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equipment; (3) garbage and recycling truck bodies; and (4) transfer trailers.
The Company also markets truck chassis. Sales of dump truck bodies accounted for
approximately 15%, sales of solid waste handling equipment accounted for
approximately 71%, and truck chassis accounted for approximately 14% of the
Company's consolidated net sales for the fiscal year ended September 30, 1998.
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 the Winesburg, Ohio facility, 24
models of balers which compact plastic and paper products, primarily cardboard.
Balers are either vertical downstroke or closed door horizontal balers.
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Garbage and Recycling Truck Bodies
E-Z Pack manufactures at its Galion, Ohio facility traditional garbage
truck bodies comprised of front, rear and side loading truck bodies and a
recycling truck body used in solid waste handling and disposal. The front
loading truck bodies vary in capacity from thirty-two cubic yards to forty-three
cubic yards, the rear loading truck bodies vary in capacity from eighteen cubic
yards to thirty-one cubic yards, and the side loading truck bodies vary in
capacity from twenty-nine cubic yards to thirty-nine cubic yards. The recycling
truck bodies vary in capacity from thirty cubic yards to forty cubic yards. The
products manufactured by E-Z Pack are sold under the registered trademark "E-Z
Pack". Within this line, E-Z Pack sells its rear loading truck bodies under the
trademarks "Goliath", "Goliath II", and "Apollo", and its front loading truck
bodies under the trademark "Hercules". The side loading truck bodies and the
recycling truck bodies are principally identified by the E-Z Pack name only.
These trademarks will expire in the year 2001, unless renewed. The Company has
several patents covering its recycling truck.
Transfer Trailers
McClain-Ohio manufactures at its Galion, Ohio facility, various types
of steel and aluminum transfer trailers, including open-top walking floor
trailers, closed-top walking floor trailers, ejection trailers and open-top
tipper trailers, varying in capacity from thirty cubic yards to 124 cubic yards.
Transfer trailers are used to transport compacted solid waste from transfer
stations to landfills or incinerators.
Truck Chassis
Truck chassis are purchased and combined with either a roll-off hoist,
garbage truck body or dump body for sale as a road ready package.
CUSTOMERS AND DISTRIBUTION
For the fiscal years ended September 30, 1998, the Company's
consolidated net sales were divided approximately 37% to distributors, 51% to
solid waste handling companies, and 12% to other entities.
During the fiscal years ended September 30, 1998 and 1997,
approximately 28.8% and 13.5%, respectively, of the Company's total sales were
made to Waste Management, Inc. No single customer accounted for more than 10% of
the Company's net sales for the fiscal year ended September 30, 1996. The
Company has no contracts with any of its customers and, accordingly, sells its
products pursuant to purchase orders placed from time to time in the ordinary
course of business. The Company delivers its products to its customers through
the use of its own trucks or common carriers.
The Company obtains its municipal as well as certain private contracts
through the process of competitive bidding. There can be no assurance that
municipalities or others will continue to solicit bids, or if they do, that the
Company will continue to be successful in having its bids accepted.
Additionally, inherent in the competitive bidding process is the risk that if a
bid is submitted and a contract is subsequently awarded, actual performance
costs may exceed the projected costs upon which the submitted bid or contract
price was based.
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Historically, foreign sales have not accounted for a significant
portion of the Company's revenues, The Company anticipates that future foreign
sales will remain steady or increase slightly.
SALES AND MARKETING
Historically, the Company's products have been marketed by the
Company's executive officers and sales personnel who have worked closely with
customers to solicit orders and to render technical assistance and advice. The
Company's executive officers will continue to devote a significant amount of
time to developing and maintaining continuing relations with the Company's
customers. The Company operates Sales, a separate wholly-owned corporation, to
act as the Company's exclusive sales representative for its solid waste handling
equipment product lines.
The Company also engages independent distributors and dealers in
various regions throughout the United States and certain foreign countries, for
marketing its products to customers. The Company's dealers are generally
responsible in their respective geographic markets for identifying customers and
soliciting customer orders. As of November 20, 1998, there were approximately
280 authorized Company dealers located in numerous states and 20 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, 1998, Leasing held net lease receivables
of approximately $9.1 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, warehouses and importers.
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.
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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 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
hydraulic cylinders from only a few major suppliers. The failure by any of such
suppliers to continue to supply the Company with cylinders on commercially
reasonable terms, or at all, could also have a material adverse effect on the
Company.
The Company generally has no supply agreements with any of its
suppliers and, accordingly, generally purchases raw materials pursuant to
purchase orders placed from time to time in the ordinary course of business.
Failure or delay by suppliers in supplying necessary raw materials to the
Company could adversely affect the Company's ability to obtain and deliver its
products on a timely and competitive basis. In addition, the Company has
experienced price fluctuations for the raw materials that it purchases,
particularly with respect to steel and aluminum. Any significant price
fluctuations in the future could also have an adverse effect on the Company.
The Company uses a forecasting and purchasing system to monitor the
quantity and cost of necessary raw materials. Such cost controls allow the
Company to minimize its operating costs by purchasing from the lowest priced
suppliers the appropriate amount of raw materials in light of the Company's
needs. The Company 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 92.8%, 91.8%, and 89% of Shelby Steel's business
and 1.6%, 1.9%, and 1.2% of the Company's consolidated net sales for the fiscal
years ended September 30, 1998, 1997 and 1996, 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.
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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 four to six 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, 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 $17
million and $16.7 million at September 30, 1998 and 1997, respectively.
Substantially all of the Company's backlog is delivered within four to six 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, 1998, 1997 and 1996, the Company had inventory of $38.9
million, $31.0 million and $25.6 million, respectively.
EMPLOYEES
The Company had approximately 810 employees as of November 15, 1998.
Seventy-Four 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 163 hourly employees of E-Z Pack are represented
by the International Association of Machinists and Aerospace Workers Union
pursuant to a
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collective bargaining agreement which expires June 12, 2000. The
62 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 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 940,200
square feet of real property located in Michigan, Ohio, Georgia, Oklahoma and
Alabama. The Company owns three facilities in Michigan, four 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
-------- --------- -------
Sterling Heights, Michigan Owned 37,000
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OWNED SQUARE
LOCATION OR LEASED FOOTAGE
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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
The Company's main office and manufacturing facilities are located in a
37,000 square foot facility situated on 8 2/3 acres in Sterling Heights,
Michigan owned by McClain-Michigan. This facility is used to manufacture
roll-off containers, roll-off hoists and compactors. McClain-Michigan also owns
a 55,000 square foot facility located in Kalamazoo, Michigan which is home to
the Company's tube mill. Shelby Steel owns a 50,000 square foot steel processing
facility on six acres of land in River Rouge, Michigan, where all of its
operations are conducted. McClain-Michigan leases, under a verbal month-to-month
lease, an 18,000 square foot manufacturing facility also located in Sterling
Heights, Michigan from the mother of Messrs. Kenneth and Robert McClain. This
facility is used by the Company as a fabrication facility. The monthly rental
for this facility is $3,500, with the lessor responsible for the payment of real
estate taxes, assessments, insurance premiums and replacement in case of damage
by fire, and the Company responsible for maintenance of the building. The
Company believes that the terms and conditions of this lease are comparable to
the terms and conditions which would be available from an unrelated party with
respect to similar facilities, although other similarly situated unrelated
parties would, in all likelihood, require a long-term written lease.
E-Z Pack owns three buildings comprising approximately 365,000 square
feet situated on approximately 38 acres of land in Galion, Ohio. This
three-building facility is the sole location for its manufacturing operations.
This facility manufactures front, side and rear loading garbage truck bodies and
recycling trucks. Sales's executive offices are located in one of the Galion,
Ohio buildings under a lease arrangement and McClain-Ohio leases one of the
other buildings at this location. Galion Dump Bodies owns three manufacturing
facilities (67,500, 15,200 and 16,000 square feet) situated on 20 acres of land
in Winesburg, Ohio where it manufactures dump bodies, hoists and balers.
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.
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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.
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 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 9 and
10 of Notes to Consolidated Financial Statements.
ITEM 3. LEGAL PROCEEDINGS
The Company is from time to time subject to various claims from
existing or former employees alleging gender, age or racial discrimination and
anti-union activity, none of which are expected to have a material adverse
affect on the Company. See ITEM 1. BUSINESS. Employees. In addition, as a
manufacturer of industrial products, the Company is, from time to time,
subjected to various product liability claims. Such claims typically involve
personal injury or wrongful death associated with the use or misuse of the
Company's products. While such claims have not been material to the Company in
any year and the Company believes that it maintains adequate product liability
insurance, there can be no assurance that such insurance will continue to be
available on terms acceptable to the Company. Any product liability claim not
fully covered by insurance, as well as any adverse publicity from a product
liability claim, could have a material adverse effect on the Company. The
Company is currently defending a number of 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 several
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 settled all of the cases
which were pending at the date of the acquisition and the Company believes that
it can continue to successfully resolve pending and future product liability
claims, there can be no assurance that the Company will be able to do so. The
Company is not presently a party to any material legal proceedings except as
described above.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's security holders
during the fourth quarter of the fiscal year covered by this report.
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is traded and quoted on the Nasdaq National
Market ("Nasdaq/NMS") under the trading symbol "MCCL." The following table sets
forth, for the periods indicated, the high and low sales prices for the Common
Stock as reported by Nasdaq/NMS. These per share quotations represent
inter-dealer prices on the Nasdaq/NMS, and do not include retail mark-ups or
commissions.
SALES PRICE
OF
COMMON STOCK
------------
HIGH LOW
---- ---
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
FISCAL YEAR ENDED SEPTEMBER 30, 1998
First Quarter 4.75 4.20
Second Quarter 6.19 3.375
Third Quarter 5.75 4.375
Fourth Quarter 5.00 3.00
On December 11, 1998, the last reported sales price for the Common
Stock as reported by Nasdaq/NMS was $5.00. As of such date there were
approximately 226 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:
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1998 1997 1996 1995 1994
---- ---- ---- ----- ----
Gross Sales $118,487,052 $96,524,208 $84,680,797 $82,263,202 $79,166,990
Sales, Net of Customer
Discounts $116,554,031 $95,255,641 $84,221,810 $81,569,427 $78,540,233
Net Income (Loss) $3,383,892 $(1,703,780) $2,384,957 $2,462,755 $3,250,996
Net Earnings (Loss) Common
and Common Equivalent
Share,(1, 2) $.72 $(.36)
$.50 $.53 $.71
Working Capital $41,919,687 $33,520,003 $32,371,639 $33,868,556 $21,997,601
Total Assets $100,246,967 $87,185,567 $79,425,255 $73,899,197 $58,189,747
Long-Term Debt $42,530,105 $38,513,490 $34,217,149 $31,170,287 $18,039,869
Stockholders' Investment $26,835,306 $23,837,091 $25,457,255 $22,841,274 $19,359,709
Weighted Average Number of
Common Equivalent Shares
Outstanding(1, 2) 4,711,741 4,729,281
4,752,050 4,657,476 4,608,137
Current Ratio 2.57:1 2.63:1 3.18:1 3.37:1 2.49:1
Long Term Debt to Equity 1.59:1 1.62:1 1.34:1 1.36:1 0.93:1
=======================================================================================================================
(1) Weighted 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.
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.
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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,
----------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
Net Sales 100.0% 100.00% 100.00% 100.00% 100.00%
Cost of Sales 82.18 83.68 79.65 78.35 78.12
------ ------ ----- ----- -----
Gross Profit 17.82 16.32 20.35 21.65 21.88
Selling, General &
Administrative Expenses 11.47 14.33 13.60 14.52 13.48
Restructuring and Impairment
Charge 0.00 1.84 0.00 0.00 0.00
------ ------ ------ ----- -----
Operating Profit 6.35 .15 6.75 7.13 8.40
Other Expense 2.22 2.24 2.48 2.59 2.19
------ ------ ------ ----- -----
Income (Loss) Before Income
Taxes 4.13 (2.09) 4.27 4.54 6.21
Income Taxes (Benefit) 1.23 (.30) 1.45 1.55 2.09
------ ------ ----- ----- -----
Net Income (Loss) 2.90% (1.79)% 2.82% 2.99% 4.12%
====== ====== ====== ====== =====
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, 1998 to year ended September 30, 1997
Net sales for the fiscal year ended September 30, 1998 increased 22.4%
to $116.6 million compared to $95.2 million for the fiscal year ended September
30, 1997. The increase was the result of strong sales of the Company's McClain
E-Z Pack and commodity products and the expansion of the Company's truck chassis
program. E-Z Pack and commodity sales increased by approximately $4.0 million
and $8.0 million, respectively, while sales of truck chassis increased
approximately $10.0 million over the prior year. Although the sales for Fiscal
1998 increased substantially, the Company's McClain E-Z Pack and Galion Dump
Bodies facilities sales were slower than expected due to logistical problems
resulting from a shortage of truck chassis throughout the year.
The Company's overall gross profit as a percentage of sales increased
to 17.82% for Fiscal 1998 from 16.32% for fiscal 1997 while the gross profit on
products manufactured by the Company increased to 20.3% for Fiscal 1998 from
17.26% for Fiscal 1997. The price increase implemented during December 1997,
increased production at the Company's Georgia facility, the transfer of the Epco
product line to the
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Winesburg facility and the closing of the Buffalo facility were the primary
factors in the increased gross profit on the products manufactured by the
Company.
The Company's inventory levels increased to $38.9 million at the end of
fiscal 1998 from $31.0 million at the end of fiscal 1997. This increase was
primarily due to the expansion of the Company's truck chassis program and
increased finished goods inventories at the McClain E-Z Pack and Galion Dump
Bodies facilities due to the shortage of truck chassis previously discussed.
Selling, general and administrative expenses decreased to 11.47% of net
sales during fiscal 1998 compared to 14.33% for fiscal 1997. This decrease was
due primarily to the increased sales and the Company's continuing efforts to
automate and centralize certain administrative functions.
Comparison of year ended September 30, 1997 to year ended September 30, 1996
Net sales for the fiscal year ended September 30, 1997 increased 13.2%
to $95.3 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 16.32% 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.
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.
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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.
Due to increased leasing activity and inventory levels, interest
expense increased to 3.83% of net sales during Fiscal 1997 compared to 3.62%
during Fiscal 1996.
LIQUIDITY AND CAPITAL RESOURCES
The Company had working capital of approximately $41.9 million and a
current ratio of 2.57:1 at September 30, 1998, compared to $33.5 million and
2.63:1 at September 30, 1997. Cash and short term investments totaled $1.9
million at September 30, 1998 while cash flows of $3.4 million were utilized for
operations during fiscal 1998. The Company also invested approximately $1.0
million in new machinery and equipment and financed approximately $1.0 million
of new leases during fiscal 1998.
The Company's required level of working capital increased during fiscal
1998 from fiscal 1997 due to increased sales creating additional accounts
receivable and
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16
increased inventory levels needed to support the expansion of the Company's
truck chassis program. Long-term debt continued to increase as a result of the
increase in accounts receivable and inventory levels, the continued expansion of
leasing activity and the Company's ongoing commitment to increasing production
efficiency by properly maintaining and upgrading its production facilities and
machinery and equipment.
The Company has a Revolving Credit Facility with Standard Federal Bank,
a federal savings bank ("Standard"), which provides maximum availability of $20
million for working capital needs and a $1.5 million credit line to fund
machinery and equipment acquisitions. At September 30, 1998, the Company had
borrowed approximately $18.0 million under the working capital line. Borrowings
under the working capital line are limited to 80% of eligible accounts
receivable and 50% of qualified inventory while the equipment line is limited to
80% of pledged equipment purchases.
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 borrowing limited to 80% of eligible lease
receivables. At September 30, 1998 approximately $7.6 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 is in compliance with
the various covenants as of September 30, 1998. The revolving credit agreements
bear interest at the Libor rate plus 200 basis points and expire in March 2000,
at which time the Company expects to obtain renewals on the same or similar
terms.
The Company has agreements with three 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, 1998, approximately $5.0 million had
been drawn on the facilities.
The Company has currently set its budget for capital expenditures in
fiscal 1999 at approximately $4.5 million as compared to $2.0 million in fiscal
1998. Despite this increase, management believes that the Company's cash flow,
together with the credit available to it under existing debt facilities, will
provide it with adequate cash for its working capital needs for the next 12
months.
YEAR 2000 COMPLIANCE
The Company uses computer hardware and financial and manufacturing
software that it purchased from third party suppliers. Such suppliers have
confirmed to the Company that such products are Year 2000 compliant.
Consequently, the Company does not expect to incur any significant costs to
become Year 2000 compliant. The Company has no information concerning the Year
2000 compliance status of its suppliers or customers. If any of the Company's
significant suppliers or customers does not successfully and timely become Year
2000 compliant, the Company's business or operations could be adversely
affected. The Company has not
15
17
yet generated any disaster contingency plans related to the Year 2000 compliance
issue.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Financial statements and supplementary data are filed herewith under
Item 14.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
There have been no changes in the Company's independent public
accountants during the past two fiscal years and the Company does not disagree
with such accountants on any matter of accounting principles, practices or
financial statement disclosure.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The directors and executive officers of the Company are as follows:
APPROXIMATE
DATE
SERVICE
NAME AGE OFFICE BEGAN
---- --- ------ -----
Kenneth D. McClain(1) 57 Chairman of the Board, Chief
Executive Officer and President 3/68
Robert W. McClain(1) 62 Senior Vice President, Assistant
Secretary and Director 3/68
Raymond Elliott 64 Director 8/90
Walter J. Kirchberger 63 Director 11/95
Carl Jaworski 55 Secretary 10/72
Mark S. Mikelait 38 Treasurer 5/97
(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.
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18
RAYMOND ELLIOTT has been a director of the Company since August 1990.
He is President of Hartland Insurance Group, Inc. From January 1, 1997 to
October 2, 1998, he was a Vice President of First of America Insurance (now
National City) 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.
MARK S. MIKELAIT has served as Treasurer of the Company since 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, 1998, 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 other executive officers whose total
annual salary and bonus from the Company exceeded $100,000 during the fiscal
year ended September 30, 1998.
SUMMARY COMPENSATION TABLE
- --------------------------------------------------------------------------------
Annual Compensation Long Term Compensation
- --------------------------------------------------------------------------------
Name and Fiscal Salary Options/
Principal Position Year Amount($) SARs(#)
------------------ ---- --------- -------
Kenneth D. McClain, 1998 $263,031 ---
President/ CEO
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- --------------------------------------------------------------------------------
Annual Compensation Long Term Compensation
- --------------------------------------------------------------------------------
Name and Fiscal Salary Options/
Principal Position Year Amount($) SARs(#)
------------------ ---- --------- -------
1997 226,885
1996 275,000 ---
Robert W. McClain, 1998 $125,004 ---
Senior Vice President
1997 183,335
1996 246,832 ---
Carl Jaworski 1998 $104,631 5,000
Secretary
1997 107,207
1996 --- ---
Mark S. Mikelait 1998 $101,250 10,000
Treasurer
1997 --- ---
1996 --- ---
AGGREGATED OPTION/SAR EXERCISES AND
FISCAL YEAR-END OPTION/SAR VALUES TABLE
Shares No. of Unexercised Options/SARs at Value of Unexercised
Acquired Fiscal Year-End In-The-Money Options/SARs at
on Exercise Fiscal Year-End(2)
in 1998 Value
Realized
Not Not
Exercisable Exercisable(1) Exercisable Exercisable
- ---------------------- --------------- -------------- ---------------- -------------------- ---------------- -----------------
Kenneth D. McClain -0- -0- 35,864 $ -0- $ -0-
Robert W. McClain -0- -0- 27,268 $ -0- $ -0-
(1) Stock options granted April 18, 1994 and November 16, 1995 pursuant
to the Company's 1989 Incentive Stock Plan (the "Incentive Plan").
Options must be exercised by April 17, 1999 and November 15, 2000.
Exercise price is $6.50 and $7.31 per share.
(2) Value based on the average of the September 30, 1998 closing bid high
and low price which was $3.50 per share.
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20
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 $3,750, 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, 1998, 7,593 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 November 14,1998, certain
information regarding the beneficial ownership of Common Stock, of: (i) each
person known to the Company to be the beneficial owner of more than five (5%)
percent of the Common Stock; (ii) each director of the Company; (iii) each
executive officer listed in the Summary Compensation Table; and (iv) all
executive officers and directors of the Company as a group, based upon
information available to the Company.
AMOUNT AND
NATURE OF PERCENT OF
NAME AND ADDRESS BENEFICIAL OUTSTANDING
OF BENEFICIAL OWNER OWNERSHIP(1) SHARES(2)
------------------- ------------ ---------
Kenneth D. McClain 1,477,057(3) 31.60%
6200 Elmridge Road
Sterling Heights, MI 48310
Robert W. McClain 1,118,946(4) 23.94%
6200 Elmridge Road
Sterling Heights, MI 48310
June McClain 337,178 7.21%
6200 Elmridge Road
Sterling Heights, MI 48310
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AMOUNT AND
NATURE OF PERCENT OF
NAME AND ADDRESS BENEFICIAL OUTSTANDING
OF BENEFICIAL OWNER OWNERSHIP(1) SHARES(2)
------------------- ------------ ---------
Lisa McClain Pfeil 310,474(5) 6.64%
6200 Elmridge Road
Sterling Heights, MI 48310
Raymond Elliott 18,245 0.39%
290 Town Center
P.O. Box 890
Troy, Michigan 48084
Walter Kirchberger 6,100 0.13%
2301 West Big Beaver Rd., Suite 800
Troy, Michigan 48084
Carl Jaworski 116.159 2.49%
6200 Elmridge Road
Sterling Heights, MI 48310
Mark S Mikelait 25.666 0.55%
500 Sherman Street
Galion, OH 44833
All current executive officers and 2,762,163(6) 59.11%
directors as a group (6 persons)
(1) For purposes of this table, a person is deemed to have "beneficial
ownership" of any shares that such person has a right to acquire within
60 days.
(2) Based on 4,673,570 shares of Common Stock issued and outstanding as of
November 22, 1998. 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 85,464 shares which executive officers and directors have the
right to acquire pursuant to stock options exercisable within 60 days.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On August 2, 1993, the Company consummated the purchase of three
facilities which it had been leasing from three different entities controlled by
certain officers and directors of the Company, including its main Sterling
Heights, Michigan facility, its Kalamazoo, Michigan facility and its Macon,
Georgia facility. In each instance, the Company paid the purchase price by
issuing shares of Common Stock and assuming existing mortgages on the
facilities. The purchase prices were determined by the Company's Board of
Directors on the basis of independent appraisals of the facilities. The stock
issued was valued at $5.40 per share, based on the market price for shares of
Common Stock as of March 29, 1993, the date that definitive purchase agreements
for the facilities were executed. These shares are restricted within the meaning
of Rule 144 promulgated under the Securities Act of 1933, as amended (the
"Securities Act"), meaning that they 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.
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22
In November 1994, in connection with a contemplated public offering of
its Common Stock and at the insistence of staff members of the Securities and
Exchange Commission, for purposes of the public offering, 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. In order to
consummate the offering, Messrs. Kenneth and Robert McClain consented 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 originally maintained pursuant to Generally Accepted
Accounting Principles in effect at the time of the transaction, that the shares
should have been valued as of March 31, 1993, but acquiesced to the position of
the staff members of the Securities and Exchange Commission in an effort to move
forward with the aborted securities offering. The accounting profession
subsequently issued a pronouncement supporting the Company's original position.
Accordingly, the letter agreement was rescinded during the year ended September
30, 1998.
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 14 of Notes to
Consolidated Financial Statements.
The Company had sales of approximately $590,000 in Fiscal 1998 to
McClain Leasing Corporation, an entity controlled by certain officers and
directors of the Company.
First of America Insurance Group, Inc., an entity that, until October
2, 1998, employed Raymond Elliott, a director of the Company, provided insurance
to the Company during Fiscal 1998. Sales from this entity to the Company
aggregated approximately $1.1 million during Fiscal 1998, for which this entity
received fees and commissions in the approximate amount of $116,200.
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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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 11, 1998 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 11, 1998 /s/ Kenneth D. McClain
------------------------------------
Kenneth D. McClain, Director
Dated: December 11, 1998 /s/ Robert W. McClain
------------------------------------
Robert W. McClain, Director
Dated: December 11, 1998 /s/ Raymond Elliott
------------------------------------
Raymond Elliott, Director
Dated: December 11, 1998 /s/ Walter J. Kirchberger
------------------------------------
Walter J. Kirchberger, Director
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SECURITIES AND EXCHANGE COMMISSION
- --------------------------------------------------------------------------------
Washington, D. C.
Form 10-K
For Corporations
ANNUAL REPORT
FOR THE YEARS ENDED SEPTEMBER 30, 1998, 1997 and 1996
McCLAIN INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
AND
INDEPENDENT AUDITORS' REPORT
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25
McCLAIN INDUSTRIES, INC. AND SUBSIDIARIES
INDEX TO THE CONSOLIDATED FINANCIAL STATEMENTS
AND SCHEDULES
- --------------------------------------------------------------------------------
CONSOLIDATED FINANCIAL STATEMENTS
Independent Auditors' Report
Consolidated Balance Sheets - September 30, 1998 and 1997
Consolidated Statements of Operations for the years ended September 30, 1998,
1997 and 1996
Consolidated Statements of Stockholders' Investment for the years ended
September 30, 1998, 1997 and 1996
Consolidated Statements of Cash Flows for the years ended September 30, 1998,
1997 and 1996
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.
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26
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
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, 1998 and 1997, and the
related consolidated statements of operations, stockholders' investment, and
cash flows for each of the three years in the period ended September 30, 1998.
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, 1998 and 1997, and the results of
their operations and their cash flows for each of the three years in the period
ended September 30, 1998 in conformity with generally accepted accounting
principles.
/s/ Rehmann Robson, P.C.
Farmington Hills, Michigan
December 7, 1998
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McCLAIN INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
ASSETS SEPTEMBER 30,
-------------------------------------------
1998 1997
--------------------- ------------------
CURRENT ASSETS
Cash and cash equivalents $ 1,924,006 $ 2,402,421
Accounts receivable, net of allowance for doubtful accounts
of $800,000 in 1998 ($500,000 in 1997) 24,235,761 16,589,263
Inventories 38,873,477 31,011,766
Net investment in sales-type leases, current portion 3,100,000 2,900,000
Prepaid expenses 543,095 362,029
Refundable federal and state income taxes - 837,638
--------------------- ------------------
TOTAL CURRENT ASSETS 68,676,339 54,103,117
--------------------- ------------------
PROPERTY, PLANT AND EQUIPMENT, NET 23,266,545 25,240,624
--------------------- ------------------
OTHER ASSETS
Net investment in sales-type leases, net of
current portion 6,013,959 5,348,773
Goodwill, net of amortization 1,440,745 1,704,132
Other 454,941 752,878
Equipment under construction 394,438 36,043
--------------------- ------------------
TOTAL OTHER ASSETS 8,304,083 7,841,826
--------------------- ------------------
TOTAL ASSETS $ 100,246,967 $ 87,185,567
===================== ==================
The accompanying notes are an integral part of these consolidated financial
statements.
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28
- ----------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' INVESTMENT SEPTEMBER 30,
---------------------------
1998 1997
------------ ------------
CURRENT LIABILITIES
Accounts payable $ 18,405,224 $ 14,132,646
Current portion of long-term debt 3,300,000 2,800,000
Accrued expenses 4,040,434 2,790,468
Accrued restructuring costs -- 610,000
Deferred income 497,000 250,000
Federal and state income taxes 513,994 --
------------ ------------
TOTAL CURRENT LIABILITIES 26,756,652 20,583,114
Long-term debt, net of current portion 42,530,105 38,513,490
Product liability 1,909,904 2,151,872
Deferred income taxes 2,215,000 2,100,000
------------ ------------
TOTAL LIABILITIES 73,411,661 63,348,476
------------ ------------
COMMITMENTS AND CONTINGENCIES (NOTE 17)
STOCKHOLDERS' EQUITY
Common stock, no par value; authorized 10,000,000 shares,
issued and outstanding, 4,686,727 shares
(4,737,622 shares in 1997) 4,997,809 5,383,486
Retained earnings 21,837,497 18,453,605
------------ ------------
TOTAL STOCKHOLDERS' INVESTMENT 26,835,306 23,837,091
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' INVESTMENT $100,246,967 $ 87,185,567
============ ============
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29
McCLAIN INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
- --------------------------------------------------------------------------------
For the Year Ended September 30,
--------------------------------
1998 1997 1996
---- ---- ----
Net sales $116,554,031 $95,255,641 $84,221,810
Cost of sales 95,786,681 79,711,774 67,086,240
------------ ----------- -----------
GROSS PROFIT 20,767,350 15,543,867 17,135,570
Selling, general and administrative
expenses 13,363,850 13,647,757 11,450,466
Restructuring and impairment charges -- 1,755,000 --
------------ ----------- -----------
INCOME FROM OPERATIONS 7,403,500 141,110 5,685,104
------------ ----------- -----------
OTHER INCOME (EXPENSE)
Interest expense (3,381,132) (3,448,867) (3,044,398)
Interest income 1,285,016 1,215,877 795,519
Other, net (493,492) 101,100 178,732
------------ ----------- -----------
OTHER EXPENSE - NET (2,589,608) (2,131,890) (2,070,147)
------------ ----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES 4,813,892 (1,990,780) 3,614,957
Income taxes (benefit) 1,430,000 (287,000) 1,230,000
------------ ----------- -----------
NET INCOME (LOSS) $ 3,383,892 $(1,703,780) $ 2,384,957
============ ============ ===========
Net income (loss) per share:
Basic $ 0.72 $ (0.36) $ 0.50
============ ============ ===========
Assuming dilution $ 0.72 $ (0.36) $ 0.49
============ ============ ===========
The accompanying notes are an integral part of these consolidated financial
statements.
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McCLAIN INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' INVESTMENT
- --------------------------------------------------------------------------------
COMMON STOCK AMOUNT
------------- RETAINED DUE FROM
SHARES AMOUNT EARNINGS OFFICERS TOTALS
------ ------ -------- -------- ------
Balance at October 1,
1995 4,587,744 $ 5,572,846 $ 17,772,428 $ (504,000) $ 22,841,274
Reversal of amount due
from officers (Note 14) - (504,000) - 504,000 -
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 5,299,870 20,157,385 - 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 5,383,486 18,453,605 - 23,837,091
Shares issued 45,284 90,323 - - 90,323
Shares repurchased (96,179) (476,000) - - (476,000)
Net income - - 3,383,892 - 3,383,892
---------- ----------- ------------ ----------- -------------
Balance at September 30,
1998 4,686,727 $ 4,997,809 $ 21,837,497 $ - $ 26,835,306
========== =========== ============ =========== =============
The accompanying notes are an integral part of these consolidated financial
statements.
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31
McCLAIN INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
FOR THE YEAR ENDED SEPTEMBER 30,
------------------------------------------------------
1998 1997 1996
-------------- --------------- ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 3,383,892 $ (1,703,780) $ 2,384,957
Adjustments to reconcile net income (loss) to
net cash (used in) provided by operating activities
Depreciation and amortization 3,395,115 4,893,701 2,550,935
Deferred income taxes 115,000 - 660,000
Provision for doubtful accounts 481,407 432,511 49,400
(Gain) loss on disposal of plant and equipment (1,530) 4,032 3,981
Common stock issued to directors for services 31,127 28,494 18,613
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 of business acquisition:
Accounts receivable (8,127,905) 1,481,176 (3,987,569)
Inventories (7,861,711) (5,434,766) 6,072,095
Net investment in sales-type leases (865,186) (2,632,423) (2,055,386)
Prepaid expenses and other assets 403,712 (1,086,661) (300,974)
Accounts payable 4,272,578 3,585,004 1,357,333
Accrued expenses 1,400,960 1,455,314 (735,656)
-------------- --------------- ------------
NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES (3,372,541) 1,085,491 6,017,729
-------------- --------------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of plant and equipment (965,246) (4,080,499) (1,991,316)
Payments on liabilities assumed upon the
Galion acquisition (241,967) (623,984) (1,371,214)
Proceeds from sale of plant and equipment 1,528 - 22,331
-------------- --------------- ------------
NET CASH USED IN INVESTING ACTIVITIES (1,205,685) (4,704,483) (3,340,199)
-------------- --------------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt 7,269,129 10,078,495 2,139,126
Repayments of long-term debt (2,752,514) (5,114,354) (5,137,398)
Sale of common stock under stock option plan 59,196 129,201 359,411
Repurchase of common stock (476,000) (136,968) (147,000)
-------------- --------------- ------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 4,099,811 4,956,374 (2,785,861)
-------------- --------------- ------------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (478,415) 1,337,382 (108,331)
Cash and cash equivalents, beginning of year 2,402,421 1,065,039 1,173,370
-------------- --------------- ------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 1,924,006 $ 2,402,421 $ 1,065,039
============== =============== ============
The accompanying notes are an integral part of these consolidated financial
statements.
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32
McCLAIN INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
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. The Company also sells truck chassis at the retail
level. 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 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, with the exception of the customer
discussed below. 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 approximately $33,642,000 and
$12,896,000 in 1998 and 1997, respectively. The Company had receivables
of approximately $8,000,000 and $3,000,000 from this customer at
September 30, 1998 and 1997, respectively. The loss of this customer
could adversely affect the Company's short-term operating results.
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McCLAIN INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
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 periods. 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.
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.
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McCLAIN INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
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, 1998 and 1997 was $809,980 and $546,593, 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 3).
Earnings (Loss) Per Share
Earnings (loss) per share is computed using the weighted average number
of common shares outstanding during the year. The Company adopted
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings
Per Share", effective September 30, 1998. This statement requires a
dual presentation and reconciliation of "basic" and "diluted" per share
amounts. Diluted reflects the potential dilution of all common stock
equivalents. At September 30, 1998, 1997 and 1996 options to purchase
199,476, 125,464 and 110,464, shares respectively, were excluded from
the computation of earnings per share because the options' exercise
prices were greater than the average market price of the common
shares. A reconciliation of the denominators used in the basic and
diluted share calculation follows for the years ended September 30:
1998 1997 1996
-------------- -------------- --------------
Denominator:
Weighted average shares outstanding, basic 4,711,741 4,729,281 4,752,050
Incremental shares from assumed
conversion of options - 41,577 81,443
------------- ------------- -------------
Weighted average shares outstanding, diluted 4,711,741 4,770,858 4,833,493
============= ============= =============
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.
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McCLAIN INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
New Accounting Pronouncements
In June 1997 the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 130,
"Reporting Comprehensive Income", which establishes standards for
reporting and display of comprehensive income and its components,
amending various prior SFAS. Management believes that the adoption of
SFAS No. 130 in fiscal 1999 will not have a significant impact on
results of operations or financial position.
Also in June 1997, the FASB issued SFAS No. 131, "Disclosures About
Segments of an Enterprise and Related Information", which establishes
standards for the way that public enterprises report information about
operating segments in annual financial statements and requires selected
information in interim financial reports issued to shareholders. It
also establishes standards for related disclosures about products and
services, geographic areas, and major customers, superseding SFAS No.
14. Management believes that the adoption of SFAS No. 131 in fiscal
1999 will not have a significant impact on the disclosure of financial
information.
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.
Reclassification
Certain amounts as reported in the 1997 and 1996 financial statements
have been reclassified to conform with the 1998 presentation.
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36
McCLAIN INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
2. BUSINESS ACQUISITION
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 years ended September 30, 1998 and 1997 approximately
$1,327,000 and $400,000 has been recorded as sales discounts in
connection with post-acquisition sales of $33,642,000 and $12,896,000,
respectively, made to Waste pursuant to the agreement.
McClain of Alabama, Inc. sales amounted to approximately $16,100,000
and $9,300,000 during the years ended September 30, 1998 and 1997,
respectively.
3. RESTRUCTURING AND IMPAIRMENT CHARGES
In September 1997, the Company decided to restructure its baler
equipment manufacturing operations based upon an evaluation of sales
levels to date, anticipated levels of business in 1998 and beyond, and
unsatisfactory operating results. The plan involved 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 in 1997 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 excluded the
writeoff of goodwill not considered to be deductible, these actions
reduced reported operating results by $1,548,000 or $0.33 per share in
1997.
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McCLAIN INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
4. SUPPLEMENTAL CASH FLOWS INFORMATION
During the years ended September 30, 1998, 1997 and 1996, common stock
valued at $31,127, $28,494 and $18,613, 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.
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 10).
Cash paid for interest amounted to $3,356,571 for 1998, $3,223,867 for
1997, and $3,044,398 for 1996. Cash paid for federal income taxes
amounted to $-0- for 1998, $350,000 for 1997, and $1,198,137 for 1996.
5. ALLOWANCE FOR DOUBTFUL ACCOUNTS RECEIVABLE
The following is a summary of changes in the allowance for doubtful
accounts during each of the three years in the period ended September
30:
1998 1997 1996
----------------- ----------------- ----------------
Balance, beginning of year $ 500,000 $ 600,000 $ 600,000
Add provision charged
against income 481,400 432,500 49,400
Less uncollectible accounts
written off, net of recoveries (181,400) (532,500) (49,400)
------------- -------------- --------------
BALANCE, END OF YEAR $ 800,000 $ 500,000 $ 600,000
============= ============== ==============
6. 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:
1998 1997
---------------- -----------------
Materials and chassis $ 22,100,252 $ 17,221,766
Work-in process 5,707,374 6,664,000
Finished goods 11,065,851 7,126,000
--------------- ---------------
$ 38,873,477 $ 31,011,766
=============== ===============
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38
McCLAIN INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
7. 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:
1998 1997
----------- -----------
Gross minimum lease payments
collectible in monthly installments $11,706,584 $10,825,166
Less advance lease payments and
deposits received 289,157 249,737
----------- -----------
Subtotal 11,417,427 10,575,429
Less unearned finance income 2,303,468 2,326,656
----------- -----------
Total net investment in sales-type leases 9,113,959 8,248,773
Current portion 3,100,000 2,900,000
----------- -----------
Noncurrent portion $ 6,013,959 $ 5,348,773
=========== ===========
Gross minimum lease payments are collectible in the following scheduled
annual amounts for the years succeeding September 30, 1998:
Year ending
September 30 Amount
- ------------------- --------------
1999 $ 3,883,358
2000 3,026,735
2001 2,341,437
2002 1,427,705
2003 738,192
-----------
Gross minimum amount collectible $11,417,427
===========
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39
McCLAIN INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
7. LEASING OPERATIONS (Continued)
Sale-Leaseback Transactions
---------------------------
The Company, through McClain Group Leasing, Inc., has TRAC (Terminal
Rental Adjustment Clause) leasing programs in place with three
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 income from
the subleasing activities was $1,382,000, $1,420,000 and $422,000 in
the years 1998, 1997 and 1996, respectively, while the related rental
expense for the leaseback of the products was $1,317,000, $1,212,000
and $316,000 during the years ended September 30, 1998, 1997 and 1996,
respectively. Proceeds of the subleasing activities have been, and are
expected to continue to be, in excess of the related rental expense.
Minimum scheduled rental payments and rental receipts under these
operating lease arrangements in future years are summarized as follows:
Year ending Rental Rental
September 30 Payments Receipts
------------------- ------------ ------------
1999 $ 930,000 $1,130,000
2000 930,000 1,130,000
2001 930,000 1,130,000
2002 930,000 1,130,000
2003 913,000 1,125,000
---------- ----------
Gross minimum rental payments $4,633,000 $5,645,000
========== ==========
Total residual values guaranteed by the Company under these leasing
arrangements approximates $725,000 as of September 30, 1998.
-38-
40
McCLAIN INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
8. 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, equipment, furniture and
fixtures, and vehicles. Expenditures for maintenance and repairs are
charged to expense as incurred, and significant betterments are
capitalized.
Property, plant and equipment consisted of the following amounts as of
September 30:
1998 1997
----------- -----------
Land $ 2,282,977 $ 2,281,480
Buildings and improvements 13,517,487 13,673,209
Machinery and equipment 22,276,726 21,584,020
Furniture, fixtures and vehicles 4,023,385 3,931,764
----------- -----------
42,100,575 41,470,473
Less accumulated depreciation 18,834,030 16,229,849
----------- -----------
Property, plant and equipment, net $23,266,545 $25,240,624
=========== ===========
-39-
41
McCLAIN INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
9. 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:
1998 1997
----------------- ----------------
Revolving line of credit providing for maximum availability of up to $20,000,000
and $21,000,000 at September 30, 1998 and 1997, respectively. Borrowings are
limited to 80% of the eligible accounts receivable and 50% of qualified
inventory and are subject to interest at the LIBOR rate plus 200 basis points
(7.5% at September 30, 1998). (At September 30, 1997, the Company had several
separate line of credit agreements with its primary bank. These agreements were
consolidated into the current line of credit as part of a new loan agreement
dated April 16, 1998.) $ 17,955,713 $ 20,139,774
The agreement is collateralized by substantially all the assets of the Company
and contains various covenants requiring the Company to maintain certain
financial ratios. The agreement also prohibits the Company from incurring
additional indebtedness other than subordinated indebtedness and limits plant
and equipment acquisitions to $3.0 million per fiscal year. This agreement
expires in March 2000, at which time the Company expects to obtain a renewal
upon the same or similar terms.
Line of credit providing for maximum availability of up to $10,000,000 in 1998
and 1997. Borrowings are limited to 80% of eligible lease receivables and are
subject to interest at the LIBOR rate plus 200 basis points. The agreement is
collateralized by certain equipment leases held by the Company's leasing
subsidiary. This agreement expires in March 2000, at which time the Company
expects to obtain a renewal upon the same or similar terms. 7,605,295 6,249,290
----------------- ----------------
Total lines of credit borrowings (Note 10) $ 25,561,008 $ 26,389,064
================= ================
-40-
42
McCLAIN INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
10. LONG-TERM DEBT
Long-term debt consisted of the following obligations as of September
30:
1998 1997
----------------- ----------------
Promissory note to a bank, collateralized by certain assets as disclosed in Note
9. The note is payable in monthly installments of $200,000 plus interest at the
LIBOR rate plus 230 basis points (effective rate of 7.8% at September 30, 1998),
maturing in July 2004. (At September 30, 1997, the Company was indebted on
several promissory notes to its primary bank. These promissory notes were
consolidated into the current promissory note pursuant to a new loan agreement
dated April 16, 1998.) $ 14,200,000 $ 7,348,253
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 8.5% to 8.75% at
September 30, 1998), maturing at various dates through January 2000. 1,369,097 2,351,173
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 4.07% at September 30, 1998) as determined by the bond
holder. 4,700,000 5,225,000
Lines of credit borrowings (Note 9) 25,561,008 26,389,064
----------------- ----------------
Total long-term debt 45,830,105 41,313,490
Less current portion 3,300,000 2,800,000
----------------- ----------------
Long-term debt, net of current portion $ 42,530,105 $ 38,513,490
================= ================
-41-
43
McCLAIN INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
10. LONG-TERM DEBT (Continued)
Scheduled aggregate principal maturities of long-term debt for years
succeeding September 30, 1998 are presented below:
Year ending
September 30 Amount
- ------------------- ----------------
1999 $ 3,300,000
2000 29,200,000
2001 3,100,000
2002 3,000,000
2003 3,000,000
Thereafter 4,230,105
----------------
$ 45,830,105
================
The debt agreements contain certain restrictive covenants which require
the Company to, among other things, meet certain net worth and working
capital requirements along with maintaining various financial ratios.
11. ACCRUED EXPENSES
Accrued expenses included on the accompanying consolidated balance
sheets consist of the following amounts at September 30:
1998 1997
--------------- ---------------
Sales discounts $ 1,162,959 $ 400,000
Compensation 640,869 577,772
Vacation and holiday pay 481,174 534,953
Taxes 488,598 -
Insurance 891,592 514,040
Other 375,242 763,703
--------------- ---------------
Total $ 4,040,434 $ 2,790,468
=============== ===============
-42-
44
McCLAIN INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
12. INCOME TAXES
The provision (benefit) for income taxes for each of the three years in
the period ended September 30, consists of the following components:
1998 1997 1996
----------------- ---------------- -----------------
Current federal provision (benefit) $ 1,315,000 $ (287,000) $ 570,000
Deferred provision 115,000 - 660,000
---------------- -------------- ---------------
Total income taxes (benefit) $ 1,430,000 $ (287,000) $ 1,230,000
================ ============== ===============
The effective income tax rate on consolidated pre-tax income differs
from the federal statutory rate for the following reasons:
1998 1997 1996
--------------- ----- --------------- ------ -------------- -----
Amount % Amount % Amount %
--------------- ----- --------------- ------ -------------- -----
Provision (benefit) computed
at statutory rate $ 1,637,000 34 $ (677,000) (34) $ 1,229,000 34
Nondeductible expenses 21,000 1 389,000 19 31,000 1
Cancellation of debt
related to EPCO restructuring (207,000) (4) - - - -
Other (21,000) (1) 1,000 - (30,000) (1)
------------ ----- ------------ ------ ------------ ---
$ 1,430,000 30 $ (287,000) (15) $ 1,230,000 34
============ ===== ============ ===== ============ ===
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:
1998 1997
---------------- ------------------
Taxable differences:
Property and equipment $ 2,850,000 $ 2,651,000
Inventory 1,140,000 1,226,000
--------------- ----------------
Gross deferred tax liabilities 3,990,000 3,877,000
--------------- ----------------
Deductible differences:
Product liability 646,000 740,000
Accounts receivable 170,000 171,000
Accrued expenses 798,000 727,000
Goodwill 161,000 82,000
Alternative minimum tax credit - 50,000
Other - 7,000
--------------- ----------------
Gross deferred tax assets 1,775,000 1,777,000
--------------- ----------------
Net deferred income tax liability $ 2,215,000 $ 2,100,000
=============== ================
The components which comprise gross deferred taxes are predominantly
noncurrent; as such, the entire related net liability is classified as
noncurrent.
-43-
45
McCLAIN INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
13. 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 $494,133 in 1998, $407,739 in 1997, and $334,924 in
1996.
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, 1998, 1997
and 1996.
14. 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, 1998, 1997 and 1996.
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 a contemplated public offering of its common stock and
at the insistence of staff members of the Securities and Exchange
Commission (SEC), for the purposes of the public offering, the Company
agreed to value these shares at a price based on the market value of
such shares as of August 2, 1993, the date the transactions were
consummated. This revision 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. In order to consummate the offering, at the
direction of the SEC staff, the Company's principal shareholders 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.
-44-
46
McCLAIN INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
14. RELATED PARTY TRANSACTIONS (Continued)
The Company originally maintained, pursuant to generally accepted
accounting principles in effect at the time of the transaction, that
the shares should have been valued as of March 29, 1993, but acquiesced
to the position of the SEC staff in an effort to move forward with the
aborted securities offering. The accounting profession subsequently
issued a pronouncement supporting the Company's original position.
Accordingly, the letter agreement was rescinded during the year ended
September 30, 1998 and the change in valuation is reported on the
accompanying consolidated statement of stockholder's investment during
the earliest year presented.
Other
Raymond Elliott, a director of the Company, served as a Vice President
of First of American Insurance Group, Inc. prior to October 2, 1998.
This entity provided insurance at a cost of approximately $1,100,000,
$1,093,000 and $1,200,000 to the Company during the years ended
September 30, 1998, 1997 and 1996, respectively. This entity received
fees and commissions in connection with these transactions of
approximately $116,000, $117,000 and $120,000, respectively.
Product Sales
The Company had product sales of approximately $590,000, $560,000 and
$660,000, during the years ended September 30, 1998, 1997 and 1996,
respectively, to a business controlled by the President of McClain
Industries, Inc.
15. 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,
1998, 1997 and 1996 the Company issued 7,593, 5,466 and 3,555 shares,
respectively, of its common stock to such directors in exchange for
services rendered.
-45-
47
McCLAIN INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
15. STOCK BASED COMPENSATION PLANS (Continued)
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.
The following table presents a summary of stock option activity for
each of the years in the three year period ended September 30:
1998 1997 1996
---------------------- ---------------------- ----------------------
Exercise Exercise Exercise
Shares Price * Shares Price * Shares Price *
----------- --------- ---------- --------- ----------- ---------
Outstanding, beginning of year 191,391 $5.71 227,896 $5.01 373,251 $5.65
Granted 74,000 5.08 15,000 5.75 - -
Exercised (30,825) 3.25 (51,505) 2.51 (134,244) 2.68
Forfeited/expired (35,090) 3.25 - - (11,111) 2.68
----------- --------- --------- --------- ---------- ---------
Outstanding, end of year 199,476 $6.30 191,391 $5.71 227,896 $5.01
----------- --------- --------- --------- ---------- ---------
Exercisable, end of year 145,131 $6.73 164,491 $5.55 174,174 $4.33
=========== ========= ========= ========= ========== =========
OPTIONS AT SEPTEMBER 30, 1998
Options Outstanding Options Exercisable
------------------------------------ ----------------------
Remaining
Contractual Exercise Exercise
Range of Exercise Prices Shares Life * Price * Shares Price *
---------------------------------- ----------- ---------- ----------- ---------- ---------
$5.00 to $6.00 89,000 4.2 years $ 5.19 34,667 $ 5.27
$6.01 to $7.00 46,478 0.6 years 6.56 46,466 6.56
$7.01 to $8.00 50,665 1.6 years 7.33 50,665 7.33
$8.01 to $9.00 13,333 0.9 years 8.81 13,333 8.81
---------- ---------- ----------- ---------- ---------
Total 199,476 2.5 years $ 6.30 145,131 $ 6.73
========== ========== =========== ========== =========
*Weighted average
-46-
48
McCLAIN INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
15. STOCK BASED COMPENSATION PLANS (Continued)
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 years ended September 30, 1998 and 1997 would have been
insignificant.
16. COMMON STOCK REPURCHASES
In February 1998, the Board of Directors authorized the Company to
repurchase from time to time on the open market up to 200,000 shares of
the Company's common stock. During the year ended September 30, 1998,
the Company repurchased 96,179 shares at prices ranging from $3.25 to
$5.25. 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.
17. 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.
-47-
49
McCLAIN INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
17. COMMITMENTS AND CONTINGENCIES (Continued)
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, 1998.
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.
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.
-48-
50
McCLAIN INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
18. 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
of 1997 by approximately $1,650,000 ($0.35 per share).
* * * * *
-49-
51
INDEX TO EXHIBITS
Exhibit No. Description Location
- ----------- ----------- --------
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 Agreement of Purchase and Sale dated July 20, 1992 by and between Peabody (4)
International Corporation, as Seller, and Galion Holding Company, as Buyer
10.4 Manufacture and License Agreement dated as of November 2, 1992, between Galion Dump (6)
Bodies, as Licensor, and the Company, as Licensee
10.5 Loan documents dated as of March 1, 1993, between the Company and Galion Dump Bodies (6)
and E-Z Pack
10.6 Guaranty Fee Agreement dated as of March 2, 1993, between Galion Holding and the (6)
Company
10.7 Purchase Agreement, dated as of March 30, 1993, between the Company and Group (7)
Properties III
10.8 Purchase Agreement, dated as of March 30, 1993, between the Company and Group (7)
Properties
10.9 Purchase Agreement, dated as of March 30, 1993, between the Company and Group (7)
Properties of Georgia
10.10 Commercial Mortgage, Assignment of Leases and Rents, Security Agreement and Financing (8)
Statement Dated February 6, 1995, between Standard Federal Bank and the Company
10.11 Commercial Mortgage, Assignment of Leases and Rents, Security Agreement and Financing (8)
Statement Dated February 6, 1995, between Standard Federal Bank and the Company
10.12 Second Amendment to Open-End Commercial Mortgage and Assignment of Lease and Rentals (8)
(Secures Future Advances) dated February 6, 1995, between Standard Federal Bank and
E-Z Pack
10.13 Second Amendment to Open-End Commercial Mortgage and Assignment of Lease and Rentals (8)
(Secures Future Advances) dated February 6, 1995, between Standard Federal Bank and
Galion Dump Bodies
10.14 Fifth Amendment to Open-End Commercial Mortgage and Assignment of Lease and Rentals (8)
(Secures Future Advances) between Standard Federal Bank and Galion Dump Bodies dated
June 22, 1995.
10.15 Third Amended and Restated Promissory Note (Line of Credit) dated June 22, 1995, (8)
between Standard Federal Bank, Galion Holding, E-Z Pack, Galion Dump Bodies and
McClain Group Sales of Florida
10.16 Security Agreement dated June 22, 1995, between Standard Federal Bank and McClain (8)
Group Sales of Florida
50
52
Exhibit No. Description Location
- ----------- ----------- --------
10.17 Fifth Amendment to Open-End Commercial Mortgage and Assignment of Lease and Rentals (8)
(Secures Future Advances) dated June 22, 1995, between Standard Federal Bank and E-Z
Pack
10.18 Loan Agreement dated July 17, 1996, between Standard Federal Bank and Leasing (9)
10.19 Promissory Note (Line of Credit) dated July 17, 1996, between Standard Federal Bank (9)
and Leasing
10.20 Commercial Mortgage, Assignment of Leases and Rents, Security Agreement and Financing (9)
Statement dated August 29, 1996, between Standard Federal Bank and McClain-Alabama.
10.21 Security Agreement dated August 29, 1996, between Standard Federal Bank and (9)
McClain-Alabama
10.22 Master Lease Agreement dated July 15, 1995 between Fifth Third Leasing Company and (9)
Leasing
10.23 Master Lease Agreement dated May 17, 1996 between NBD Bank and Leasing (9)
10.24 Term Note dated January 17, 1997 between Trust Company Bank of Middle Georgia and the (10)
Company
10.25 Preliminary Placement Memorandum dated April 17, 1997 - The Industrial Development (10)
Board of the City of Demopolis Industrial Development Revenue Bonds Series 1997
(McClain of Alabama, Inc. Project)
10.26 Lease Agreement dated April 1, 1997 between the Industrial Development Board of the (10)
City of Demopolis and McClain of Alabama
10.27 Trust Indenture Agreement dated April 1, 1997 between the Industrial Development Board (10)
of the City of Demopolis and LaSalle National Bank
10.28 Bond Guaranty Agreement dated April 1, 1997 between LaSalle National Bank and (10)
McClain-Alabama
10.29 Mortgage, Assignment of Leases and Security Agreement dated April 1, 1997 from the (10)
Industrial Development Board of the City of Demopolis and McClain-Alabama to Standard
Federal Bank
10.30 Standard Federal Bank Irrevocable Letter of Credit dated April 23, 1997 (10)
10.31 Placement Agency Agreement dated April 23, 1997 - The Industrial Development Board of (10)
the City of Demopolis Industrial Development Revenue Bond Series 1997 (McClain of
Alabama, Inc. Project)
10.32 Remarketing Agreement dated April 23, 1997 among LaSalle National Bank, The Industrial (10)
Development Board of the City of Demopolis and McClain of Alabama, Inc.
10.33 Loan Agreement dated April 16, 1998 between Standard Federal Bank and McClain 53
Industries, Inc., McClain of Alabama, Inc., McClaim of Georgia, Inc., McClain of Ohio,
Inc., McClain of Oklahoma, Inc., McClain Epco, Inc., Shelby Steel Processing Company,
McClain Tube Company, Galion Holding Company, McClain E-Z Pack, Inc., Galion Dump
Bodies, Inc., McClain Group Sales, Inc., and McClain Group Sales of Florida, Inc.
51
53
Exhibit No. Description Location
- ----------- ----------- --------
10.34 Promissory Note (Line of Credit) dated April 16, 1998 between Standard Federal Bank 86
and McClain Industries, Inc., McClain of Alabama, Inc., McClaim of Georgia, Inc.,
McClain of Ohio, Inc., McClain of Oklahoma, Inc., McClain Epco, Inc., Shelby Steel
Processing Company, McClain Tube Company, Galion Holding Company, McClain E-Z Pack,
Inc., Galion Dump Bodies, Inc., McClain Group Sales, Inc., and McClain Group Sales of
Florida, Inc.
10.35 Promissory Note (Term Loan) dated April 16, 1998 between Standard Federal Bank and 93
McClain Industries, Inc., McClain of Alabama, Inc., McClaim of Georgia, Inc., McClain
of Ohio, Inc., McClain of Oklahoma, Inc., McClain Epco, Inc., Shelby Steel Processing
Company, McClain Tube Company, Galion Holding Company, McClain E-Z Pack, Inc., Galion
Dump Bodies, Inc., McClain Group Sales, Inc., and McClain Group Sales of Florida, Inc.
10.36 Promissory Note (Line of Credit Converting to Term Loan) dated April 16, 1998 between 100
Standard Federal Bank and McClain Industries, Inc., McClain of Alabama, Inc., McClaim
of Georgia, Inc., McClain of Ohio, Inc., McClain of Oklahoma, Inc., McClain Epco,
Inc., Shelby Steel Processing Company, McClain Tube Company, Galion Holding Company,
McClain E-Z Pack, Inc., Galion Dump Bodies, Inc., McClain Group Sales, Inc., and
McClain Group Sales of Florida, Inc.
10.37 Second Amendment Agreement, Loan Agreement, Promissory Note (Line of Credit) dated 107
April 16, 1998 between Standard Federal Bank and McClain Group Leasing, Inc.
22 List of Subsidiaries (9)
27 Financial Data Schedule 120
(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
(10) Incorporated by reference to the Company's Form 10;K f/y/e 9/30/97
52