10-K 1 k66941e10-k.txt ANNUAL REPORT DATED 9/30/01 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, 2001 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO --------------- --------------- Commission File No. 0-7770 MCCLAIN INDUSTRIES, INC. (Exact name of Registrant as specified in its charter) STATE OF MICHIGAN 38-1867649 State of Incorporation I.R.S. Employer I.D. No. 6200 ELMRIDGE ROAD STERLING HEIGHTS, MICHIGAN 48310 (810) 264-3611 (Address of principal executive offices and telephone number) Securities Registered Pursuant to Section 12(b) of the Act: NONE Securities Registered Pursuant to Section 12(g) of the Act: COMMON STOCK, NO PAR VALUE Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] As of December 7, 2001, the aggregate market value of the Registrant's voting stock held by nonaffiliates of the Registrant was $5,650,932 determined in accordance with the highest price at which the stock was sold on such date as reported by the Nasdaq National Market. As of December 7, 2001, there were 4,520,746 shares of the Registrant's common stock issued and outstanding. The Exhibit Index Begins on Page 51 PART I ITEM 1. BUSINESS GENERAL McClain Industries, Inc., a Michigan corporation ("McClain"), 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 was incorporated in 1968 and became a publicly-traded company in 1973. It currently has: (i) five wholly-owned operating subsidiaries: McClain E-Z Pack, Inc. ("E-Z Pack"); McClain Galion, Inc. ("Galion"); McClain Southland Company ("Southland"); Shelby Steel Processing Co. ("Shelby Steel"); McClain Tube Company (d/b/a Quality Tubing) ("Tube"); (ii) one wholly-owned lease financing subsidiary: McClain Group Leasing, Inc. ("Leasing"); and (iii) one wholly-owned international sales corporation, McClain International FSC, Inc. ("FSC"). All of these companies are Michigan corporations, except for FSC, which is a Virgin Islands corporation. The Company's executive offices are located at 6200 Elmridge Road, Sterling Heights, Michigan 48310 and its telephone number is (810) 264-3611. PRODUCTS The Company manufactures and markets dump truck bodies and four solid waste handling equipment product lines: (1) containers; (2) compactors and baling equipment; (3) garbage and recycling truck bodies; and (4) transfer trailers. The Company also markets truck chassis. Sales of dump truck bodies accounted for approximately 15%, sales of solid waste handling equipment accounted for approximately 66%, and truck chassis accounted for approximately 19% of the Company's consolidated net sales for the fiscal year ended September 30, 2001. Dump Truck Bodies and Hoists Galion manufactures steel and aluminum dump truck bodies varying in capacity from two to twenty-five cubic yards at its Winesburg, Ohio facility. E-Z Pack, under license from Galion, also manufactures dump truck bodies at its Oklahoma City, Oklahoma facility. Dump truck bodies are assemblies that 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 are sold under the registered trademark "Galion". 2 Containers Detachable Roll-Off Containers and Roll-Off Hoists. E-Z Pack manufactures several types of detachable roll-off containers and roll-off hoists at the Company's facilities in Sterling Heights, Michigan, Macon, Georgia, Demopolis, Alabama, and Oklahoma City, Oklahoma. 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, Demopolis, Alabama, and Oklahoma City, Oklahoma. 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 facilities in Sterling Heights, Michigan, Demopolis, Alabama, and Oklahoma City, Oklahoma. 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". E-Z Pack manufactures, at the Winesburg, Ohio facility, several models of balers which compact plastic and paper products, primarily cardboard. Balers are either vertical downstroke or closed door horizontal balers. Garbage and Recycling Truck Bodies E-Z Pack manufactures at its Galion, Ohio facility traditional garbage truck bodies comprised of front, rear and side loading truck bodies and a recycling truck body used in solid waste handling and disposal. The front loading truck bodies vary in capacity from thirty-two cubic yards to forty-three cubic yards, the rear loading truck bodies vary in capacity from eighteen cubic yards to thirty-one cubic yards, and the side loading truck bodies vary in capacity from twenty-nine cubic yards to thirty-nine cubic yards. The recycling truck bodies vary in capacity from thirty cubic yards to forty cubic yards. The products manufactured by E-Z Pack are sold under the registered trademark "E-Z Pack". Within this line, E-Z Pack sells its rear loading truck bodies under the trademarks "Goliath", "Goliath II", and "Apollo", and its front loading truck bodies under the trademark "Hercules". The side loading truck bodies and the recycling truck bodies are principally identified by the E-Z Pack name only. The Company has several patents covering these products. 3 Transfer Trailers E-Z Pack 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 or garbage truck body for sale as a road ready package. This program gives the Company the opportunity to provide a more complete product to its customers and gives it the ability to react quickly to unexpected customer needs. Since the trucks are purchased rather than manufactured by the Company, lower margins are expected on the sales of these package units then the sales of products manufactured by the Company. Leasing Leasing provides the Company's customers with financing options through both finance type and operating leases. The operating leases are T.R.A.C. (Terminal Rental Adjustment Clause) leases. CUSTOMERS AND DISTRIBUTION For the fiscal year ended September 30, 2001 the Company's consolidated net sales were divided approximately 45% to distributors, 45% to solid waste handling companies, and 10% to other entities. During the fiscal years ended September 30, 2001, 2000 and 1999, approximately 17.0%, 22.6% and 23.1%, respectively, of the Company's total sales were made to Waste Management, Inc. The Company has no contracts with any of its customers, except Waste Management, Inc. (see footnote 16 to the consolidated financial statements of the Company, included under Item 8 of the Form 10-K, for additional information) 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. 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 4 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 also engages independent distributors and dealers in various regions throughout the United States and certain foreign countries, for marketing its products to customers. The Company's dealers are generally responsible in their respective geographic markets for identifying customers and soliciting customer orders. As of December 7, 2001, there were approximately 225 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, 2001, Leasing held net lease receivables of approximately $27.8 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. 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 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 5 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 processes coiled steel and manufactures 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 88.5%, 93.8%, and 92.6% of Shelby Steel's business and 1.7%, 1.4%, and 1.5% of the Company's consolidated net sales for the fiscal years ended September 30, 2001, 2000 and 1999, 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 95% of its steel tubing requirements. COMPETITION The Company faces intense competition in the solid waste handling equipment and dump truck bodies industries. Certain of the Company's competitors offer as wide a range of products, and have greater market share and financial, marketing, manufacturing and other resources than the Company. At present, the Company's order backlogs are approximately two to four weeks. In addition, the Company believes that several of its competitors have added or are in the process of adding additional manufacturing capacity, which could reduce order backlogs and price levels, and consequently adversely affect the Company. Moreover, the absence of highly sophisticated technology results in a number of small regional companies entering the container and dump truck body industries 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, 6 consumers generally find the products relatively interchangeable. Consequently, price, product availability and delivery, design and manufacturing quality and service are the principal means of competition. The Company believes that it can continue to compete and further strengthen its competitive position through proper pricing, marketing and cost-effective distribution of the Company's products. The steel processing industry is also highly competitive, with quality, price and delivery the principal means of competition. The Company believes that it will generally continue to maintain its competitive position in the marketplace with respect to steel processing. Shelby Steel's ability to warehouse customers' steel attracts customers such as steel brokers who do not maintain facilities of their own to warehouse steel. BACKLOG AND INVENTORY The Company generally produces solid waste handling equipment and dump truck bodies pursuant to customer purchase orders. The Company includes in its backlog only firm product orders, which are subject to termination at will and rescheduling, without penalty. The Company's backlog was approximately $11.2 million and $12.9 million at September 30, 2001 and 2000, 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, 2001, 2000 and 1999, the Company had inventory of $36.7 million, $52.0 million and $63.3 million, respectively. EMPLOYEES The Company had approximately 560 employees as of December 7, 2001. Sixty-eight of the Company's hourly employees are represented by the McClain Hourly Employees' Union pursuant to a collective bargaining agreement that expires September 16, 2002. The 104 hourly employees of E-Z Pack (E-Z Pack Division) are represented by the International Association of Machinists and Aerospace Workers Union pursuant to a collective bargaining agreement which expires June 12, 2003. The 45 hourly employees of E-Z Pack (Ohio Division) are represented by the International Association of Machinists and Aerospace Workers Union pursuant to a collective bargaining agreement which expires November 1, 2002. The Shopmen's Local Union No. 616 of the International Association of Bridge, Structional and Ornamental Workers represent certain hourly employees at the Company's facility in Macon, Georgia. E-Z Pack has conducted extensive negotiations with this union toward a collective bargaining agreement which, at this time, has not been finalized. 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 7 manufacturing operations and in owning real estate is the risk of environmental liabilities as a result of both current and past operations, which cannot be predicted with certainty. The Company has incurred and will continue to incur costs, on an ongoing basis, associated with environmental regulatory compliance in its business. The Company has budgeted approximately $1.0 million to make capital additions and improvements to its painting processes and enhance the related environmental controls at its facilities in Sterling Heights, Michigan and Oklahoma City, Oklahoma. 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 961,000 square feet of real property located in Michigan, Ohio, Georgia, Oklahoma, Alabama and Florida. The Company owns three facilities in Michigan, two facilities in Ohio, one facility in Georgia, one facility in Oklahoma, one facility in Alabama and one facility in Florida. The properties that the Company owns or leases consist of the following:
OWNED SQUARE LOCATION OR LEASED FOOTAGE -------- --------- ------- Sterling Heights, Michigan Owned 37,000 Sterling Heights, Michigan Leased 18,000 Kalamazoo, Michigan Owned 55,000 River Rouge, Michigan Owned 50,000 Galion, Ohio Owned 365,000 Winesburg, Ohio Owned 113,500 Macon, Georgia Owned 114,500 Oklahoma City, Oklahoma Owned 100,000 Demopolis, Alabama Owned 102,000 Bartow, Florida Owned 6,000
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 the Company. This facility is used to manufacture roll-off containers, roll-off hoists and compactors. The Company also owns a 55,000 square foot facility located in Kalamazoo, Michigan which is home to the Company's tube mill. The Company leases, under a verbal month-to-month lease, an 18,000 square foot manufacturing facility also located in Sterling Heights, Michigan from siblings 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, 8 although other similarly situated unrelated parties would, in all likelihood, require a long-term written lease. 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. E-Z Pack owns three buildings comprising approximately 365,000 square feet situated on approximately 38 acres of land in Galion, Ohio. This facility manufactures front, side and rear loading garbage truck bodies and recycling trucks as well as transfer trailers. E-Z Pack's Georgia facility is an approximately 114,500 square foot manufacturing facility on 13.2 acres in Macon, Georgia where it manufactures roll-off hoists. E-Z Pack's Oklahoma facility consists of four 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, compactors and dump bodies. E-Z Pack 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 and compactors. Galion owns a 113,500 square foot manufacturing facility situated on 20 acres of land in Winesburg, Ohio where it manufactures dump bodies, hoists and balers. The Company's Southland facility owns a building that is approximately 6,000 square feet on approximately 3.43 acres of land. This property provides administration offices and service facilities for Southland. The Company's Sterling Heights, Michigan facility and Galion, Ohio facility are currently operating at approximately 60% 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 Winesburg, Ohio facility is currently operating at 80% 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 that collateralize certain obligations. See Notes 6 and 7 of Notes to Consolidated Financial Statements. 9 ITEM 3. LEGAL PROCEEDINGS The Company is from time to time subject to various claims from existing or former employees alleging gender, age or racial discrimination and anti-union activity, none of which are expected to have a material adverse affect on the Company. In addition, as a manufacturer of industrial products, the Company is, from time to time, subjected to various product liability claims. Such claims typically involve personal injury or wrongful death associated with the use or misuse of the Company's products. While such claims have not been material to the Company in any year and the Company believes that it maintains adequate product liability insurance, there can be no assurance that such insurance will continue to be available on terms acceptable to the Company. Any product liability claim not fully covered by insurance, as well as any adverse publicity from a product liability claim, could have a material adverse effect on the Company. The Company is currently defending a number of legal proceedings involving product liability claims relating to McClain, Galion and E-Z Pack brand products. Although 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 International Association of Bridge, Structual, Ornamental and Reinforcing Iron Workers, Local Union 526 (the "Local 526") filed unfair labor practices with regard to the Company's Macon, Georgia operations in 1995 which were subsequently upheld by the National Labor Relations Board and the U.S. Court of Appeals for the Eleventh Circuit. The Company is negotiating with the NLRB in an effort to reach a settlement as to the extent of the liability arising from the matter. Local 526 filed additional unfair labor practices in 1996. On October 4, 2001 the NLRB issued an Order Consolidating Cases, Second Amended Consolidated Complaint and Notice of Hearing which set a hearing date of March 11, 2002. The Second Amended Consolidated Complaint asserts various unfair labor practices including violations of Sections 8(a)(1) and (3) and (5) and 8(d) of the National Labor Relations Act. The NLRB seeks backpay, reinstatement, and an order requiring transfer of work. While the Company believes these lawsuits will be settled, there can be no assurance that they will be. If they are not settled, there can be no assurance that the amounts awarded will not have a material adverse effect on the Company. The Company is not presently a party to any material legal proceedings except as described above in this item. 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. 10 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, 2000 First Quarter 6.25 3.875 Second Quarter 6.812 4.187 Third Quarter 5.437 4.625 Fourth Quarter 5.625 3.875 FISCAL YEAR ENDED SEPTEMBER 30, 2001 First Quarter 4.50 3.75 Second Quarter 3.12 2.12 Third Quarter 2.75 2.12 Fourth Quarter 2.75 1.25
On December 7, 2001, the last reported sales price for the Common Stock as reported by Nasdaq/NMS was $1.25. As of such date there were approximately 199 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: 11
======================================================================================================================== 2001 2000 1999 1998 1997 ---- ---- ---- ---- ---- Gross Sales $ 92,499,362 $ 142,978,636 $ 142,079,475 $ 118,487,052 $ 95,255,641 Sales, Net of $ 91,549,939 $ 141,117,959 $ 140,604,885 $ 116,554,031 $ 95,255,641 Customer Discounts Net Income (Loss) $ (4,989,041) $ (85,854) $ 4,181,938 $ 3,383,892 $ (1,703,780) Net Earnings (Loss) Per Common and Common Equivalent $ (1.11) $ (.02) $ .90 $ .72 $ (.36) Share,(1) Working Capital (Deficit) $ (12,409,479) $ 59,987,560 $ 58,689,965 $ 41,919,687 $ 33,520,003 Total Assets $ 102,646,275 $ 123,684,913 $ 129,923,989 $ 100,246,967 $ 87,185,567 Long-Term Debt(2) $ 0 $ 67,476,117 $ 62,648,684 $ 42,530,105 $ 38,513,490 Stockholders' Investment $ 25,005,663 $ 30,207,456 $ 30,890,965 $ 26,835,306 $ 23,837,091 Weighted Average Number of Common Equivalent Shares Outstanding(1) 4,504,341 4,565,661 4,673,027 4,711,741 4,729,281 Current Ratio(2) 0.83:1 3.67:1 2.79:1 2.57:1 2.63:1 Funded Debt to Equity 2.38:1 2.24:1 2.03:1 1.59:1 1.62:1 ========================================================================================================================
1 Weighted average number of shares outstanding includes, as appropriate, adjustments for the effect of common stock equivalents. 2 For 2001, current liabilities include long term debt subject to a forbearance agreement. See Note 7 of the Consolidated Financial Statements. 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. Certain statements in this Form 10-K and in future filings by the Company with the Securities and Exchange Commission, and in the Company's written and oral statements made by or with the approval of an authorized executive officer, constitute "forward-looking statements" within the meaning of the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended. The Company intends that such forward-looking statements be subject to the safe harbors created by such acts. The words "believe", "expect", "anticipate"; and similar expressions identify forward-looking statements. These forward-looking statements reflect the Company's current views with respect to future events and financial performance, but are subject to many uncertainties and factors relating to the Company's operations and business environment which may cause the actual results of the Company to be materially different from any future results expressed or implied by such forward-looking 12 statements. Examples of such uncertainties include, but are not limited to, changes in customer demand and requirements, interest rate fluctuations, changes in federal income tax laws and regulations, competition, industry specific factors and both national and world wide economic and business conditions. The Company undertakes no obligation to publicly update or revise any forward-looking statements whether as a result of new information, future events or otherwise. 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, ----------------------------------------------------------------------------- 2001 2000 1999 1998 1997 ---- ---- ---- ---- ---- Net Sales 100.00% 100.00% 100.00% 100.0% 100.00% Cost of Sales 86.71 84.47 82.40 82.18 83.68 ------ ------ ------ ----- ------ Gross Profit 13.29 15.53 17.60 17.82 16.32 Selling, General & Administrative Expenses 18.82 12.76 11.55 11.47 14.33 Restructuring and Impairment Charge 0.00 0.00 0.00 0.00 1.84 ------ ------ ------ ----- ------ Operating Profit (Loss) (5.53) 2.77 6.05 6.35 .15 Other Expense 2.71 2.86 1.54 2.22 2.24 ------ ------ ------ ----- ------ Income (Loss) Before Income Taxes (8.24) (.09) 4.51 4.13 (2.09) Income Taxes (Benefit) (2.79) (.03) 1.53 1.23 (.30) ------ ------ ------ ----- ------ Net Income (Loss) (5.45)% (.06)% 2.98% 2.90% (1.79)% ====== ====== ====== ====== ======
RESULTS OF OPERATIONS Comparison of year ended September 30, 2001 to year ended September 30, 2000 Net sales decreased 35.1% to $91.6 million for the fiscal year ended September 30, 2001 (Fiscal 2001) from $141.1 million for the fiscal year ended September 30, 2000 (Fiscal 2000). The decrease was due primarily to slumping sales resulting from the slowdown in the economy. McClain E-Z Pack's sales decreased 36.1% or $31.0 million during Fiscal 2001 compared to the Fiscal 2000 while McClain Truck sales decreased 40.9% or $12.1 million during Fiscal 2001 compared to Fiscal 2000. These decreases were the result of the continuing economic slowdown and limited capital expenditures in the hauling industry. Sales of the Company's dump body products decreased by 28.8% or $5.5 million for Fiscal 2001 compared to Fiscal 2000 due to the continued slump and excess production capacity in the dump body markets. Sales of the Company's other product lines fell 22.8% due to the current economic slump for Fiscal 2001 compared to Fiscal 2000. The sales of the McClain Truck division accounted for 23.2% of the Company's sales for fiscal 2001 compared to 20.6% of the Company's sales for Fiscal 2000. Cost of goods sold increased to 86.7% for Fiscal 2001 from 84.5% for Fiscal 2000. The gross profit margin on manufactured products decreased to 17.7% for Fiscal 2001 compared to 21.8% for Fiscal 2000 due primarily to the lower sales volume that increased the Company's fixed cost rates and continued increases in health insurance costs. The McClain Truck division had a gross loss of 1.1% for Fiscal 2001 compared to a gross loss of 3.15% for Fiscal 2000. Selling, General & Administrative Expenses increased to 18.8% of net sales for Fiscal 2001 from 12.8% of net sales for Fiscal 2000 primarily due to the lower sales volume, increases in the reserves for the accounts and lease receivable, continued 13 increases in health insurance costs, various severance packages for terminated employees, and costs related to the ongoing negotiations with the principal lender regarding the Company's debt structure (see the discussion in the Liquidity and Capital Resources section). Inventory has decreased to $36.7 million at September 30, 2001 from $52.0 million at September 30, 2000. This decrease is due primarily to the Company's efforts to liquidate inventory in order to bring the inventory levels into line with the current sales levels. The Company's leasing subsidiary generated pretax income of $1.0 Million for Fiscal 2001 compared to of $.70 Million for Fiscal 2000. The Company had $27.8 Million in net finance lease receivables at September 30, 2001 compared to $23.6 Million at September 30, 2000. Interest expense decreased to $5.5 million in Fiscal 2001 from $6.3 in Fiscal 2000. This decrease was due primarily to falling interest rates, decreased debt related to the inventory reductions and was partially offset by increased debt related to the leasing company. Income taxes are calculated based on the current statutory rates. No significant differences between the Company's effective rate and the statutory rates exist. The Company had a Net Loss of $4,989,041 for Fiscal 2001 compared to a Net Loss of $85,854 for Fiscal 2000. The loss was due primarily to reduced sales volumes throughout the Company's product lines and increases in certain other costs as previously discussed. Comparison of year ended September 30, 2000 to year ended September 30, 1999 Net sales increased .4% to $141.1 million for the fiscal year ended September 30, 2000 (Fiscal 2000) from $140.6 million for the fiscal year ended September 30, 1999 (Fiscal 1999). The Company experienced increases in the sales of its commodity products and truck chassis while refuse truck and dump body sales decreased. Sales for the commodity products increased 5.14% or $2.7 million, while truck chassis sales increased 11.3% or $3.0 million. Dump body sales decreased 5.4% or $1.1 million due primarily to an overall slump in the dump body industry. During Fiscal 2000, E-Z Pack sales fell 9.41% or $3.4 million after an increase of 49.6% or $11.8 million in Fiscal 1999. This decrease was due primarily to the national haulers limiting their capital purchases while they implemented integration plans following ongoing consolidations in the waste hauling industry. Sales of the Company's other product lines increased slightly or were flat for Fiscal 2000 compared to Fiscal 1999. The sales of the McClain truck division accounted for 20.6% of the Company's sales for Fiscal 2000 compared to 18.8% of the Company's sales for Fiscal 1999. The Company's overall gross profit as a percentage of sales decreased to 15.53% for Fiscal 2000 from 17.60% for Fiscal 1999, while the gross profit margin for products the Company manufactured increased to 21.8% for Fiscal 2000 compared to 21.4% for Fiscal 1999. This increase results from reduced steel prices and increased production efficiencies at certain of the Company's production facilities. The truck chassis division had a gross loss of 3.15% during Fiscal 2000 compared to a gross profit of 6.8% for Fiscal 1999. During Fiscal 2000 the Company determined that due to the current slump in the tandem dump truck market and certain other market factors it would not be able to compete effectively in the package dump truck market. Based on 14 this determination and the costs to continue carrying the dump truck chassis inventory, the Company decided to liquidate the entire portion of this inventory in the fourth quarter of Fiscal 2000. This liquidation resulted in a realized loss on disposal of approximately $1.75 million. Selling, General & Administrative Expenses increased to 12.76 % of net sales for Fiscal 2000 from 11.55% of net sales for the Fiscal 1999 due primarily to increases in marketing activity, health insurance costs, professional fees and additional trucking expenses necessary to ship commodity products made at E-Z Pack's Demopolis, Alabama facility to regions outside the Southeast in order to reduce a build up of the finished goods inventory at that facility. Inventory has decreased to $52.0 million at September 30, 2000 from $63.3 million at September 30, 1999. This decrease is due primarily to the liquidation of the dump truck chassis inventory as discussed above. The Company's leasing subsidiary generated pretax income of $.70 Million for Fiscal 2000 compared to of $.5 Million for Fiscal 1999. The Company had $23.6 Million in net finance lease receivables at September 30, 2000 compared to $18.8 Million at September 30, 1999. Interest expense increased to $6.3 million in Fiscal 2000 from $4.0 in Fiscal 1999. This increase was due primarily to rising interest rates, increased debt related to the leasing company and the debt service on the dump truck chassis inventory prior to the liquidation previously discussed. Income taxes are calculated based on the current statutory rates. No significant differences between the Company's effective rate and the statutory rates exist. The Company had a net loss of $85,854 for Fiscal 2000 compared to a net profit of $4,181,938 for Fiscal 1999. This decrease was due primarily to losses incurred by the Company's truck chassis division and increased interest expense as previously discussed as well as reduced profits from the Company's refuse truck and dump body divisions due to slower than expected sales. LIQUIDITY AND CAPITAL RESOURCES The Company had negative working capital of $12.4 million at September 30, 2001 compared to positive working capital $59.9 million at September 30, 2000. The ratio of current assets to current liabilities was 0.83:1 at September 30, 2001 and 3.63:1 at September 30, 2000. The decline in working capital is primarily a result of classifying long term debt as current at September 30, 2001 due to noncompliance with debt covenants at that date. The Company's cash and cash equivalents totaled $0.8 million at September 30, 2001. Cash flows provided by operations were $13.3 million for the year ended September 30, 2001. The Company's working capital needs decreased during Fiscal 2001 from Fiscal 2000 due to the Company's ongoing efforts to reduce its inventory to levels more consistent with the current sales volumes. The Company has a Revolving Credit Facility with Standard Federal Bank, a federal savings bank ("Standard"), which provides maximum availability of $22.0 for working capital needs. At September 30, 2001 the Company had borrowed approximately $20.7 million under the working capital line. Borrowings under the 15 working capital line are limited to 80% of eligible accounts receivable and 50% of qualified inventory The Company has a second Revolving Credit Facility with Standard used to finance certain of its lease receivables. The agreement calls for a maximum availability of $20.0 million with borrowing limited to 80% of eligible lease receivables. At September 30, 2001 approximately $18.8 million had been drawn on this facility. All borrowings with Standard are secured by substantially all of the assets of the Company. The Company's debt agreements contain certain restrictive covenants that require the Company to, among other things, meet certain net worth and working capital requirements along with maintaining various financial ratios. As the result of non compliance with certain of the financial covenants, the Company entered into a forbearance agreement with its principal lending institution in June of 2001 and expiring August 31, 2001. This agreement was extended to October 31, 2001 and further extended through January 31, 2002. Under the most recent amended and extended forbearance agreement, the line of credit is capped at $22 million, effective December 4, 2001, interest will accrue at the default rate of prime plus 2 1/2%, the leasing credit limit is reduced to the lesser of $19 million or the borrowing base, as defined, and the Company has been placed under a dominion of funds arrangement. Accordingly, the debt related to these agreements has been shown as a current liability. Management's plans to resolve this matter include, exploring other financing options while continuing to negotiate with its principal lender to extend the forbearance period or amend its current agreements to among other things reset those covenants that are currently out of compliance and extend the maturity dates on certain of its revolving credit agreements, continuing to evaluate the need for additional personnel reductions, analyzing all plant operations and product lines to determine the viability of each facility, and continuing inventory reductions to match forecasted operating levels. While management believes it will be successful in its negotiations with it principal lender or in obtaining an alternative financing source, that outcome is not certain. If either of these options are ultimately unavailable to the Company and the principal lender exercises it right to accelerate the repayment of the outstanding debt, the Company would be unable to pay the amount outstanding. The revolving credit agreements expire in May 2002. 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 $19.5 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, 2001, approximately $14.0 million had been drawn on the facilities. Management believes, that if its principal lender extends the forbearance period, the negotiations discussed above are successful or the Company secures an alternative financing source, 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. If these options are ultimately unavailable to the Company and the principal lender exercises it right to accelerate the repayment of the outstanding debt, the Company would be unable to pay the amount outstanding. 16 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Financial statements and supplementary data are filed under Item 14 of this Form 10-K. 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) 60 Chairman of the Board, Chief Executive Officer and President 3/68 Robert W. McClain(1) 65 Senior Vice President, Assistant Secretary and Director 3/68 Raymond Elliott 67 Director 8/90 Walter J. Kirchberger 66 Director 11/95 Ronald B. Briggs 66 Director 6/01 Carl Jaworski 58 Secretary 10/72 Mark S. Mikelait 41 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. Mr. McClain is also a director and the Chairman of the Board of E-Z Pack and Galion. 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. 17 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 a Director at UBS Warburg LLC and has served in such capacity for more than 25 years. Until recently he also served as a director of Simpson Industries, Inc. RONALD BRIGGS was elected to the Board of Directors in June 2001. Mr. Briggs is a former shareholder/director of Doeren Mayhew, Certified Public Accountants located in Troy, Michigan. He started his career with the firm in 1960, became audit director in 1967 and served as managing director of the firm from 1984 to 1996 and retired in 1997. Mr. Briggs is a member of the American Institute of Certified Public Accountants and the Michigan Association of Certified Public Accountants. 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. Mr. Jaworski is the Secretary of E-Z Pack and Galion. 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, 2001, 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 $100,000 during the fiscal year ended September 30, 2001. 18 SUMMARY COMPENSATION TABLE
------------------------------------------------------------------------------------ Annual Compensation Long Term Compensation ------------------------------------------------------------------------------------ Name and Fiscal Salary Options/ Principal Position Year Amount($) SARs(#) ------------------ ---- ------ ---- Kenneth D. McClain, President/ CEO 2001 $277,083 --- 2000 294,792 --- 1999 275,000 25,000 Robert W. McClain, Senior Vice President 2001 $150,000 --- 2000 150,000 --- 1999 143,751 25,000 Carl Jaworski Secretary 2001 $112,750 --- 2000 111,373 --- 1999 108,750 5,000 Mark S. Mikelait Treasurer 2001 $126,075 --- 2000 122,781 --- 1999 126,250 5,000 ====================================================================================
AGGREGATED OPTION/SAR EXERCISES AND FISCAL YEAR-END OPTION/SAR VALUES TABLE
---------------------------------------------------------------------------------------------------------------------------------- Shares No. of Unexercised Value of Unexercised Acquired Options/SARs at In-The-Money Options/SARs at on Fiscal Year-End (1) Fiscal Year-End(2) Exercise Value in 2001 Realized ------------------------------------------------------------------------- Not Not Exercisable Exercisable(1) Exercisable Exercisable ---------------------------------------------------------------------------------------------------------------------------------- Kenneth D. McClain -0- -0- 16,666 8,334 $ -0- $ -0- Robert W. McClain -0- -0- 13,333 6,667 $ -0- $ -0- Carl Jaworski -0- -0- 10,000 -0- $ -0- $ -0- Mark S. Mikelait -0- -0- 15,000 -0- $ -0- $ -0- ==================================================================================================================================
(1) Stock options granted between February 9, and May 7,1999 pursuant to the Company's 1989 and 1999 Incentive Stock Plans (the "Incentive Plans"). Options must be exercised by May 7, 2004. Exercise prices vary from $5.08 to $5.50 per share. (2) Value based on the average of the September 30, 2001 closing bid high and low price which was $1.38 per share. COMPENSATION OF DIRECTORS Directors who are employees of the Company do not receive compensation for serving on the Board or on the Board's committees. Directors who are not employees of the Company are entitled to a quarterly retainer fee of $4,000, 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 1999 Retainer Stock Plan for Non-Employee 19 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, 2001, 19,939 shares of Common Stock were issued under the Retainer Plan. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth, as of December 7, 2001, 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 1,423,662(3) 31.49% 6200 Elmridge Road Sterling Heights, MI 48310 Robert W. McClain 998,361(4) 22.08% 6200 Elmridge Road Sterling Heights, MI 48310 June McClain 337,178 7.46% 6200 Elmridge Road Sterling Heights, MI 48310 Robert J. Gordon 899,233(5) 19.89% Suite 2400 One Woodward Avenue Detroit, MI 48226 Raymond Elliott 37,844 0.84% 290 Town Center P.O. Box 890 Troy, Michigan 48084 Walter J. Kirchberger 15,890 0.35% 2301 West Big Beaver Rd., Suite 800 Troy, Michigan 48084 Ronald B. Briggs 4,026 0.09% 755 West Big Beaver RD Troy, MI 48084
20
AMOUNT AND NATURE OF PERCENT OF NAME AND ADDRESS BENEFICIAL OUTSTANDING OF BENEFICIAL OWNER OWNERSHIP(1) SHARES(2) ------------------------------- ------------ --------- Carl Jaworski 124.493 2.75% 6200 Elmridge Road Sterling Heights, MI 48310 Mark S Mikelait 15,000 0.33% 500 Sherman Street Galion, OH 44833 All current executive officers and 2,619,276(6) 57.24% 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 4,520,746 shares of Common Stock issued and outstanding as of December 7, 2001. 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) Represents shares of common stock held by Mr. Gordon as trustee of trusts established for family members of Messrs. Kenneth D. McClain and Robert W. McClain. Messrs. Kenneth D. McClain, Robert W. McClain and Robert J. Gordon disclaim beneficial ownership of these shares. (6) Includes 54,999 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 The Company leases one of its facilities from siblings 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. The Company had sales of approximately $103,500 in Fiscal 2000 to McClain Leasing Corporation, an entity controlled by certain officers and directors of the Company. The Hartland Insurance Group, an entity owned by Raymond Elliott, a director of the Company, provided insurance to the Company during Fiscal 2001. Sales from this entity to the Company aggregated approximately $2,050,000 million during Fiscal 2001, for which this entity received fees and commissions in the approximate amount of $210,000. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) The following documents are filed herewith as part of this Form 10-K: (1) A list of the financial statements required to be filed as a part of this Form 10-K is shown in the "Index to the Consolidated Financial Statements and Schedules" filed herewith. 21 (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. 22 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Dated: January 9, 2002 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: January 9, 2002 /s/ Kenneth D. McClain ----------------------------------------- Kenneth D. McClain, Director Dated: January 9, 2002 /s/ Robert W. McClain ----------------------------------------- Robert W. McClain, Director Dated: January 9, 2002 /s/ Raymond Elliott ------------------------------------ Raymond Elliott, Director Dated: January 9, 2002 /s/ Walter J. Kirchberger ------------------------------------ Walter J. Kirchberger, Director Dated: January 9, 2002 /s/ Ronald B Briggs ------------------------------------ Ronald B. Briggs, Director 23 SECURITIES AND EXCHANGE COMMISSION Washington, D. C. Form 10-K For Corporations ANNUAL REPORT FOR THE YEARS ENDED SEPTEMBER 30, 2001, 2000, and 1999 MCCLAIN INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED FINANCIAL STATEMENTS AND INDEPENDENT AUDITORS' REPORT -24- MCCLAIN INDUSTRIES, INC. AND SUBSIDIARIES INDEX TO THE CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES CONSOLIDATED FINANCIAL STATEMENTS Independent Auditors' Report Consolidated Balance Sheets - September 30, 2001 and 2000 Consolidated Statements of Operations for the years ended September 30, 2001, 2000 and 1999 Consolidated Statements of Stockholders' Investment for the years ended September 30, 2001, 2000 and 1999 Consolidated Statements of Cash Flows for the years ended September 30, 2001, 2000 and 1999 Notes to Consolidated Financial Statements SCHEDULES The information required to be submitted in Schedule II - Valuation and Qualifying Accounts is included in the consolidated financial statements and notes thereto. The following schedules are omitted as not required or not applicable: I, III, IV and V. -25- INDEPENDENT AUDITORS' REPORT To the Board of Directors and Stockholders McClain Industries, Inc. and Subsidiaries Sterling Heights, Michigan We have audited the accompanying consolidated balance sheets of McClain Industries, Inc. and Subsidiaries as of September 30, 2001 and 2000, and the related consolidated statements of operations, stockholders' investment, and cash flows for each of the three years in the period ended September 30, 2001. 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 auditing standards generally accepted in the United States of America. 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, 2001 and 2000, and the results of their operations and their cash flows for each of the three years in the period ended September 30, 2001 in conformity with accounting principles generally accepted in the United States of America. The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As described in Note 1 to the consolidated financial statements, the Company's recent losses from operations and its attendant difficulties in generating sufficient cash flow to meet its obligations have resulted in noncompliance with certain financial covenants contained in its debt agreements. The Company's principal lender has not waived its rights to call the debt arising from such noncompliance and has renewed a forbearance agreement only through January 31, 2002. This condition raises substantial doubt about the Company's ability to continue as a going concern. Management's plans concerning these matters are also described in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. REHMANN ROBSON Troy, Michigan December 28, 2001 -26- MCCLAIN INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
ASSETS SEPTEMBER 30 --------------------------------------------- 2 0 0 1 2 0 0 0 --------------------- --------------------- CURRENT ASSETS Cash and cash equivalents $ 763,635 $ 1,401,810 Accounts receivable, net of allowance for doubtful accounts of $1,147,000 ($520,000 in 2000) 11,818,760 20,692,647 Inventories 36,729,464 52,031,112 Net investment in sales-type leases, current portion 10,600,000 7,500,000 Refundable federal and state taxes 2,733,572 587,612 Prepaid expenses 142,539 238,404 --------------------- --------------------- TOTAL CURRENT ASSETS 62,787,970 82,451,585 PROPERTY, PLANT AND EQUIPMENT, NET 21,620,641 23,298,832 Net investment in sales-type leases net of allowance for doubtful collections of $900,000 ($400,000 in 2000), less current portion 17,200,109 16,086,444 Equipment under construction 777,643 1,012,690 Goodwill, net of amortization 188,495 616,624 Other 71,417 218,738 --------------------- --------------------- TOTAL ASSETS $ 102,646,275 $ 123,684,913 ===================== =====================
The accompanying notes are an integral part of these consolidated financial statements. -27-
LIABILITIES AND STOCKHOLDERS' INVESTMENT SEPTEMBER 30 ------------------------------------------- 2 0 0 1 2 0 0 0 -------------------- -------------------- CURRENT LIABILITIES Accounts payable $ 11,555,975 $ 14,523,573 Current portion of long-term debt (Note 7) 59,415,504 4,200,000 Accrued expenses 4,225,970 3,740,452 -------------------- -------------------- TOTAL CURRENT LIABILITIES 75,197,449 22,464,025 Long-term debt, net of current portion - 67,476,117 Product liability 897,163 1,182,315 Deferred income taxes 1,546,000 2,355,000 -------------------- -------------------- TOTAL LIABILITIES 77,640,612 93,477,457 -------------------- -------------------- COMMITMENTS AND CONTINGENCIES (NOTE 16) STOCKHOLDERS' INVESTMENT Common stock, no par value; authorized 10,000,000 shares, issued and outstanding, 4,520,746 shares (4,560,086 shares in 2000) 4,061,123 4,273,875 Retained earnings 20,944,540 25,933,581 -------------------- -------------------- TOTAL STOCKHOLDERS' INVESTMENT 25,005,663 30,207,456 -------------------- -------------------- TOTAL LIABILITIES AND STOCKHOLDERS' INVESTMENT $ 102,646,275 $ 123,684,913 ==================== ====================
-28- MCCLAIN INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED SEPTEMBER 30 ------------------------------------------------------------------ 2 0 0 1 2 0 0 0 1 9 9 9 ------------------- -------------------- -------------------- Net sales $ 91,549,939 $ 141,117,959 $ 140,604,885 Cost of sales 79,379,375 119,208,522 115,863,228 ------------------- -------------------- -------------------- GROSS PROFIT 12,170,564 21,909,437 24,741,657 Selling, general and administrative expenses 17,229,156 18,002,259 16,234,546 ------------------- -------------------- -------------------- (LOSS) INCOME FROM OPERATIONS (5,058,592) 3,907,178 8,507,111 ------------------- -------------------- -------------------- OTHER INCOME (EXPENSE) Interest expense (5,482,236) (6,343,380) (3,982,325) Interest income 3,300,014 2,457,524 1,575,188 Other, net (304,227) (151,176) 236,964 ------------------- -------------------- -------------------- OTHER EXPENSE - NET (2,486,449) (4,037,032) (2,170,173) ------------------- -------------------- -------------------- (LOSS) INCOME BEFORE INCOME TAXES (7,545,041) (129,854) 6,336,938 Income taxes benefit (expense) 2,556,000 44,000 (2,155,000) ------------------- -------------------- -------------------- NET (LOSS) INCOME $(4,989,041) $ (85,854) $ 4,181,938 =================== ==================== ==================== Net (loss) income per share: Basic $ (1.11) $ (0.02) $ 0.90 =================== ==================== ==================== Assuming dilution $ (1.11) $ (0.02) $ 0.90 =================== ==================== ==================== Weighted average shares outstanding, basic and diluted 4,504,341 4,560,086 4,673,027 =================== ==================== ====================
The accompanying notes are an integral part of these consolidated financial statements. -29- MCCLAIN INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' INVESTMENT
COMMON STOCK RETAINED -------------------------------------- SHARES AMOUNT EARNINGS TOTALS ---------------- ------------------ -------------------- ------------------- Balance at October 1, 1998 4,686,727 $ 4,997,809 $ 21,837,497 $ 26,835,306 Shares issued 4,505 25,123 - 25,123 Shares repurchased (30,354) (151,402) - (151,402) Net income - - 4,181,938 4,181,938 ---------------- ------------------ -------------------- ------------------- Balance at September 30, 1999 4,660,878 4,871,530 26,019,435 30,890,965 Shares issued 7,350 32,970 - 32,970 Shares repurchased (108,142) (630,625) - (630,625) Net loss - - (85,854) (85,854) ---------------- ------------------ -------------------- ------------------- Balance at September 30, 2000 4,560,086 4,273,875 25,933,581 30,207,456 Shares issued 19,939 34,486 - 34,486 Shares repurchased (59,279) (247,238) - (247,238) Net loss - - (4,989,041) (4,989,041) ---------------- ------------------ -------------------- ------------------- BALANCE AT SEPTEMBER 30, 2001 4,520,746 $ 4,061,123 $ 20,944,540 $ 25,005,663 ================ ================== ==================== ===================
-30- MCCLAIN INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED SEPTEMBER 30 -------------------------------------------------------------- 2 0 0 1 2 0 0 0 1 9 9 9 ------------------- -------------------- ------------------- CASH FLOWS FROM OPERATING ACTIVITIES Net (loss) income $ (4,989,041) $ (85,854) $ 4,181,938 Adjustments to reconcile net (loss) income to net cash used in operating activities Depreciation and amortization 3,345,633 3,425,281 3,280,109 Deferred income taxes (benefit) (809,000) 155,000 (15,000) Provision for doubtful accounts 1,375,000 230,800 146,500 Gain on disposal of plant and equipment 14,607 (28,856) (8,330) Common stock issued to directors for services 34,486 32,970 25,123 Net changes in operating assets and liabilities which provided (used) cash: Accounts receivable 7,998,887 (383,281) 3,949,095 Inventories 15,301,648 11,250,673 (24,408,308) Net investment in sales-type leases (4,713,665) (5,214,471) (9,658,012) Prepaid expenses and other assets 373,480 (623,411) (233,581) Refundable federal and state taxes (2,145,960) (587,612) - Accounts payable (2,967,598) (7,251,566) 3,369,915 Accrued expenses 485,518 (2,224,309) 1,500,945 ------------------- -------------------- ------------------- NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 13,303,995 (1,304,636) (17,869,606) ------------------- -------------------- ------------------- CASH FLOWS FROM INVESTING ACTIVITIES Purchases of plant and equipment (1,190,345) (2,953,102) (2,768,433) Payments on liabilities assumed upon the Galion acquisition (285,152) (224,513) (503,077) Proceeds from sale of plant and equipment 41,178 28,856 8,330 ------------------- -------------------- ------------------- NET CASH USED IN INVESTING ACTIVITIES (1,434,319) (3,148,759) (3,263,180) ------------------- -------------------- ------------------- CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from long-term debt 1,499,807 9,027,433 24,303,311 Repayments of long-term debt (13,760,420) (4,450,000) (3,034,732) Repurchase of common stock (247,238) (630,625) (151,402) ------------------- -------------------- ------------------- NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES (12,507,851) 3,946,808 21,117,177 ------------------- -------------------- ------------------- NET DECREASE IN CASH AND CASH EQUIVALENTS (638,175) (506,587) (15,609) Cash and cash equivalents, beginning of year 1,401,810 1,908,397 1,924,006 ------------------- -------------------- ------------------- CASH AND CASH EQUIVALENTS, END OF YEAR $ 763,635 $ 1,401,810 $ 1,908,397 =================== ==================== ===================
The accompanying notes are an integral part of these consolidated financial statements. -31- 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. Going Concern As indicated in Note 7, the Company, at September 30, 2001, was not in compliance with certain restrictive covenants contained in various debt agreements. As a result of this noncompliance, the Company entered into a forbearance agreement with its principal lending institution in June 2001 which has been extended through January 31, 2002. The lender has not waived its rights to call the debt arising from such noncompliance nor given any assurance that the agreement will be extended beyond that date; as such, all debt has been classified as current on the 2001 balance sheet, which has resulted in a significant working capital deficit. Should the lender exercise its right to accelerate the repayment of the outstanding debt, the Company would be unable to pay the amount outstanding. This condition raises substantial doubt about the Company's ability to continue operating as a going concern in the normal course of business. Management's plans to address the above matter, recent operating losses from operations and the Company's ability to generate sufficient cash flows includes the following actions: - Exploring other financial options while the Company continues to negotiate with its principal lender. - Continuing to evaluate the need to reduce additional personnel. - Management is analyzing all plant operations to determine the viability of each facility. - Reduce inventory to match appropriate operating levels. -32- McCLAIN INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Principles of Consolidation The consolidated financial statements include the accounts of McClain Industries, Inc., and its wholly-owned subsidiaries (McClain E-Z Pack, Inc., McClain, Galion, Inc., Shelby Steel Processing Co., McClain Group Leasing, Inc., McClain Tube Company, McClain Southland, Inc., and McClain International FSC, Inc., an international sales corporation). 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 $13,200,000, $31,870,000, and $32,500,000 in 2001, 2000, and 1999, respectively. The Company had receivables of approximately $1,526,000 and $2,070,000 from this customer at September 30, 2001 and 2000, respectively. The loss of this customer could adversely affect the Company's short-term operating results. 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, plant and equipment, receivables, and net operating losses. -33- McCLAIN INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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, along with certain TRAC leases (Note 4), 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 advance payments, deposits, unearned finance income, and an allowance for doubtful collections. Unearned finance income is amortized in such a manner as to produce a constant periodic rate of return on the net investment in the lease. Goodwill Goodwill representing the purchase price in excess of the fair values of net assets acquired is amortized on a straight line basis. The amortization period is estimated based upon management's judgements and is generally five years. Accumulated amortization as of September 30, 2001 and 2000 was $2,062,230 and $1,634,101, respectively. Earnings (Loss) Per Share Earnings (loss) per share is computed using the weighted average number of common shares outstanding during the year. The diluted amount reflects the potential dilution of all common stock equivalents. At September 30, 2001, 2000 and 1999 options to purchase 219,000, 262,000, and 244,998 common 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. 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. -34- McCLAIN INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 its Directors 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. Recent Accounting Pronouncements In June 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 141, "Business Combinations." Statement 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. The Company has historically accounted for its business combinations using the purchase method and expects that adoption of the new standard will not have a material effect on the Company's financial position or results of operations. In June 2001, the FASB also issued Statement No. 142 "Goodwill and Other Intangible Assets" which is effective generally beginning January 1, 2002. Statement 142 requires that goodwill and intangible assets with indefinite useful lives no longer be amortized but, instead, tested for impairment at least annually in accordance with the provisions of Statement 142. As of January 1, 2002, the Company expects to have unamortized goodwill of approximately $188,000, which will be subject to the transition provisions of Statements 141 and 142. Amortization expense related to goodwill was approximately $428,000, $428,000 and $396,000 for the years ended September 30, 2001, 2000, and 1999, respectively. The Company is currently evaluating the effects of adopting the remaining provisions of Statements 141 and 142 (which are effective January 1, 2002), including whether any transitional adjustments will be required. In June 2001, the FASB issued Statement No. 143 "Accounting for Asset Retirement Obligations." Statement 143 requires entities to record the fair value of a liability for an asset retirement obligation in the period in which it is incurred. When the liability is initially recorded, the entity capitalizes the cost by increasing the carrying amount of the related long-lived asset. Over time, the liability is accreted to its present value each period and the capitalized cost is depreciated over the remaining useful life of the related asset. Upon settlement of the liability, the entity either settles the obligation for the amount recorded or incurs a gain or loss. Statement 143 is effective for fiscal years beginning after June 15, 2002. Adoption of this statement is not expected to impact the Company's results of operations or financial position. -35- McCLAIN INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS In August 2001, the FASB issued Statement No. 144 "Accounting for the Impairment or Disposal of Long-Lived Assets," effective prospectively for fiscal years beginning after December 15, 2001. Statement 144 supersedes Statement No. 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," and the accounting and reporting provisions of APB No. 30 "Reporting the Results of Operations - Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions ("Opinion 30") for the disposal of a segment of business (as previously defined under Opinion 30). The FASB issued Statement No. 144 to establish a single accounting model for long-lived assets to be disposed of by sale. Statement 144 broadens the presentation of discontinued operations in the income statement to include a component of an entity (rather than a segment of a business). A component of an entity comprises operations and cash flows that can be clearly distinguished, operationally and for financial reporting purposes, from the rest of an entity. Statement 144 also requires that discontinued operations be measured at the lower of the carrying amount or fair value less cost to sell, rather than net realizable value. The Company is currently evaluating the effects of adopting Statement No. 144 and at this time cannot predict whether or not its provisions will have a material impact on its financial position or results of operations. 2. 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:
2001 2000 1999 ----------- ----------- ----------- Balance, beginning of year $ 520,000 $ 570,000 $ 800,000 Add provision charged against income 875,000 130,800 146,500 Less uncollectible accounts written off, net of recoveries (248,000) (180,800) (376,500) ----------- ----------- ----------- BALANCE, END OF YEAR $ 1,147,000 $ 520,000 $ 570,000 =========== =========== ===========
3. INVENTORIES Inventories are stated at the lower of cost, determined by the first-in, first-out (FIFO) and certain inventories on the last-in, last-out (LIFO) method, or market. The major components of inventories were as follows at September 30:
2001 2000 ------------ ----------- Materials $16,136,116 $23,918,300 Work-in process 4,306,681 5,521,754 Finished goods 8,583,582 11,146,428 ----------- ----------- 29,026,379 40,586,482 Chassis 7,703,085 11,444,630 ----------- ----------- $36,729,464 $52,031,112 =========== ===========
-36- McCLAIN INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The chassis inventory above consists of the cost of the vehicle as purchased from the manufacturer and, as applicable, includes the Company's cost of manufacturing, assembling and mounting its truck bodies and waste handling equipment products. The purchased cost of the chassis on a stand-alone basis was $5,684,975 and $8,473,526 at September 30, 2001 and 2000, respectively. 4. LEASING OPERATIONS Sale-Leaseback-Sublease 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. 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 having a five-year term, which are accounted for as sales-type leases, with the related gross profit on sale of the products recognized as income currently. The total net investment in these sales-type leases is comprised of the following amounts at September 30:
2001 2000 ------------ ----------- Gross minimum lease payments $35,263,432 $30,248,398 collectible in monthly installments Less advance lease payments and deposits received 915,193 787,093 ----------- ----------- Subtotal 34,348,239 29,461,305 Less unearned finance income 5,648,130 5,474,861 ----------- ----------- Subtotal 28,700,109 23,986,444 Less allowance for doubtful collection and losses 900,000 400,000 ----------- ----------- Total net investment in sales-type leases 27,800,109 23,586,444 Current portion 10,600,000 7,500,000 ----------- ----------- Noncurrent portion $17,200,109 $16,086,444 =========== ===========
-37- McCLAIN INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Gross minimum lease payments, net of advances and deposits, are collectible in the following scheduled annual amounts for the years succeeding September 30, 2001:
Year ending September 30 Amount ---------------- ----------------- 2002 $ 10,600,000 2003 9,400,000 2004 7,900,000 2005 4,600,000 2006 1,848,239 ----------------- Gross minimum amount collectible $ 34,348,239 ================
The TRAC leasing programs in place with financial institutions allow for maximum availability of $19,500,000 in lease commitments, which provide for financing of 80% of eligible lease receivables and 95% of unamortized costs of eligible leased assets over the term of the related lease. These notes are secured by a pledge of the remittances in the related sublease. At September 30, 2001, approximately $16,489,214 had been drawn on these lease programs, $2,487,443 of which is accounted for as capital lease obligations (Note 7) and $14,001,771 of which is accounted for as minimum lease payments due under operating leases. The following is a schedule of future minimum lease payments required under capital lease obligations for the years succeeding September 30, 2001.
Year ending September 30 Amount ---------------- ----------------- 2002 $ 850,000 2003 850,000 2004 787,443 ----------------- Total 2,487,443 Less amounts representing interest imputed at various interest rates 46,075 ----------------- Present value of net minimum lease payments $ 2,441,368 =================
Rental income from these subleasing activities was $4,513,315, $2,817,000 and $1,221,000 in the years 2001, 2000, and 1999, respectively, while the related rental expense for the leaseback of the products was $4,096,972, $2,629,000 and $1,035,000 during the years ended September 30, 2001, 2000, and 1999, 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: -38- McCLAIN INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Year ending Rental Rental September 30 Payments Receipts ------------ ----------------- ---------------- 2002 $ 3,080,390 $ 3,782,368 2003 3,080,390 3,782,368 2004 3,080,390 3,782,368 2005 3,080,390 3,782,368 2006 1,680,211 2,063,110 ----------------- ---------------- Gross minimum rental payments $ 14,001,771 $ 17,192,582 ================ ================
Total residual values guaranteed by the Company under these leasing arrangements approximates $2,405,000 as of September 30, 2001. 5. 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:
2001 2000 ------------------ ---------------- Land $ 2,381,487 $ 2,366,387 Buildings and improvements 16,385,856 15,783,431 Machinery and equipment 24,217,980 24,008,223 Furniture, fixtures and vehicles 3,989,037 4,400,067 ------------------ ---------------- 46,974,360 46,558,108 Less accumulated depreciation 25,353,719 23,259,276 ------------------ ---------------- Property, plant and equipment, net $ 21,620,641 $ 23,298,832 ================== ================
-39- McCLAIN INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 6. 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:
2001 2000 ----------------- ---------------- Revolving line of credit providing for maximum availability of up to $22,000,000 and $32,142,858 at September 30, 2001 and 2000, respectively. Borrowings are limited to 80% of the eligible accounts receivable and 50% of qualified inventory and are subject to interest at prime rate plus 2 1/2% (default rate) (8.5% at September 30, 2001). $ 20,638,621 $ 30,341,000 The agreement is collateralized by substantially all the assets of the Company and contains various covenants requiring the Company to maintain certain financial ratios (see Note 7). 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 May 2002. Line of credit providing for maximum availability of $20,000,000 in 2001 and 2000 (see Note 7). Borrowings are limited to 80% of eligible lease receivables and are subject to interest at the prime rate plus 2 1/2% (8.5% at September 30, 2000). The agreement is collateralized by certain equipment leases held by the Company's leasing subsidiary. This agreement expires in May 2002. 18,813,000 17,808,000 ----------------- ---------------- Total lines of credit borrowings (Note 7) $ 39,451,621 $ 48,149,000 ================= ================
-40- McCLAIN INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 7. LONG-TERM DEBT Long-term debt consisted of the following obligations as of September 30:
2001 2000 ----------------- ---------------- Promissory note to a bank, collateralized by certain assets as disclosed in Note 6. The note is payable in monthly installments of $220,000 plus interest at the prime rate plus 2 1/2% (effective rate of 8.5% at September 30, 2001), maturing in September 2006. $ 13,220,000 $ 15,860,000 Promissory notes to banks, collateralized by commercial mortgages on certain real estate and equipment, payable in monthly installments of $28,300 plus interest ranging from the bank prime rate to prime plus 1/4% (effective rates of 6.0% to 6.25% at September 30, 2001), maturing at various dates through December 2002. 1,177,515 791,653 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 2.33% at September 30, 2001) as determined by the bond holder. 3,125,000 3,650,000 ----------------- ---------------- Subtotal, notes and bonds 17,522,515 20,301,653 Lines of credit borrowings (Note 6) 39,451,621 48,149,000 Capital lease obligations (Note 4) 2,441,368 3,225,464 ----------------- ---------------- Total long-term debt 59,415,504 71,676,117 Less current portion 59,415,504 4,200,000 ----------------- ---------------- Long-term debt, net of current portion $ - $ 67,476,117 ================= ================
-41- McCLAIN INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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. As of September 30, 2001, the Company was not in compliance with certain of the financial covenants contained in the loan agreements with its principal lending institution. As a result, the Company and the lender entered into a forbearance agreement in June 2001 which expired August 31, 2001. This agreement was extended through October 31, 2001 and further extended only through January 31, 2002. Under the most recent amended and extended forbearance agreement, the line of credit is capped at $22 million, interest will accrue effective December 4, 2001 at the default rate of prime plus 2 1/2%, the leasing credit limit is reduced to the lesser of $19 million or the borrowing base, as defined, and the Company has been placed under a dominion of funds arrangement. Since there can be no assurance beyond January 31, 2002 that the lender will continue to a) lend to the Company, b) forbear from enforcing its rights and remedies, or c) further extend the forbearance period, all debt is classified as current on the accompanying September 30, 2001 balance sheet. As a result, the Company has a significant working capital deficit. 8. ACCRUED EXPENSES Accrued expenses included on the accompanying consolidated balance sheets consist of the following amounts at September 30:
2001 2000 ---------- ---------- Sales discounts $1,792,250 $1,084,919 Compensation 313,446 300,343 Vacation and holiday pay 343,295 415,006 Taxes 360,565 439,738 Insurance 144,865 394,270 Other 1,271,549 1,106,176 ---------- ---------- Total $4,225,970 $3,740,452 ========== ==========
9. INCOME TAXES The benefit (provision) for income taxes for each of the three years in the period ended September 30, consists of the following components:
2001 2000 1999 ----------- ----------- ----------- Current federal benefit (provision) $ 1,747,000 $ 199,000 $(2,170,000) Deferred benefit (provision) 809,000 (155,000) 15,000 ----------- ----------- ----------- Total $ 2,556,000 $ 44,000 $(2,155,000) =========== =========== ===========
-42- McCLAIN INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The effective income tax rate on consolidated pre-tax income differs from the federal statutory rate for the following reasons:
2001 2000 1999 ---------------------- -------------------- ----------------------- Amount % Amount % Amount % -------------- ----- ------------- ----- ---------------- ----- Benefit (provision) $ 2,568,000 34 $ 44,000 34 $ (2,155,000) 34 computed at statutory rate Nondeductible expenses (32,000) - (27,000) (1) (22,000) (1) Other 20,000 - 27,000 1 22,000 1 -------------- ----- ------------- ----- ---------------- ----- $ 2,556,000 34 $ 44,000 34 $ (2,155,000) 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:
2001 2000 ---------------- ---------------- Taxable differences: Property and equipment $ 2,972,000 $ 3,101,000 Inventory 1,149,000 1,143,000 ---------------- ---------------- Gross deferred tax liabilities 4,121,000 4,244,000 ---------------- ---------------- Deductible differences: Product liability 305,000 402,000 Accounts receivable 696,000 313,000 Accrued expenses 942,000 812,000 Goodwill 442,000 362,000 Net operating loss 190,000 - ---------------- ---------------- Gross deferred tax assets 2,575,000 1,889,000 ---------------- ---------------- Net deferred income tax liability $ 1,546,000 $ 2,355,000 ================ ================
The components which comprise gross deferred taxes are predominantly noncurrent; as such, the entire related net liability is classified as noncurrent. The Company has a net operating loss of approximately $560,000, expiring in 2015, available to offset future federal taxable income. 10. EMPLOYEE PENSION AND PROFIT SHARING PLANS The Company and certain subsidiaries have qualified pension and profit sharing plans covering substantially all union employees. Contributions to the plans were calculated at an hourly rate as defined in the various union contracts. The 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 $614,032 in 2001, $729,183 in 2000 and $673,480 in 1999. -43- McCLAIN INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 any of the years ended September 30, 2001, 2000 and 1999. 11. RELATED PARTY TRANSACTIONS Leases The Company leases an operating facility from siblings 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, 2001, 2000 and 1999. Insurance Costs Raymond Elliott, a director of the Company, is also the owner of Hartland Insurance Group. That entity provided insurance at a cost of approximately $2,050,000, $1,466,000 and $1,005,000 to the Company during the years ended September 30, 2001, 2000 and 1999, respectively. That entity received fees and commissions in connection with these transactions of approximately $210,000, $170,000 and $117,500, respectively. Product Sales The Company had product sales of approximately $103,500, $282,500 and $231,000, during the years ended September 30, 2001, 2000 and 1999, respectively, to a business controlled by the President of McClain Industries, Inc. 12. STOCK BASED COMPENSATION PLANS The Company maintains the 1999 and 1989 Retainer Stock Plans for Non-employee Directors and the McClain 1999 and 1989 Incentive Stock Plans. Retainer Stock Plans The Retainer Stock Plans as adopted call for reserving 233,333 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, 2001, 2000 and 1999 the Company issued 1,999, 7,350 and 4,505 shares, respectively, of its common stock to such directors in exchange for services rendered. -44- McCLAIN INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Incentive Stock Plan The Incentive Stock Plans as adopted call for reserving 2,333,333 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 these plans 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:
2001 2000 1999 --------------------- --------------------- ---------------------- Exercise Exercise Exercise Shares Price * Shares Price * Shares Price * ----------- -------- ---------- --------- ----------- --------- Outstanding, beginning of year 219,000 $ 5.34 269,665 $5.71 199,476 $6.30 Granted - - - - 130,000 5.42 Exercised - - - - - - Forfeited/expired - - (50,665) 7.33 (59,811) 7.06 ----------- -------- ---------- --------- ----------- --------- Outstanding, end of year 219,000 5.34 219,000 $5.34 269,665 $5.71 ----------- -------- ---------- --------- ----------- --------- Exercisable, end of year 168,660 5.34 102,982 $5.34 85,332 $6.50 =========== ======== ========== ========= =========== =========
OPTIONS AT SEPTEMBER 30, 2001
Options Outstanding Options Exercisable --------------------------------- --------------------- Remaining Contractual Exercise Exercise Range of Exercise Prices Shares Life * Price * Shares Price * ------------------------ ---------- ----------- -------- ---------- -------- $5.00 to $5.50 204,000 2.0 years 5.30 153,660 5.40 $5.51 to $6.00 15,000 0.2 years 5.75 15,000 5.75 ---------- ----------- -------- ---------- -------- Total 219,000 1.9 years 5.34 168,660 5.43 ========== =========== ======== ========== ======== *Weighted average
The Company continues 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 1999 and 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. There were no stock options granted during fiscal 2001 or 2000. Had stock option compensation expense been determined pursuant to the methodology provided in Statement of Financial Accounting Standards No. 123, "Accounting -45- McCLAIN INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS for Stock-Based Compensation", using the Black-Scholes option pricing model, the following weighted average assumptions for grants in 1999 would have been employed: expected volatility of 71%, risk free interest rate of 5.5%, and expected lives of 5 years. The pro-forma effect on results of operations would have been a decrease in net income of $223,000 for the year ended September 30, 1999. 13. COMMON STOCK REPURCHASES The Board of Directors has authorized the Company to repurchase from time to time on the open market up to 500,000 shares of the Company's common stock. During the year ended September 30, 2001, the Company repurchased 59,279 shares at prices ranging from $1.40 to $4.50 per share. During the year ended September 30, 2000, the Company repurchased 108,142 shares at prices ranging from $3.87 to $5.97. During the year ended September 30, 1999, the Company repurchased 30,354 shares at prices ranging from $3.375 to $5.75 14. SUPPLEMENTAL CASH FLOWS INFORMATION During the years ended September 30, 2001, 2000 and 1999, common stock valued at $34,486, $32,970 and $25,123, respectively, was issued to non-employee directors in exchange for services rendered. Cash paid for interest amounted to $5,558,826 for 2001, $6,210,200 for 2000, and $3,855,735 for 1999. Cash paid for federal income taxes amounted to $-0- for 2001, $304,000 for 2000, and $350,000 for 1999. 15. SEGMENT INFORMATION The Company operates in three principal operating segments 1) Manufactured Equipment, 2) Truck Chassis Sales, and 3) Leasing Operations. The accounting policies of the reportable segments are the same as those described in Note 1. Management evaluates the performance of its operating segments separately to individually monitor the different factors affecting performance. The Company measures the performance of its operating segments based on net revenue and operating income. Income taxes are managed on a Company-wide basis. Segment performance is also evaluated based on profit or loss before income taxes. -46- McCLAIN INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Information regarding the Company's operating segments follows:
Manufacturing Truck Leasing Operations Group Operations Totals ------------------ ----------------- ----------------- ----------------- 2001 Net sales $ 67,673,984 $23,875,955 $ - $ 91,549,939 Lease revenues - - 7,493,107 7,493,107 Operating (loss) income (4,972,771) (1,124,814) 1,038,993 (5,058,592) Interest expense 2,114,539 1,642,096 1,725,601 5,482,236 Income (loss) before income taxes (5,756,446) (2,827,588) 1,038,993 (7,545,041) Identifiable assets 66,628,496 7,622,890 28,394,889 102,646,275 Capital expenditures 1,190,345 - - 1,190,345 Depreciation and amortization 3,345,633 - - 3,345,633 2000 Net sales $103,648,239 $37,469,720 $ - $ 141,117,959 Lease revenues - - 5,391,613 5,391,613 Operating income 4,878,056 (1,675,215) 704,337 3,907,178 Interest expense 2,973,818 1,825,362 1,544,200 6,343,380 Income (loss) before income taxes 2,666,386 (3,500,577) 704,337 (129,854) Identifiable assets 86,921,342 11,641,505 25,122,066 123,684,913 Capital expenditures 2,953,102 - - 2,953,102 Depreciation amortization 3,425,281 - - 3,425,281 1999 Net sales $105,024,800 $35,580,085 $ - $ 140,604,885 Lease revenues - - 3,597,594 3,597,594 Operating income 7,661,619 368,844 476,648 8,507,111 Interest expense 2,283,630 988,496 710,199 3,982,325 Income (loss) before income taxes 6,247,914 (387,624) 476,648 6,336,938 Identifiable assets 80,563,757 26,162,434 23,197,798 129,923,989 Capital expenditures 2,768,433 - - 2,768,433 Depreciation and amortization 3,280,109 - - 3,280,109
Net sales for the Truck Group include sales of products manufactured by the Company of $8,613,903, $9,906,371 and $9,129,104 for the years ended September 30, 2001, 2000 and 1999, respectively. -47- McCLAIN INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Net sales by product for the years ended September 30, 2001, 2000 and 1999 were as follows:
2001 2000 1999 ------------ ------------ ------------ Product type Containers $ 19,735,213 $ 28,906,263 $ 27,255,856 Refuse bodies 18,178,816 32,353,072 35,714,049 Truck chassis 17,394,489 29,440,561 26,450,982 Dump truck bodies 13,593,146 19,083,440 20,175,160 Compactors 7,643,758 9,018,576 7,529,480 Transfer trailers 7,157,843 11,056,258 9,824,136 Parts 3,683,575 3,681,513 3,711,092 Tilt frame assemblies 2,216,699 4,475,165 5,301,279 Other 1,946,400 3,103,111 4,642,851 ------------ ------------ ------------ $ 91,549,939 $141,117,959 $140,604,885 ============ ============ ============
-48- McCLAIN INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 16. COMMITMENTS AND CONTINGENCIES Product Liability As a manufacturer of industrial products, the Company is occasionally subjected to various product liability claims. Such claims typically involve personal injury or wrongful death associated with the use or misuse of the Company's products. The Company is currently defending certain legal proceedings involving allegations of product liability relating to products manufactured and sold by the Company. Historically, such claims have not resulted in material losses to the Company in any one year, and the Company maintains product liability insurance in amounts believed by management to be adequate. McClain E-Z Pack, Inc., as successor to 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. In addition, the acquisition agreement called for the seller to share in the payment of certain costs related to the defense of these cases. On December 29, 1998, the Company reached a settlement agreement with the seller, the terms of which called for the Company to release the seller from its obligations related to product liability claims under the Galion acquisition agreement in exchange for a cash payment to the Company of $1,050,000. 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, 2001. Nevertheless, it is not possible to predict the ultimate outcome of any product liability claim, and any such claim not fully covered by insurance, as well as adverse publicity from a product claim, could have a material adverse effect on the Company. 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. -49- McCLAIN INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 2002 and June 2003. In 1995, a local union filed unfair labor practices against the Company's Macon, Georgia plant, which were subsequently upheld by the National Labor Relations Board (NLRB) and the U.S. Court of Appeals. The local union filed additional unfair labor practices in 1996. The NLRB seeks back pay, reinstatement and an order requiring transfer of work. The Company is currently negotiating with the NLRB in an effort to reach a settlement of all of these matters. There can be no assurance that these claims will be settled or that the amounts awarded to the union will not have a material adverse impact on the Company. Sales Commitment In connection with the purchase of a manufacturing facility in 1996, the seller of the facility agreed to use reasonable commercial efforts to purchase annually from the Company, manufactured products in an amount that is not less than $25,000,000 in sales per year through December 31, 2001. In the event the $25,000,000 is reached, the Company has agreed to pay to the customer $1,200,000 during each year. In addition, a 5% sales discount will be paid on sales in excess of $25,000,000. If the customer 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. For the years ended September 30, 2001, 2000, 1999 and 1998 approximately $707,000, $1,395,000, and $1,308,000 has been recorded as sales discounts in connection with post-acquisition sales of $13,200,000, $31,870,000 and $32,500,000, respectively, made to the customer pursuant to the agreement. On November 29, 1999, the Company signed an amendment to this agreement that extended the contract through December 31, 2003. Self Health Insurance The Company is self-insured for certain health benefits up to $100,000 per occurrence per individual, with an aggregate limitation of $1,600,000 annually. The Company is self-insured for State of Michigan workers' compensation up to $200,000 per occurrence, with an annual limitation of $500,000 annually. 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. * * * * * -50- 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 International (4) 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 Company (6) 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 Properties (7) 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 Group (8) Sales of Florida 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)
51 Exhibit No. Description Location ----------- ----------- -------- 10.19 Promissory Note (Line of Credit) dated July 17, 1996, between Standard Federal Bank and (9) 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 (11) Industries, Inc., McClain of Alabama, Inc., McClain 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. 10.34 Promissory Note (Line of Credit) dated April 16, 1998 between Standard Federal Bank and (11) McClain Industries, Inc., McClain of Alabama, Inc., McClain 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.
52 Exhibit No. Description Location ----------- ----------- -------- 10.35 Promissory Note (Term Loan) dated April 16, 1998 between Standard Federal Bank and (11) McClain Industries, Inc., McClain of Alabama, Inc., McClain 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 (11) Standard Federal Bank and McClain Industries, Inc., McClain of Alabama, Inc., McClain 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 (11) April 16, 1998 between Standard Federal Bank and McClain Group Leasing, Inc. 10.38 McClain Industries, Inc. 1999 Incentive Stock Plan (12) 10.39 McClain Industries, Inc. 1999 Retainer Stock Plan for Non-Employee Directors (12) 10.40 Amended and Restated Loan Agreement dated July 9, 1999 between Standard Federal Bank (12) and McClain Industries, Inc., McClain E-Z Pack, Inc., McClain Galion, Inc., Shelby Steel Processing Company, McClain Tube Company, McClain International FSC, and McClain Southland Co. 10.41 Promissory Note (Line of Credit) dated July 9, 1999 between Standard Federal Bank and (12) McClain Industries, Inc., McClain E-Z Pack, Inc., McClain Galion, Inc., Shelby Steel Processing Company, McClain Tube Company, McClain International FSC, and McClain Southland Co. 10.42 Promissory Note (Term Loan) dated July 9, 1999 between Standard Federal Bank and (12) McClain Industries, Inc., McClain E-Z Pack, Inc., McClain Galion, Inc., Shelby Steel Processing Company, McClain Tube Company, McClain International FSC, and McClain Southland Co. 10.43 Promissory Note (Line of Credit Converting to Term Loan) dated July 9, 1999 between (12) Standard Federal Bank and McClain Industries, Inc., McClain E-Z Pack, Inc., McClain Galion, Inc., Shelby Steel Processing Company, McClain Tube Company, McClain International FSC, and McClain Southland Co. 10.44 Third Amendment Agreement, Loan Agreement, Promissory Note (Line of Credit) dated July (12) 9, 1999 between Standard Federal Bank and McClain Group Leasing, Inc. 10.45 Second Amendment Agreement dated May 10, 2000 between Standard Federal Bank and McClain (13) Industries, Inc., McClain E-Z Pack, Inc., McClain Galion, Inc., Shelby Steel Processing Company, McClain Tube Company, McClain International FSC, and McClain Southland Co. 10.46 Fourth Amendment Agreement, Loan Agreement, Promissory Note (Line of Credit) dated May (13) 10, 2000 between Standard Federal Bank and McClain Group Leasing, Inc.
53 Exhibit No. Description Location ----------- ----------- -------- 10.47 Amendment and Forbearance Agreement dated June 20, 2001 between Standard Federal Bank 55 and McClain Industries, Inc., McClain E-Z Pack, Inc., McClain Galion, Inc., Shelby Steel Processing Company, McClain Tube Company, McClain International FSC, McClain Southland Co., and McClain Group Leasing, Inc. 10.48 Extension Agreement for Amendment and Forbearance Agreement dated June 20, 2001, dated 80 September 1, 2001 between Standard Federal Bank and McClain Industries, Inc., McClain E-Z Pack, Inc., McClain Galion, Inc., Shelby Steel Processing Company, McClain Tube Company, McClain International FSC, McClain Southland Co., and McClain Group Leasing, Inc. 10.49 Second Extension Agreement for Amendment and Forbearance Agreement dated June 20, 2001, 85 dated December 28, 2001 between Standard Federal Bank and McClain Industries, Inc., McClain E-Z Pack, Inc., McClain Galion, Inc., Shelby Steel Processing Company, McClain Tube Company, McClain International FSC, McClain Southland Co., and McClain Group Leasing, Inc. 10.50 Amended and Restated Loan Agreement Between Standard Federal Bank and McClain Group 92 Leasing, Inc. 10.51 Amended and Restated Guaranty dated June 20, 2001 between Standard Federal Bank and 112 McClain Industries, Inc., McClain E-Z Pack, Inc., McClain Galion, Inc., Shelby Steel Processing Company, McClain Tube Company, McClain International FSC, and McClain Southland Co. 10.52 Guaranty dated June 20, 2001 between Standard Federal Bank and McClain Group Leasing, Inc. 119 22 List of Subsidiaries (9) (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 (11) Incorporated by reference to the Company's Form 10;K f/y/e 9/30/98 (12) Incorporated by reference to the Company's Form 10;K f/y/e 9/30/99 (13) Incorporated by reference to the Company's Form 10;K f/y/e 9/30/00
54