-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, NbFfpfg5vumHu7OegzgdwdOz4Bu/26INKcbR/kXmFlqSxacHZWp2YJofuyqHfZTs FHrvBi1+tjlMcfpyZIHsGg== 0000950124-99-006625.txt : 19991229 0000950124-99-006625.hdr.sgml : 19991229 ACCESSION NUMBER: 0000950124-99-006625 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991228 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MCCLAIN INDUSTRIES INC CENTRAL INDEX KEY: 0000063686 STANDARD INDUSTRIAL CLASSIFICATION: TRUCK & BUS BODIES [3713] IRS NUMBER: 381867649 STATE OF INCORPORATION: MI FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-07770 FILM NUMBER: 99781854 BUSINESS ADDRESS: STREET 1: 6200 ELMRIDGE RD CITY: STERLING HEIGHTS STATE: MI ZIP: 48310 BUSINESS PHONE: 8102643611 10-K 1 FORM 10-K 1 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, 1999 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, 1999, the aggregate market value of the Registrant's voting stock held by nonaffiliates of the Registrant was $26,430,853 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, 1999, there were 4,647,183 shares of the Registrant's common stock issued and outstanding. The Exhibit Index Begins on Page 48 2 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-Michigan was incorporated in 1968 and became a publicly-traded company in 1973. On January 1, 1999, the Company restructured its subsidiaries. Currently they are: McClain E-Z Pack, Inc. ("E-Z Pack"); McClain Galion, Inc. ("Galion", formerly Galion Dump Bodies, Inc.); McClain Southland Company ("Southland", formerly, McClain Group Sales of Florida, Inc.); Shelby Steel Processing Co. ("Shelby Steel"); McClain Tube Company (d/b/a Quality Tubing) ("Tube"); McClain Group Leasing, Inc. ("Leasing"); and McClain International FSC, Inc. ("FSC"). All of these companies are Michigan corporations, except Southland, which is a Florida Corporation, and for FSC, which is a Virgin Islands corporation. Southland is a Distributorship, Leasing is a Lease Financing Company, and FSC is an International Sales 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 14%, sales of solid waste handling equipment accounted for approximately 67%, and truck chassis accounted for approximately 19% of the Company's consolidated net sales for the fiscal year ended September 30, 1999. 3 Dump Truck Bodies and Hoists Galion manufactures steel 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 Macon, Georgia and Oklahoma City, Oklahoma facilities. Dump truck bodies are assemblies which are attached to a truck's frame or chassis, to allow the truck to carry and dump solid materials such as dirt, gravel or waste materials. Hoists are the hydraulic lift mechanisms used to tilt the dump body. Trucks with a dump body and hoist are commonly seen in use as "dump trucks". The products manufactured by Galion Dump Bodies are sold under the registered trademark "Galion". The trademark registration, if not renewed, will expire in the year 2001. Containers Detachable Roll-Off Containers and Roll-Off Hoists. 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, Macon, Georgia, 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 Sterling Heights, Michigan facility. Compactors consist of a compaction unit and separate power source. Compaction units force deposited refuse through an opening at one end of the unit into a roll-off body coupled to the compaction unit. When the roll-off body is filled, the compactor is detached and the roll-off body is removed for dumping. The Company also manufactures unitized compaction systems consisting of a compactor and roll-off container manufactured as a single unit. Compactors are sold under the trade name "MAGNUM" and unitized compactor systems are sold under the trade name "OCTAMAG". E-Z Pack manufactures, at the Winesburg, Ohio facility, 24 models of balers which compact plastic and paper products, primarily cardboard. Balers are either vertical downstroke or closed door horizontal balers. 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 2 4 capacity from thirty-two cubic yards to forty-three cubic yards, the rear loading truck bodies vary in capacity from eighteen cubic yards to thirty-one cubic yards, and the side loading truck bodies vary in capacity from twenty-nine cubic yards to thirty-nine cubic yards. The recycling truck bodies vary in capacity from thirty cubic yards to forty cubic yards. The products manufactured by E-Z Pack are sold under the registered trademark "E-Z Pack". Within this line, E-Z Pack sells its rear loading truck bodies under the trademarks "Goliath", "Goliath II", and "Apollo", and its front loading truck bodies under the trademark "Hercules". The side loading truck bodies and the recycling truck bodies are principally identified by the E-Z Pack name only. These trademarks will expire in the year 2001, unless renewed. The Company has several patents covering its recycling truck. Transfer Trailers 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, garbage truck body or dump 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, margins on sales of these package units lower than those generated from the products manufactured by the Company are expected. Leasing Leasing provides the Company's customers with financing options through finance type leases including TRAC (Terminal Rental Adjustment Clause) leases. CUSTOMERS AND DISTRIBUTION For the fiscal year ended September 30, 1999, the Company's consolidated net sales were divided approximately 40% to distributors, 53% to solid waste handling companies, and 7% to other entities. During the fiscal years ended September 30, 1999, 1998 and 1997, approximately 23.1%, 28.8% and 13.5%, respectively, of the Company's total sales were made to Waste Management, Inc. The Company has no contracts with any of its customers and, accordingly, sells its products pursuant to purchase orders placed from time to time in the ordinary course of business. The Company delivers its products to its customers through the use of its own trucks or common carriers. The Company obtains its municipal as well as certain private contracts through the process of competitive bidding. There can be no assurance that municipalities or others will continue to solicit bids, or if they do, that the Company will continue to be successful in having its bids accepted. Additionally, inherent in the competitive bidding process is the risk that if a bid is submitted and a contract is subsequently awarded, 3 5 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 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 13, 1999, there were approximately 280 authorized Company dealers located in numerous states and 20 authorized Company dealers, licensees and commissioned district managers in 10 foreign countries, each of which is independently owned. The Company is dependent on such dealers for a significant portion of its revenues. These dealers typically specialize in specific products and areas and, accordingly, have specific knowledge of and contacts in particular markets. The Company believes that its dealers have enhanced and will continue to enhance the scope of the Company's marketing and sales efforts and have, to a certain extent, also enabled the Company to avoid certain significant costs associated with creating a more extensive direct sales network. The Company advertises its products under trade names and under its name in trade journals and brochures. Other marketing efforts include articles in trade publications, attendance at trade shows and presentations by the Company's personnel at industry trade conferences. The Company, through Leasing, also provides both sales-type financing and operating leases. At September 30, 1999, Leasing held net lease receivables of approximately $18.8 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. 4 6 While the Company attempts to maintain alternative sources for the Company's raw materials and believes that multiple sources are currently available for all of the raw materials that it uses, the Company's business is generally subject to periodic shortages of raw materials which could have an adverse effect on the Company. The Company currently purchases all of its hydraulic cylinders from only a few major suppliers. The failure by any of such suppliers to continue to supply the Company with cylinders on commercially reasonable terms, or at all, could also have a material adverse effect on the Company. The Company generally has no supply agreements with any of its suppliers and, accordingly, generally purchases raw materials pursuant to purchase orders placed from time to time in the ordinary course of business. Failure or delay by suppliers in supplying necessary raw materials to the Company could adversely affect the Company's ability to obtain and deliver its products on a timely and competitive basis. In addition, the Company has experienced price fluctuations for the raw materials that it purchases, particularly with respect to steel and aluminum. Any significant price fluctuations in the future could also have an adverse effect on the Company. The Company uses a forecasting and purchasing system to monitor the quantity and cost of necessary raw materials. Such cost controls allow the Company to minimize its operating costs by purchasing from the lowest priced suppliers the appropriate amount of raw materials in light of the Company's needs. The Company often orders raw materials in amounts in excess of its anticipated short-term needs in order to take advantage of price discounts available on large volume purchases of raw materials. To reduce its cost of raw materials, the Company has been processing coiled steel and manufacturing some of its own tubing, rather than purchasing tubing and processed sheet steel from third parties. The Company believes that it is the only manufacturer of dump truck bodies and solid waste handling equipment to process coiled steel and to operate a steel tube mill. Steel Processing Shelby Steel, a wholly-owned subsidiary of the Company, receives coiled steel and either warehouses or cuts and processes the steel at its River Rouge, Michigan facility to prescribed specifications. In addition to processing coiled steel for use by the Company, Shelby Steel also offers steel processing and warehousing services to third parties. Shelby Steel's ability to warehouse customers' steel attracts customers such as steel brokers who do not maintain facilities of their own to warehouse steel. Its steel processing and warehousing sales are generally limited to customers in the Detroit metropolitan area. Sales to third parties represented 92.6%, 92.8%, and 91.8% of Shelby Steel's business and 1.5%, 1.6%, and 1.9% of the Company's consolidated net sales for the fiscal years ended September 30, 1999, 1998 and 1997, 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. 5 7 COMPETITION The Company faces intense competition in the solid waste handling equipment and dump truck bodies industries. Certain of the Company's competitors offer as wide a range of products, have greater market share and financial, marketing, manufacturing and other resources than the Company. At present, the Company's order backlogs are approximately four to six weeks. In addition, the Company believes that several of its competitors have added or are in the process of adding additional manufacturing capacity, which could reduce order backlogs and price levels, and consequently adversely affect the Company. Moreover, the absence of highly sophisticated technology results in a number of small regional companies entering the container product business periodically and competing with the Company. Although the Company believes that its products are superior to those of most of its competitors because of the quality and amount of steel used in its products, consumers generally find the products relatively interchangeable. Consequently, price, product availability and delivery, design and manufacturing quality and service are the principal means of competition. The Company believes that it can continue to compete and further strengthen its competitive position through proper pricing, marketing and cost-effective distribution of the Company's products. The steel processing industry is also highly competitive, with quality, price and delivery the principal means of competition. The Company believes that it will generally continue to maintain its competitive position in the marketplace with respect to steel processing. Shelby Steel's ability to warehouse customers' steel attracts customers such as steel brokers who do not maintain facilities of their own to warehouse steel. BACKLOG AND INVENTORY The Company generally produces solid waste handling equipment and dump truck bodies pursuant to customer purchase orders. The Company includes in its backlog only firm product orders, which are subject to termination at will and rescheduling, without penalty. The Company's backlog was approximately $18.5 million and $17 million at September 30, 1999 and 1998, 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, 1999, 1998 and 1997, the Company had inventory of $63.3 million, $38.9 million and $31.0 million, respectively. EMPLOYEES The Company had approximately 881 employees as of December 13, 1999. Seventy-Five of the Company's hourly employees are represented by the McClain Hourly Employees' Union pursuant to a collective bargaining agreement which expires September 16, 2002. 225 hourly employees of E-Z Pack are represented by the International Association of Machinists and Aerospace Workers Union pursuant to a 6 8 collective bargaining agreement which expires June 12, 2000. 57 hourly employees of E-Z Pack are represented by the International Association of Machinists and Aerospace Workers Union pursuant to a collective bargaining agreement which expires November 1, 2002. On February 23, 1995 the National Labor Relations Board (the "NLRB") conducted an election in response to a petition filed by the Shopmen's Local Union No. 616 of the International Association of Bridge, Structural and Ornamental Iron Workers (AFL-CIO) (the "Union") to represent the hourly employees at E-Z Pack's facility in Macon, Georgia. The ballots of 11 employees were challenged as ineligible. The Union filed charges against the Company asserting that it committed various unfair labor practices which affected the election results and that the challenged ballots should be counted. On October 17, 1996, the NLRB issued a Decision, Order and Direction upholding the unfair labor practice charges, and on November 5, 1996, the NLRB determined that the results of the election were in favor of the Union. The Company is bargaining with the Union and discussing the appropriate remedy and possible settlement of all claims with the NLRB. The Company believes that relations with the hourly employees at its Georgia facility are generally satisfactory. There have been no work stoppages due to labor difficulties. ENVIRONMENTAL The Company's operations are subject to extensive federal, state and local regulation under environmental laws and regulations concerning, among other things, emissions into the air, discharges into the waters and the generation, handling, storage, transportation, treatment and disposal of waste and other materials. Inherent in manufacturing operations and in owning real estate is the risk of environmental liabilities as a result of both current and past operations, which cannot be predicted with certainty. The Company has incurred and will continue to incur costs, on an ongoing basis, associated with environmental regulatory compliance in its business. State and local agencies have become increasingly active in the environmental area. The increased regulation by multiple agencies can be expected to increase the Company's future environmental costs. In particular, properties under federal and state scrutiny frequently result in significant clean-up costs and litigation expenses related to a party's clean-up obligation. However, the Company believes that the ever-increasing waste stream and the continuing initiatives of government authorities relating to environmental and waste disposal problems, including restrictions on landfill locations and operations and extensive regulation relating to the disposal of waste, create significant opportunities for companies in the solid waste handling equipment industry. ITEM 2. PROPERTIES In the aggregate, the Company owns or leases approximately 940,200 square feet of real property located in Michigan, Ohio, Georgia, Oklahoma and Alabama. The Company owns three facilities in Michigan, four facilities in Ohio, one facility in Georgia, one facility in Oklahoma and one facility in Alabama. The properties that the Company owns or leases consist of the following:
OWNED SQUARE LOCATION OR LEASED FOOTAGE -------- --------- ------- Sterling Heights, Michigan Owned 37,000 Sterling Heights, Michigan Leased 18,000
7 9
OWNED SQUARE LOCATION OR LEASED FOOTAGE -------- --------- ------ Kalamazoo, Michigan Owned 55,000 River Rouge, Michigan Owned 50,000 Galion, Ohio Owned 365,000 Winesburg, Ohio Owned 67,500 Winesburg, Ohio Owned 16,000 Winesburg, Ohio Owned 15,200 Macon, Georgia Owned 114,500 Oklahoma City, Oklahoma Owned 100,000 Demopolis, Alabama Owned 102,000
The Company's main office and manufacturing facilities are located in a 37,000 square foot facility situated on 8 2/3 acres in Sterling Heights, Michigan owned by 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. 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. 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, although other similarly situated unrelated parties would, in all likelihood, require a long-term written lease. E-Z Pack owns three buildings comprising approximately 365,000 square feet situated on approximately 38 acres of land in Galion, Ohio. This facility manufactures front, side and rear loading garbage truck bodies and recycling trucks as well as transfer trailers. Galion owns three manufacturing facilities (67,500, 15,200 and 16,000 square feet) situated on 20 acres of land in Winesburg, Ohio where it manufactures dump bodies, hoists and balers. E-Z Pack's Georgia facility is an approximately 114,500 square foot manufacturing facility on 13.2 acres in Macon, Georgia. This facility manufactures dump bodies and roll-off hoists to sell principally in the Southeast. E-Z Pack's Oklahoma facility consists of three buildings in Oklahoma City, aggregating 100,000 square feet. This facility is used to fabricate and process steel for its own use and to manufacture roll-off containers. 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. The Company's Sterling Heights, Michigan facility and Galion, Ohio facility are currently operating at approximately 80% of capacity. The Oklahoma facility is currently operating at 65% of capacity. The Georgia facility is currently operating at 50% of 8 10 capacity. The Alabama facility is currently operating at 60% capacity. The Winesburg, Ohio facility is currently operating at 90% of capacity. The Kalamazoo, Michigan facility is currently operating at 60% of capacity. The determination of the productive capacity on each facility actually used by the Company is a function of the mix of products being produced at such facility and the pricing of such products. The production capacity figures set forth in this paragraph reflect the mix of products presently produced by each facility and the present pricing of such products. The Company enjoys expandable capacity at most of these facilities depending on double-shifting and other performance enhancing activities. The facilities owned and leased by the Company are well maintained and in good operating condition. Its plants and equipment are subject to various liens and encumbrances which collateralize certain obligations. See Notes 6 and 7 of Notes to Consolidated Financial Statements. ITEM 3. LEGAL PROCEEDINGS The Company is from time to time subject to various claims from existing or former employees alleging gender, age or racial discrimination and anti-union activity, none of which are expected to have a material adverse affect on the Company. See ITEM 1. BUSINESS. Employees. In addition, as a manufacturer of industrial products, the Company is, from time to time, subjected to various product liability claims. Such claims typically involve personal injury or wrongful death associated with the use or misuse of the Company's products. While such claims have not been material to the Company in any year and the Company believes that it maintains adequate product liability insurance, there can be no assurance that such insurance will continue to be available on terms acceptable to the Company. Any product liability claim not fully covered by insurance, as well as any adverse publicity from a product liability claim, could have a material adverse effect on the Company. The Company is currently defending a number of legal proceedings involving product liability claims relating to McClain, Galion and E-Z Pack brand products. A subsidiary of the Company purchased the business now conducted by Galion and E-Z Pack from the Peabody Galion Division of Peabody International Corporation ("Peabody"). Pursuant to an indemnification provided Peabody in connection with the acquisition, the Company is currently defending several legal proceedings involving product liability claims arising out of products manufactured by Peabody prior to the date of the acquisition. These claims are also covered by insurance. 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 of $1,050,000. Although the Company has settled all of the cases which were pending at the date of the acquisition and the Company believes that it can continue to successfully resolve pending and future product liability claims, there can be no assurance that the Company will be able to do so. The Company is not presently a party to any material legal proceedings except as described above in this item and in Item 1. Business, Employees. 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. 9 11 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, 1998 First Quarter 4.75 4.20 Second Quarter 6.19 3.375 Third Quarter 5.75 4.375 Fourth Quarter 5.00 3.00 FISCAL YEAR ENDED SEPTEMBER 30, 1999 First Quarter 5.875 3.125 Second Quarter 6.00 5.250 Third Quarter 5.938 4.25 Fourth Quarter 7.125 4.375
On December 7, 1999, the last reported sales price for the Common Stock as reported by Nasdaq/NMS was $5.6875. As of such date there were approximately 209 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: 10 12
======================================================================================================================= 1999 1998 1997 1996 1995 ---- ---- ---- ---- ---- Gross Sales $142,079,475 $118,487,052 $95,255,641 $84,680,797 $82,263,202 Sales, Net of Customer Discounts $140,604,885 $116,554,031 $95,255,641 $84,221,810 $81,569,427 Net Income (Loss) $4,181,938 $3,383,892 $(1,703,780) $2,384,957 $2,462,755 Net Earnings (Loss) Per Common and Common Equivalent Share,1, 2 $.90 $.72 $(.36) $.50 $.53 Working Capital $58,689,965 $41,919,687 $33,520,003 $32,371,639 $33,868,556 Total Assets $129,923,989 $100,246,967 $87,185,567 $79,425,255 $73,899,197 Long-Term Debt $62,648,684 $42,530,105 $38,513,490 $34,217,149 $31,170,287 Stockholders' Investment $30,890,965 $26,835,306 $23,837,091 $25,457,255 $22,841,274 Weighted Average Number of Common Equivalent Shares Outstanding 1, 2 4,673,027 4,711,741 4,729,281 4,752,050 4,657,476 Current Ratio 2.79:1 2.57:1 2.63:1 3.18:1 3.37:1 Long Term Debt to Equity 2.03:1 1.59:1 1.62:1 1.34:1 1.36:1 =======================================================================================================================
1 Weighted average number of shares outstanding includes, as appropriate, adjustments for the effect of common stock equivalents. 2 Adjusted to reflect a 4-for-3 stock split effective February 28, 1995. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW The following discussion should be read in conjunction with the consolidated financial statements, including the notes to them, appearing elsewhere in this report. 11 13 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, ---------------- --------------- ---------------- ------------ -------------- 1999 1998 1997 1996 1995 ---- ---- ---- ---- ---- Net Sales 100.00% 100.0% 100.00% 100.00% 100.00% Cost of Sales 82.40 82.18 83.68 79.65 78.35 ------ ----- ------ ----- ------ Gross Profit 17.60 17.82 16.32 20.35 21.65 Selling, General & Administrative Expenses 11.55 11.47 14.33 13.60 14.52 Restructuring and Impairment Charge 0.00 0.00 1.84 0.00 0.00 ------ ----- ------ ----- ------ Operating Profit 6.05 6.35 .15 6.75 7.13 Other Expense 1.54 2.22 2.24 2.48 2.59 ------ ----- ------ ----- ------ Income (Loss) Before Income Taxes 4.51 4.13 (2.09) 4.27 4.54 Income Taxes (Benefit) 1.53 1.23 (.30) 1.45 1.55 ------ ----- ------ ----- ------ Net Income (Loss) 2.98% 2.90% (1.79)% 2.82% 2.99% ====== ===== ====== ===== ======
The Company manufactures dump truck bodies and a variety of solid waste handling products including: (i) detachable roll-off waste containers ("roll-off containers") and hydraulically operated roll-off hoist tilt truck frames used to load, transport and dump roll-off containers ("roll-off hoists"); (ii) intermodal waste containers designed for interchangeable use on trucks, trains and ships ("intermodals"); (iii) water-tight and sludge detachable roll-off waste containers designed to handle wet waste and slurry type waste, respectively; (iv) compactors, unitized compactor/roll-off container systems ("unitized compaction systems"), and balers; (v) an assortment of front, rear and side loading garbage truck bodies; (vi) recycling truck bodies; and (vii) transfer trailers used to transport compacted solid waste from transfer stations to landfills or incinerators. RESULTS OF OPERATIONS Comparison of year ended September 30, 1999 to year ended September 30, 1998 Net sales increased 20.7% to $140.6 million for the fiscal year ended September 30, 1999 (Fiscal 1999) from $116.5 million for the fiscal year ended September 30, 1998 (Fiscal 1998). The increase was due primarily to strong sales by the Company's E-Z Pack and Truck Chassis divisions. Sales for E-Z Pack increased 49.6% or $11.8 million, while Truck Chassis sales increased 56.9% or $9.6 million. Sales of the Company's other product lines increased slightly or were flat for Fiscal 1999 compared to Fiscal 1998 The sales of the McClain Truck division accounted for 18.8% of the Company's sales for Fiscal 1999 compared to 14.5% of the Company's sales for Fiscal 1998. Although truck chassis sales increased significantly, the number of trucks the Company had available for sale at September 30, 1999 increased significantly over the September 30, 1998 level. This increase was due primarily to the Company's decision to aggressively pursue the Truck Chassis market for its tandem dump body product line. The market for these Truck Chassis was extremely soft in 1999, which combined with the Company's attempt to pursue this market caused approximately 60% of the increase in the Truck Chassis inventory. The Company paid approximately $1.0 million dollars in interest on debt incurred to finance this inventory increase. The Company's overall gross profit as a percentage of sales decreased to 17.60% for Fiscal 1999 from 17.82% for Fiscal 1998, while the gross profit margin on 12 14 products manufactured by the Company increased to 21.4% for Fiscal 1999 compared to 21.2% for Fiscal 1999. This increase results from reduced steel prices and increased production, providing overhead reductions, at certain of the Company's production facilities. The gross profit margin for the Truck Chassis division decreased to 5.8% for Fiscal 1999 from 6.8% for Fiscal 1998, due primarily to the softness in the truck chassis market in Fiscal 1999. Selling, General & Administrative Expenses increased to 11.55 % of net sales for Fiscal 1999 from 11.47% of net sales for the Fiscal 1998 as a result of increased marketing activity by the Company and expansion of its sales force. Inventory has increased to $63.3 million at September 30, 1999 from $38.9 million at September 30, 1998. Approximately $27.2 million of the inventory consists of trucks and related equipment the Company has dedicated to its truck ready program. This increase is the result of the Company's decision in the fourth quarter of fiscal 1998 to more aggressively pursue an expanding market it believes exists for package units consisting of a truck chassis and a piece of equipment manufactured by the Company (Roll-off Hoists, Refuse Truck Bodies and Dump Bodies). See above discussion regarding dump truck chassis. The Company's leasing subsidiary generated pretax income of $.48 Million for Fiscal 1999 compared to a pretax loss of $.02 Million for Fiscal 1998. The Company had $18.8 Million in net finance lease receivables at September 30, 1999 compared to $10.8 Million at September 30, 1998. Comparison of year ended September 30, 1998 to year ended September 30, 1997 Net sales for the fiscal year ended September 30, 1998 increased 22.4% to $116.6 million compared to $95.2 million for the fiscal year ended September 30, 1997. The increase was the result of strong sales of the Company's E-Z Pack and commodity products and the expansion of the Company's truck chassis program. E-Z Pack and commodity sales increased by approximately $4.0 million and $8.0 million, respectively, while sales of truck chassis increased approximately $10.0 million over the prior year. Although the sales for Fiscal 1998 increased substantially, the Company's E-Z Pack and Galion facilities sales were slower than expected due to logistical problems resulting from a shortage of truck chassis throughout the year. The Company's overall gross profit as a percentage of sales increased to 17.82% for Fiscal 1998 from 16.32% for fiscal 1997 while the gross profit on products manufactured by the Company increased to 21.2% for Fiscal 1998 from 17.26% for Fiscal 1997. The price increase implemented during December 1997, increased production at the Company's Georgia facility, the transfer of the EPCO product line to the Winesburg facility and the closing of the Buffalo facility were the primary factors in the increased gross profit on the products manufactured by the Company. The Company's inventory levels increased to $38.9 million at the end of fiscal 1998 from $31.0 million at the end of fiscal 1997. This increase was primarily due to the expansion of the Company's truck chassis program and increased finished goods inventories at the E-Z Pack and Galion facilities due to the shortage of truck chassis previously discussed. 13 15 Selling, general and administrative expenses decreased to 11.47% of net sales during fiscal 1998 compared to 14.33% for fiscal 1997. This decrease was due primarily to the increased sales and the Company's continuing efforts to automate and centralize certain administrative functions. LIQUIDITY AND CAPITAL RESOURCES The Company had working capital of $58.7 million at September 30, 1999 compared to $41.9 million at September 30, 1998. The ratio of current assets to current liabilities was 2.79 at September 30 1999 and 2.57:1 at September 30, 1998. The Company's cash and cash equivalents totaled $1.9 million at September 30, 1999. Cash flows used by operations were $13.6 million for the year ended September 30, 1999 primarily due to the increased inventory dedicated to the Company's truck program as discussed previously. The Company's required level of working capital increased during fiscal 1999 from fiscal 1998 due to increases in the Company's Truck Chassis program and continued success in expanding its leasing subsidiary. Long-term debt continued to increase as a result of the increased inventory levels, the continued expansion of leasing activity and the Company's ongoing commitment to increasing production efficiency by properly maintaining and upgrading its production facilities and machinery and equipment. The Company has a Revolving Credit Facility with Standard Federal Bank, a federal savings bank ("Standard"), which provides maximum availability of $33.3 million for working capital needs and a $1.5 million credit line to fund machinery and equipment acquisitions. On July 9, 1999 the Company signed an amendment to this agreement that temporarily increased the availability of the line to $35.0 million. The new agreement calls for a monthly reduction to the availability of $833,333, beginning August 1, 1999, and continuing through July 1, 2000, when the total availability will be $25,000,000. At September 30, 1999 the Company had borrowed approximately $26.9 million under the working capital line. Borrowings under the working capital line are limited to 80% of eligible accounts receivable and 50% of qualified inventory while the equipment line is limited to 80% of pledged equipment purchases. The Company also has a Revolving Credit Facility with Standard used to finance certain of its lease receivables. The agreement calls for a maximum availability of $15.0 million with borrowing limited to 80% of eligible lease receivables. At September 30, 1999 approximately $12.1 million had been drawn on this facility. All borrowings with Standard are secured by substantially all of the assets of the Company. In addition, the loans contain various covenants including those requiring the Company to maintain certain current ratios, levels of tangible net worth and debt ratios and restricting the among of capital expenditures the Company may make each year. The Company is in compliance with the various covenants as of September 30, 1999. The revolving credit agreements bear interest at the LIBOR rate plus 175 basis points and expire in May 2001, at which time the Company expects to obtain renewals on the same or similar terms. The Company has agreements with three financial institutions to provide financing for its TRAC (Terminal Rental Adjustment Clause) Leasing Agreements. The agreements call for maximum availability of $8 million in lease commitments. Under these facilities, the Company may finance 100% of eligible lease receivables over the 14 16 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, 1999, approximately $7.3 million had been drawn on the facilities. The Company has currently set its budget for capital expenditures in fiscal 1999 at approximately $3.0 million as compared to $4.5 million in fiscal 1998. Despite the increase in inventory and leasing activity, management believes that the Company's cash flow, together with the credit available to it under existing debt facilities, will provide it with adequate cash for its working capital needs for the next 12 months. YEAR 2000 COMPLIANCE The Company purchases the various computer hardware and software used in the administration of its financial, manufacturing and engineering processes from third party suppliers. A centralized computer and software is used for approximately 90% of the financial and manufacturing applications of the Company and certification has been received from both the hardware and software suppliers that these products are Year 2000 compliant. The engineering software is run on either a LAN (local area network) or individual personal computers depending on the size of the manufacturing facility. All the necessary hardware and software for the engineering is Year 2000 compliant. Additionally, the Company has various stand alone personal computers and laptop computers that run word processing, database and spreadsheet software. The Company is currently in the process of upgrading all the software run on these stand alone computers with versions that are Year 2000 compliant and estimates completion of this project prior to December 31, 1999. To date, the Company has expended approximately $80,000 to make its engineering hardware and software and certain of its stand alone computers and software Year 2000 compliant and estimates that it will expend approximately $10,000 on its remaining computers and software. These amounts represent approximately 75% and 10% of the Company's information technology budget for the fiscal years ended September 30, 1999 and 2000, respectively, and will be paid from the cash flow from operations. The Company believes that the steps it has taken regarding the Year 2000 issue will allow operations to run normally on January 1, 2000 and thereafter. The possibility exists however, that certain stand alone computers or software may not be upgraded timely or unforeseen circumstances may arise that interrupt certain areas of the Company's operations. In case of any such occurrence the Company believes that it can correct the problem within a few days and no serious interruption in its business or operations will occur. The Company has made no formal assessment concerning the Year 2000 compliance status of its suppliers or customers. If any of the Company's significant suppliers or customers does not successfully and timely become Year 2000 compliant, the Company's business or operations could be adversely affected. The Company has not yet generated and does not intend to generate any disaster contingency plans related to the Year 2000 compliance issue. 15 17 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Financial statements and supplementary data are filed herewith under Item 14. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS There have been no changes in the Company's independent public accountants during the past two fiscal years and the Company does not disagree with such accountants on any matter of accounting principles, practices or financial statement disclosure. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY The directors and executive officers of the Company are as follows:
APPROXIMATE DATE SERVICE NAME AGE OFFICE BEGAN ---- --- ------ ----- Kenneth D. McClain(1) 58 Chairman of the Board, Chief Executive Officer and President 3/68 Robert W. McClain(1) 63 Senior Vice President, Assistant Secretary and Director 3/68 Raymond Elliott 65 Director 8/90 Walter J. Kirchberger 64 Director 11/95 Carl Jaworski 56 Secretary 10/72 Mark S. Mikelait 39 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. 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 16 18 October 1996. Prior to that he was President and a director of Elliott & Sons Insurance Agency, Inc. and Michigan Benefit Plans Insurance Agency, Inc. since 1967. Mr. Elliott also serves as a director of the Boys and Girls Club of Troy, a charitable organization located in Troy, Michigan. WALTER J. KIRCHBERGER was elected to the Board of Directors in November 1995. Mr. Kirchberger is First Vice President - Research of PaineWebber Incorporated, and has served in such capacity for more than 25 years. He also serves as a director of Simpson Industries, Inc. CARL JAWORSKI has served as Secretary since October 1972. Mr. Jaworski was also a director and the Treasurer of the Company from October 1972 until April 1992. Mr. Jaworski also serves as Secretary and a director of Shelby Steel. 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, 1999, 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 $100,000 during the fiscal year ended September 30, 1999. 17 19 SUMMARY COMPENSATION TABLE
- ------------------------------------------------------------------------------------ Annual Compensation Long Term Compensation - ------------------------------------------------------------------------------------ Name and Fiscal Salary Options/ Principal Position Year Amount($) SARs(#) ------------------ ---- --------- ------- Kenneth D. McClain, President/ CEO 1999 $275,000 25,000 1998 $263,031 --- 1997 226,885 --- Robert W. McClain, Senior Vice President 1999 $143,751 25,000 1998 125,004 --- 1997 183,335 Carl Jaworski Secretary 1999 $108,750 5,000 1998 $104,631 5,000 1997 107,207 Mark S. Mikelait Treasurer 1999 $126,250 5,000 1998 101,250 10,000 1997 --- --- ====================================================================================
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 1998 Realized Not Not Exercisable Exercisable(1) Exercisable Exercisable - ---------------------- --------------- ----------------- ---------------- -------------------- ------------------ ------------------ Kenneth D. McClain -0- -0- 13,333 25,000 $ -0- $ -0- Robert W. McClain -0- -0- 6,666 20,000 $ -0- $ -0- - ---------------------- --------------- ----------------- ---------------- -------------------- ------------------ ------------------
(1) Stock options granted November 16, 1995 and pursuant to the Company's 1989 and 1999 Incentive Stock Plan (the "Incentive Plan"). Options must be exercised by November 15, 2000 and May 7, 2004. Exercise price is $7.31 and $5.50 per share. (2) Value based on the average of the September 30, 1999 closing bid high and low price which was $4.375 per share. COMPENSATION OF DIRECTORS Directors who are employees of the Company do not receive compensation for serving on the Board or on the Board's committees. Directors who are not employees of the Company are entitled to a quarterly retainer fee of $3,750, a $1,000 fee for each regular or special meeting of the Board and a $1,000 fee for each committee meeting attended on a day other than a regular or special Board meeting date (collectively, the "Fees"). A Director may elect to receive payment of the Fees in shares of Common Stock pursuant to the Company's 1989 Retainer Stock Plan for Non-Employee Directors (the "Retainer Plan"). To participate in the Retainer Plan, an eligible director must elect prior to December 31 of each year the percentage, if any, of Fees he desires to receive in the form of shares of Common Stock. The Common Stock is issued 18 20 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, 1999, 6,114 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 7,1999, 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 1,433,279(3) 30.84% 6200 Elmridge Road Sterling Heights, MI 48310 Robert W. McClain 1,025,844(4) 22.08% 6200 Elmridge Road Sterling Heights, MI 48310 June McClain 337,178 7.26% 6200 Elmridge Road Sterling Heights, MI 48310 Lisa McClain Pfeil 310,474(5) 6.68% 6200 Elmridge Road Sterling Heights, MI 48310 Raymond Elliott 22,322 0.48% 290 Town Center P.O. Box 890 Troy, Michigan 48084 Walter Kirchberger 6,137 0.18% 2301 West Big Beaver Rd., Suite 800 Troy, Michigan 48084 Carl Jaworski 117,825 2.54% 6200 Elmridge Road Sterling Heights, MI 48310 Mark S Mikelait 17,332 0.55% 500 Sherman Street Galion, OH 44833 All current executive officers and 2,624,739(6) 56.48% directors as a group (6 persons)
19 21 (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 4,647,183 shares of Common Stock issued and outstanding as of December 7, 1999. In addition, for purposes of computing the percentage of outstanding shares held by each person or group of persons named above, any security that such person or persons has or have the right to acquire within 60 days is also deemed to be outstanding, but is not deemed to be outstanding for the purpose of computing the percentage ownership of any other person. (3) Includes 2,430 shares of Common Stock owned by Kenneth D. McClain's wife. Mr. McClain disclaims beneficial ownership of these shares. (4) Includes 337,178 shares of Common Stock owned by Robert W. McClain's wife. Mr. McClain disclaims beneficial ownership of these shares. (5) Of the shares beneficially owned by Mrs. Pfeil, 305,098 are held of record by an irrevocable trust for her benefit. Mrs. Pfeil is the daughter of Kenneth D. McClain. (6) Includes 32,331 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 $231,000 in Fiscal 1999 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 1999. Sales from this entity to the Company aggregated approximately $1.0 million during Fiscal 1999, for which this entity received fees and commissions in the approximate amount of $117,500. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) The following documents are filed herewith as part of this Form 10-K: (1) A list of the financial statements required to be filed as a part of this Form 10-K is shown in the "Index to the Consolidated Financial Statements and Schedules" filed herewith. (2) A list of financial statement schedules required to be filed as a part of this Form 10-K is shown in the "Index to the Consolidated Financial Statements and Schedules" filed herewith. (3) A list of the exhibits required by Item 601 of Regulation S-K to be filed as a part of this Form 10-K is shown on the "Index to Exhibits" filed herewith. 20 22 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Dated: December 13, 1999 McCLAIN INDUSTRIES, INC. By:/s/ Kenneth D. McClain ------------------------------------------ Kenneth D. McClain, President (Principal Executive Officer) And By:/s/ Mark S. Mikelait -------------------------------------- Mark S. Mikelait, Treasurer (Principal Financial Officer and Principal Accounting Officer) Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. Dated: December 13, 1999 /s/ Kenneth D. McClain ----------------------------------------------- Kenneth D. McClain, Director Dated: December 13, 1999 /s/ Robert W. McClain ----------------------------------------------- Robert W. McClain, Director Dated: December 13, 1999 /s/ Raymond Elliott ----------------------------------------------- Raymond Elliott, Director Dated: December 13, 1999 /s/ Walter J. Kirchberger ----------------------------------------------- Walter J. Kirchberger, Director 21 23 SECURITIES AND EXCHANGE COMMISSION - -------------------------------------------------------------------------------- Washington, D. C. Form 10-K For Corporations ANNUAL REPORT FOR THE YEARS ENDED SEPTEMBER 30, 1999, 1998 and 1997 MCCLAIN INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED FINANCIAL STATEMENTS AND INDEPENDENT AUDITORS' REPORT -22- 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, 1999 and 1998 Consolidated Statements of Operations for the years ended September 30, 1999, 1998 and 1997 Consolidated Statements of Stockholders' Investment for the years ended September 30, 1999, 1998 and 1997 Consolidated Statements of Cash Flows for the years ended September 30, 1999, 1998 and 1997 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. -23- 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, 1999 and 1998, and the related consolidated statements of operations, stockholders' investment, and cash flows for each of the three years in the period ended September 30, 1999. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of McClain Industries, Inc. and Subsidiaries as of September 30, 1999 and 1998, and the results of their operations and their cash flows for each of the three years in the period ended September 30, 1999 in conformity with generally accepted accounting principles. REHMANN ROBSON, P.C. Farmington Hills, Michigan December 13, 1999 -24- 26 MCCLAIN INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS - --------------------------------------------------------------------------------
ASSETS SEPTEMBER 30, ------------------------------- 1 9 9 9 1 9 9 8 --------------- ------------- Current assets Cash and cash equivalents $ 1,908,397 $ 1,924,006 Accounts receivable, net of allowance for doubtful accounts of $570,000 in 1999 ($800,000 in 1998) 20,140,166 24,235,761 Inventories 63,281,785 38,873,477 Net investment in sales-type leases, current portion 5,900,000 3,100,000 Prepaid expenses 237,129 543,095 -------------- ------------- TOTAL CURRENT ASSETS 91,467,477 68,676,339 -------------- ------------- PROPERTY, PLANT AND EQUIPMENT, NET 23,236,170 23,266,545 -------------- ------------- OTHER ASSETS Net investment in sales-type leases, net of current portion 12,871,973 6,013,959 Goodwill, net of amortization 1,044,734 1,440,745 Other 605,401 454,941 Equipment under construction 698,234 394,438 -------------- ------------- TOTAL OTHER ASSETS 15,220,342 8,304,083 -------------- ------------- TOTAL ASSETS $ 129,923,989 $ 100,246,967 ============== =============
The accompanying notes are an integral part of these consolidated financial statements. -25- 27 - -------------------------------------------------------------------------------- LIABILITIES AND STOCKHOLDERS' INVESTMENT
SEPTEMBER 30, ------------------------------------------- 1 9 9 9 1 9 9 8 -------------------- -------------------- CURRENT LIABILITIES Accounts payable $ 21,775,139 $ 18,405,224 Current portion of long-term debt 4,450,000 3,300,000 Accrued expenses 4,682,156 4,537,434 Federal and state income taxes 1,870,217 513,994 ------------------- -------------------- TOTAL CURRENT LIABILITIES 32,777,512 26,756,652 Long-term debt, net of current portion 62,648,684 42,530,105 Product liability 1,406,828 1,909,904 Deferred income taxes 2,200,000 2,215,000 ------------------- ------------------- TOTAL LIABILITIES 99,033,024 73,411,661 ------------------- ------------------- COMMITMENTS AND CONTINGENCIES (NOTE 17) STOCKHOLDERS' INVESTMENT Common stock, no par value; authorized 10,000,000 shares, issued and outstanding, 4,660,878 shares (4,686,727 shares in 1998) 4,871,530 4,997,809 Retained earnings 26,019,435 21,837,497 ------------------- ------------------- TOTAL STOCKHOLDERS' INVESTMENT 30,890,965 26,835,306 ------------------- ------------------- TOTAL LIABILITIES AND STOCKHOLDERS' INVESTMENT $ 129,923,989 $ 100,246,967 =================== ===================
-26- 28 MCCLAIN INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS - --------------------------------------------------------------------------------
YEAR ENDED SEPTEMBER 30, ----------------------------------------------------------------- 1 9 9 9 1 9 9 8 1 9 9 7 ------------------- ------------------- ------------------- Net sales $ 140,604,885 $ 116,554,031 $ 95,255,641 Cost of sales 115,863,228 95,786,681 79,711,774 ------------------- ------------------- ------------------- GROSS PROFIT 24,741,657 20,767,350 15,543,867 Selling, general and administrative expenses 16,234,546 13,363,850 13,647,757 Restructuring and impairment charges - - 1,755,000 ------------------- ------------------- ------------------- INCOME FROM OPERATIONS 8,507,111 7,403,500 141,110 ------------------- ------------------- ------------------- OTHER INCOME (EXPENSE) Interest expense (3,982,325) (3,381,132) (3,448,867) Interest income 1,575,188 1,285,016 1,215,877 Other, net 236,964 (493,492) 101,100 ------------------- ------------------- ------------------- OTHER EXPENSE - NET (2,170,173) (2,589,608) (2,131,890) ------------------- ------------------- ------------------- INCOME (LOSS) BEFORE INCOME TAXES 6,336,938 4,813,892 (1,990,780) Income taxes (benefit) 2,155,000 1,430,000 (287,000) ------------------- ------------------- ------------------- NET INCOME (LOSS) $ 4,181,938 $ 3,383,892 $ (1,703,780) =================== =================== =================== Net income (loss) per share: Basic $ 0.90 $ 0.72 $ (0.36) =================== =================== =================== Assuming dilution $ 0.90 $ 0.72 $ (0.36) =================== =================== ===================
The accompanying notes are an integral part of these consolidated financial statements. -27- 29 MCCLAIN INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' INVESTMENT - --------------------------------------------------------------------------------
COMMON STOCK ------------------------------------ RETAINED SHARES AMOUNT EARNINGS TOTALS ---------------- ------------------ -------------------- ------------------- Balance at October 1, 1996 $ 4,693,916 $ 5,299,870 $ 20,157,385 $ 25,457,255 Shares issued 56,971 157,695 -- 157,695 Shares repurchased (24,467) (136,968) -- (136,968) Common stock issued in connection with EPCO acquisition 11,202 62,889 -- 62,889 Net loss -- -- (1,703,780) (1,703,780) ------------ ------------ ------------ ------------ Balance at September 30, 1997 4,737,622 5,383,486 18,453,605 23,837,091 Shares issued 45,284 90,323 -- 90,323 Shares repurchased (96,179) (476,000) -- (476,000) Net income -- -- 3,383,892 3,383,892 ------------ ------------ ------------ ------------ Balance at September 30, 1998 4,686,727 4,997,809 21,837,497 26,835,306 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 ============ ============ ============ ============
The accompanying notes are an integral part of these consolidated financial statements. -28- 30 MCCLAIN INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS - --------------------------------------------------------------------------------
YEAR ENDED SEPTEMBER 30, ----------------------------------------------------------- 1 9 9 9 1 9 9 8 1 9 9 7 ------------------ ----------------- ------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $ 4,181,938 $ 3,383,892 $ (1,703,780) Adjustments to reconcile net income (loss) to net cash (used in) provided by operating activities Depreciation and amortization 3,280,109 3,395,115 4,893,701 Deferred income taxes (benefit) (15,000) 115,000 - Provision for doubtful accounts 146,500 481,407 432,511 (Gain) loss on disposal of plant and equipment (8,330) (1,530) 4,032 Common stock issued to directors for services 25,123 31,127 28,494 Common stock issued in connection with EPCO acquisition - - 62,889 Net changes in operating assets and liabilities which provided (used) cash: Accounts receivable 3,949,095 (8,127,905) 1,481,176 Inventories (24,408,308) (7,861,711) (5,434,766) Net investment in sales-type leases (9,658,012) (865,186) (2,632,423) Prepaid expenses and other assets (233,581) 403,712 (1,086,661) Accounts payable 3,369,915 4,272,578 3,585,004 Accrued expenses 1,500,945 1,400,960 1,455,314 ------------------ ---------------- ------------------ NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES (17,869,606) (3,372,541) 1,085,491 ------------------ ---------------- ------------------ CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of plant and equipment (2,768,433) (965,246) (4,080,499) Payments on liabilities assumed upon the Galion acquisition (503,077) (241,967) (623,984) Proceeds from sale of plant and equipment 8,330 1,528 - ------------------ ---------------- ------------------ NET CASH USED IN INVESTING ACTIVITIES (3,263,180) (1,205,685) (4,704,483) ------------------ ---------------- ------------------ CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from long-term debt 19,768,579 7,269,129 10,078,495 Repayments of long-term debt (2,900,000) (2,752,514) (5,114,354) Proceeds from funding of capital lease obligations 4,534,732 - - Repayments of capital lease obligations (134,732) - - Sale of common stock under stock option plan - 59,196 129,201 Repurchase of common stock (151,402) (476,000) (136,968) ------------------ ---------------- ------------------ NET CASH PROVIDED BY FINANCING ACTIVITIES 21,117,177 4,099,811 4,956,374 ------------------ ---------------- ------------------ NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (15,609) (478,415) 1,337,382 Cash and cash equivalents, beginning of year 1,924,006 2,402,421 1,065,039 ------------------ ---------------- ------------------ CASH AND CASH EQUIVALENTS, END OF YEAR $ 1,908,397 $ 1,924,006 $ 2,402,421 ================== ================ ==================
The accompanying notes are an integral part of these consolidated financial statements. -29- 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. 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, and McClain International FSC, Inc., an international sales corporation). On January 1, 1999, Galion Holding Company, McClain of Georgia, Inc., McClain of Ohio, Inc., McClain of Oklahoma, Inc., McClain of Alabama, Inc., McClain EPCO, Inc., and McClain Group Sales, Inc. were merged into McClain E-Z Pack, Inc. McClain E-Z Pack, Inc. and McClain Galion, Inc. were formerly operating subsidiaries of Galion Holding Company. 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 $32,500,000, $33,642,000 and $12,896,000 in 1999, 1998 and 1997, respectively. The Company had receivables of approximately $3,066,000 and $8,000,000 from this customer at September 30, 1999 and 1998, respectively. The loss of this customer could adversely affect the Company's short-term operating results. -30- 32 MCCLAIN INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- Use of Estimates The preparation of consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of income and expenses during the reporting periods. Actual results could differ from those estimates. Significant estimates include but are not limited to product liability, goodwill amortization and the allowance for doubtful receivables. Income Taxes Deferred income tax assets and liabilities are computed annually for differences between the financial statement and tax bases of assets and liabilities that will result in taxable or deductible amounts in the future, based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. Income tax expense is the tax payable or refundable for the year plus or minus the change during the year in deferred tax assets and liabilities. Deferred income taxes arise from temporary basis differences principally related to inventory, product liability, and plant and equipment. Cash and Cash Equivalents The Company considers all highly liquid investments with an original maturity of three months or less when purchased to be cash equivalents. Sales-Type Leases The Company, through McClain Group Leasing, Inc., offers lease financing to certain purchasers of the Company's products. These leases, along with TRAC leases entered into subsequent to September 30, 1998, meet the criteria for classification as capitalized leases and are accounted for as sales-type leases, whereby sales and gross profit are recognized at the inception of the lease. Accordingly, an investment is reflected on the accompanying balance sheets in an amount equal to the gross minimum lease payments receivable less unearned finance income. Unearned finance income is amortized in such a manner as to produce a constant periodic rate of return on the net investment in the lease. -31- 33 MCCLAIN INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- Goodwill Goodwill representing the purchase price in excess of the fair values of net assets acquired is amortized on a straight line basis. The amortization period is estimated based upon management's judgements and generally ranges from 5 to 40 years. Accumulated amortization as of September 30, 1999 and 1998 was $1,205,990 and $821,998, respectively. A significant portion of goodwill attributable to certain business combinations has arisen in recent years. While management believes that these costs will be recovered from the profitable operating of these businesses in the future, a change in the estimates of the applicable recovery periods or the development of unfavorable business conditions pertinent to these operations could adversely affect the Company's operating results. 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, 1999, 1998 and 1997 options to purchase 244,998, 199,476, and 125,464 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. A reconciliation of the denominators used in the basic and diluted share calculation follows for the years ended September 30:
1 9 9 9 1 9 9 8 1 9 9 7 ------------- ------------- ------------- Denominator: Weighted average shares outstanding, basic 4,673,027 4,711,741 4,729,281 Incremental shares from assumed conversion of options 109 - 41,577 ------------- ------------- ------------- Weighted average shares outstanding, diluted 4,673,583 4,711,741 4,770,858 ============= ============= =============
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. Common Stock Issued to Directors for Services Common stock is issued from time to time in lieu of cash for services provided to the Company by Directors of the Company and is recorded as compensation expense generally at the fair value on the date of issuance. -32- 34 MCCLAIN INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- Revenue Recognition Sales are recorded by the Company when the products are delivered to independent distributors or other customers. 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:
1 9 9 9 1 9 9 8 1 9 9 7 -------------- -------------- -------------- Balance, beginning of year $ 800,000 $ 500,000 $ 600,000 Add provision charged against income 146,500 481,400 432,500 Less uncollectible accounts written off, net of recoveries (376,500) (181,400) (532,500) -------------- -------------- -------------- Balance, end of year $ 570,000 $ 800,000 $ 500,000 ============== ============== ==============
3. INVENTORIES Inventories are stated at the lower of cost or market. The LIFO (last-in, first-out) method is utilized for certain inventories, while the FIFO (first-in, first-out) method is utilized for the remaining inventories. The major components of inventories were as follows at September 30:
1 9 9 9 1 9 9 8 ------------------ ------------------ Materials $ 19,416,535 $ 16,530,726 Work-in process 5,555,977 5,707,374 Finished goods 11,120,913 11,065,851 ------------------ ------------------ 36,093,425 33,303,951 Chassis 27,188,360 5,569,526 ------------------ ------------------ $ 63,281,785 $ 38,873,477 ================== ==================
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 $24,733,961 and $4,839,853 at September 30, 1999 and 1998, respectively. -33- 35 MCCLAIN INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- 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. TRAC leasing activity subsequent to September 30, 1998 is accounted for as sales-type leases. 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 net investment in these sales-type leases is comprised of the following amounts at September 30:
1 9 9 9 1 9 9 8 --------------- ---------------- Gross minimum lease payments collectible in monthly installments $ 23,060,916 $ 11,706,584 Less advance lease payments and deposits received 428,563 289,157 --------------- ---------------- Subtotal 22,632,353 11,417,427 Less unearned finance income 3,860,380 2,303,468 --------------- ---------------- Total net investment in sales-type leases 18,771,973 9,113,959 Current portion 5,900,000 3,100,000 --------------- ---------------- Noncurrent portion $ 12,871,973 $ 6,013,959 =============== ================
Gross minimum lease payments are collectible in the following scheduled annual amounts for the years succeeding September 30, 1999:
Year ending September 30 Amount ------------------- ---------------- 2000 $ 7,130,000 2001 5,690,000 2002 4,610,000 2003 3,345,000 2004 1,857,353 ---------------- Gross minimum amount collectible $ 22,632,353 ================
-34- 36 MCCLAIN INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- The TRAC leasing programs in place with financial institutions allow for maximum availability of $8,000,000 in lease commitments which provide for financing of 100% of eligible lease receivables over the term of the related lease. These notes are secured by a pledge of the remittances in the related sublease. At September 30, 1999, approximately $7,300,000 had been drawn on these lease programs, $4,400,000 of which is accounted for as capital lease obligations and $2,900,000 of which is accounted for as minimum lease payments under operating leases. Rental income from these subleasing activities was $1,221,000, $1,382,000, and $1,420,000 in the years 1999, 1998 and 1997, respectively, while the related rental expense for the leaseback of the products was $1,035,000, $1,317,000, and $1,212,000 during the years ended September 30, 1999, 1998 and 1997, respectively. Proceeds of the subleasing activities have been, and are expected to continue to be, in excess of the related rental expense. Minimum scheduled rental payments and rental receipts under these operating lease arrangements in future years are summarized as follows:
Year ending Rental Rental September 30 Payments Receipts ------------ ----------------- ---------------- 2000 $ 930,000 $ 1,130,000 2001 930,000 1,130,000 2002 930,000 1,130,000 2003 913,000 1,125,000 ----------------- ---------------- Gross minimum rental payments $ 3,703,000 $ 4,515,000 ================= ================
Total residual values guaranteed by the Company under these leasing arrangements approximates $1,390,000 as of September 30, 1999. 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. -35- 37 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- Property, plant and equipment consisted of the following amounts as of September 30:
1 9 9 9 1 9 9 8 --------------- ---------------- Land $ 2,282,977 $ 2,282,977 Buildings and improvements 14,926,790 13,517,487 Machinery and equipment 22,903,789 22,276,726 Furniture, fixtures and vehicles 4,169,061 4,023,385 --------------- ---------------- 44,282,617 42,100,575 Less accumulated depreciation 21,046,447 18,834,030 --------------- ---------------- Property, plant and equipment, net $ 23,236,170 $ 23,266,545 =============== ================
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:
1 9 9 9 1 9 9 8 ----------------- ---------------- Revolving line of credit providing for maximum availability of up to $33,333,334 and $20,000,000 at September 30, 1999 and 1998, respectively. On July 9, 1999, the Company signed a new agreement temporarily increasing the availability of the line to $35,000,000. The agreement calls for a monthly reduction to the availability of $833,000, beginning August 1, 1999, and continuing through July 1, 2000, when the total availability will be $25,000,000. Borrowings are limited to 80% of the eligible accounts receivable and 50% of qualified inventory and are subject to interest at the LIBOR rate plus 175 basis points (7.09% at September 30, 1999). $ 26,858,901 $ 17,955,713 The agreement is collateralized by substantially all the assets of the Company and contains various covenants requiring the Company to maintain certain financial ratios. The agreement also prohibits the Company from incurring additional indebted- ness other than subordinated indebtedness and limits plant and equipment acquisitions to $3.0 million per fiscal year. This agreement expires in May 2001, at which time the Company expects to obtain a renewal upon the same or similar terms.
-36- 38 MCCLAIN INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - --------------------------------------------------------------------------------
1 9 9 9 1 9 9 8 ----------------- ---------------- Line of credit providing for maximum availability of $15,000,000 in 1999 and $10,000,000 in 1998. Borrowings are limited to 80% of eligible lease receivables and are subject to interest at the LIBOR rate plus 175 basis points. The agreement is collateralized by certain equipment leases held by the Company's leasing subsidiary. This agreement expires in May 2001, at which time the Company expects to obtain a renewal upon the same or similar terms. 12,125,000 7,605,295 ----------------- ---------------- Total lines of credit borrowings (Note 7) $ 38,983,901 $ 25,561,008 ================ ================
7. LONG-TERM DEBT Long-term debt consisted of the following obligations as of September 30:
1 9 9 9 1 9 9 8 ----------------- ---------------- 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 LIBOR rate plus 205 basis points (effective rate of 7.39% at September 30, 1999), maturing in September 2006. This note was refinanced in July 1999. $ 18,500,000 $ 14,200,000 Promissory notes to banks, collateralized by commercial mortgages on certain real estate, payable in monthly installments of $28,300 plus interest ranging from the bank prime rate to prime plus 1/4% (effective rates of 8.5% to 8.75% at September 30, 1999), maturing at various dates through January 2000. 1,039,783 1,369,097 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 3.84% at September 30, 1999) as determined by the bond holder. 4,175,000 4,700,000 ----------------- ----------------
-37- 39 MCCLAIN INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - --------------------------------------------------------------------------------
1 9 9 9 1 9 9 8 ---------------- -------------- Subtotal, notes and bonds 23,714,783 20,269,097 Capital lease obligations (Note 4) 4,400,000 - Lines of credit borrowings (Note 6) 38,983,901 25,561,008 ---------------- -------------- 67,098,684 45,830,105 Total long-term debt Less current portion 4,450,000 3,300,000 ---------------- -------------- Long-term debt, net of current portion $ 62,648,684 $ 42,530,105 ================ ==============
Scheduled aggregate principal maturities of long-term debt for years succeeding September 30, 1999 are presented below:
Year ending September 30 Amount ----------------- --------------- 2000 $ 4,450,000 2001 43,200,000 2002 4,300,000 2003 4,300,000 2004 3,700,000 Thereafter 7,148,684 --------------- $ 67,098,684 ===============
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, 1999, the Company was not in compliance with one of the financial covenants contained in the loan agreements with its principal lending institution. In December, 1999, the Company's principal lender waived its rights to accelerate repayment of the debt arising from such covenant violation and agreed to amend that covenant which is considered by management to be more compatible with the Company's current operations. Accordingly, the obligations are classified on the accompanying consolidated balance sheet at September 30, 1999 according to their original repayment terms. 8. ACCRUED EXPENSES Accrued expenses included on the accompanying consolidated balance sheets consist of the following amounts at September 30:
1 9 9 9 1 9 9 8 --------------- ---------------- Sales discounts $ 1,018,312 $ 1,162,959 Compensation 788,200 640,869 Vacation and holiday pay 434,303 481,174 Taxes 607,510 488,598 Insurance 777,283 891,592 Other 1,056,548 872,242 --------------- ---------------- Total $ 4,682,156 $ 4,537,434 =============== ================
-38- 40 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- 9. INCOME TAXES The provision (benefit) for income taxes for each of the three years in the period ended September 30, consists of the following components:
1 9 9 9 1 9 9 8 1 9 9 7 --------------- --------------- --------------- Current federal provision (benefit) $ 2,170,000 $ 1,315,000 $ (287,000) Deferred provision (credit) (15,000) 115,000 - --------------- --------------- -------------- Total income taxes (benefit) $ 2,155,000 $ 1,430,000 $ (287,000) =============== =============== ==============
The effective income tax rate on consolidated pre-tax income differs from the federal statutory rate for the following reasons:
1 9 9 9 1 9 9 8 1 9 9 7 ---------------------- -------------------- ----------------------- Amount % Amount % Amount % --------------- ------ --------------- ----- --------------- ------ Provision (benefit) computed at statutory rate $ 2,155,000 34 $ 1,637,000 34 $ (677,000) (34) Nondeductible expenses 22,000 1 21,000 1 389,000 19 Cancellation of debt related to EPCO restructuring - - (207,000) (4) - - Other (22,000) (1) (21,000) (1) 1,000 - ------------- -- ------------ --- ------------- --- $ 2,155,000 34 $ 1,430,000 30 $ (287,000) (15) ============= == ============ === ============= ===
The balance of the net deferred income tax liability consists of temporary basis differences related to the following assets and liabilities as of September 30:
1 9 9 9 1 9 9 8 ---------------- ----------------- Taxable differences: Property and equipment $ 2,905,000 $ 2,850,000 Inventory 1,100,000 1,140,000 --------------- ---------------- Gross deferred tax liabilities 4,005,000 3,990,000 --------------- ---------------- Deductible differences: Product liability 478,000 646,000 Accounts receivable 193,000 170,000 Accrued expenses 889,000 798,000 Goodwill 245,000 161,000 --------------- ---------------- Gross deferred tax assets 1,805,000 1,775,000 --------------- ---------------- Net deferred income tax liability $ 2,200,000 $ 2,215,000 =============== ================
The components which comprise gross deferred taxes are predominantly noncurrent; as such, the entire related net liability is classified as noncurrent. -39- 41 MCCLAIN INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- 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 $673,480 in 1999, $494,133 in 1998, and $407,739 in 1997. The Company has an employee stock bonus plan for full time, salaried and non-union employees. Company contributions are discretionary each year and are generally limited to 15% of participants' compensation. No contributions were made for the years ended September 30, 1999, 1998 and 1997. 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, 1999, 1998 and 1997. 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 $1,005,000, $1,100,000, and $1,093,000 to the Company during the years ended September 30, 1999, 1998 and 1997, respectively. That entity received fees and commissions in connection with these transactions of approximately $117,500, $116,000, and $117,000, respectively. Product Sales The Company had product sales of approximately $231,000, $590,000, and $560,000, during the years ended September 30, 1999, 1998 and 1997, 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. -40- 42 MCCLAIN INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- 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, 1999, 1998 and 1997 the Company issued 4,505, 7,593, and 5,466 shares, respectively, of its common stock to such directors in exchange for services rendered. 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:
1 9 9 9 1 9 9 8 1 9 9 7 --------------------- --------------------- ---------------------- Exercise Exercise Exercise Shares Price * Shares Price * Shares Price * ----------- -------- ---------- --------- ----------- --------- Outstanding, beginning of year 199,476 $ 6.30 191,391 $ 5.71 227,896 $ 5.01 Granted 130,000 5.42 74,000 5.08 15,000 5.75 Exercised - - (30,825) 3.25 (51,505) 2.51 Forfeited/expired (59,811) 7.06 (35,090) 3.25 - - ------- -------- ------- --------- ------- --------- Outstanding, end of year 269,665 5.71 199,476 $ 6.30 191,391 $ 5.71 ------- -------- ------- --------- ------- --------- Exercisable, end of year 85,332 $ 6.50 145,131 $ 6.73 164,491 $ 5.55 ======= ======== ======= ========= ======= =========
OPTIONS AT SEPTEMBER 30, 1999
Options Outstanding Options Exercisable ------------------------------------ ---------------------- Remaining Contractual Exercise Exercise Range of Exercise Prices Shares Life * Price * Shares Price * ---------------------------------- --------- -------- --------- ---------- --------- $5.00 to $6.00 219,000 .5 years $ 5.33 34,667 $ 5.27 $7.00 to $8.00 50,665 3.9 years 7.33 50,665 7.33 ------- --------- --------- ------ --------- Total 269,665 1.1 years $ 5.71 85,332 $ 6.50 ======= ========= ========= ====== =========
*Weighted average -41- 43 MCCLAIN INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- 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. Had stock option compensation expense been determined pursuant to the methodology provided in Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation", using the Black-Schales option pricing model with the following weighted average assumptions for grants in 1999, 1998 and 1997: expected volatility of 71%, 66% and 65%, risk free interest rate of 5.5% and expected lives of 5 years. The proforma effect on results of operations would have been a decrease in net income by $223,000 and $121,000 for the years ended September 30, 1999 and 1998, respectively, and an increase in the net loss of $27,000 for fiscal 1997. 13. COMMON STOCK REPURCHASES The Board of Directors has authorized the Company to repurchase from time to time on the open market up to 300,000 shares of the Company's common stock. During the year ended September 30, 1999, the Company repurchased 30,354 shares at prices ranging from $3.375 to $5.75. During the year ended September 30, 1998, the Company repurchased 96,179 shares at prices ranging from $3.25 to $5.25. During the year ended September 30, 1997, the Company repurchased 24,467 shares at prices ranging from $5.32 to $5.75 per share. 14. SUPPLEMENTAL CASH FLOWS INFORMATION During the years ended September 30, 1999, 1998 and 1997, common stock valued at $25,123, $31,127, and $28,494, respectively, was issued to non-employee directors in exchange for services rendered. During the year ended September 30, 1997, common stock valued at $62,889 was issued in accordance with the EPCO purchase agreement. Cash paid for interest amounted to $3,855,735 for 1999, $3,356,571 for 1998, and $3,223,867 for 1997. Cash paid for federal income taxes amounted to $350,000 for 1999, $-0- for 1998, and $350,000 for 1997. -42- 44 MCCLAIN INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- 15. RESTRUCTURING AND IMPAIRMENT CHARGES In September 1997, the Company decided to restructure its baler equipment manufacturing operations based upon an evaluation of sales levels to date, anticipated levels of business in 1998 and beyond, and unsatisfactory operating results. The plan involved the shift of all baler production from the Company's facility in Buffalo, New York to its Winesburg, Ohio plant, the abandonment of the leased premises in Buffalo, and the transfer of moveable property and equipment to other locations. The related restructuring and impairment charge of $1,755,000 in 1997 consists principally of a writeoff of goodwill of $1,145,000, the writedown of leasehold improvements and other assets of $310,000, and costs associated with the abandoned leased facilities of $300,000. After an income tax benefit of $207,000, which excluded the writeoff of goodwill not considered to be deductible, these actions reduced reported operating results by $1,548,000 or $0.33 per share in 1997. 16. SEGMENT INFORMATION During fiscal 1999, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 131 "Disclosures About Segments of an Enterprise and Related Information". This statement requires financial information to be reported on the basis that management uses for evaluating segment performance and making operating decisions. 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. -43- 45 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 ----------------- --------------- ------------- ----------------- 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, net 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 1998 ---- Net sales $ 95,143,347 $21,410,684 $ - $ 116,554,031 Lease revenues - - 2,588,787 2,588,787 Operating income (loss) 6,677,317 743,721 (17,538) 7,403,500 Interest expense, net 2,809,504 - 571,628 3,381,132 Income (loss) before income taxes 4,087,709 743,721 (17,538) 4,813,892 Identifiable assets 83,883,371 5,569,526 10,794,070 100,246,967 Capital expenditures 965,246 - - 965,246 Depreciation and amortization 3,395,115 - - 3,395,115 1997 ---- Net sales $ 92,429,721 $ 2,825,920 $ - $ 95,255,641 Lease revenues - - 2,604,060 2,604,060 Operating income (141,182) 78,752 203,540 141,110 Interest expense, net 2,877,614 - 571,253 3,448,867 Income (loss) before income taxes (2,141,594) (52,654) 203,540 (1,990,708) Identifiable assets 75,610,014 2,311,737 9,263,816 87,185,567 Capital expenditures 4,080,499 - - 4,080,499 Depreciation amortization 4,893,701 - - 4,893,701
Total net sales to foreign countries were not significant in 1999, 1998 and 1997. There were no capital assets located in foreign countries at September 30, 1999, 1998 or 1997. The net sales for the Truck Group include sales of products manufactured by the Company of $9,129,104, $4,551,877 and $600,786 for the years ended September 30, 1999, 1998 and 1997, respectively. -44- 46 MCCLAIN INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- 17. COMMITMENTS AND CONTINGENCIES Product Liability As a manufacturer of industrial products, the Company is occasionally subjected to various product liability claims. Such claims typically involve personal injury or wrongful death associated with the use or misuse of the Company's products. The Company is currently defending certain legal proceedings involving allegations of product liability relating to products manufactured and sold by the Company. Historically, such claims have not resulted in material losses to the Company in any one year, and the Company maintains product liability insurance in amounts believed by management to be adequate. 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, 1999. 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. -45- 47 MCCLAIM INDUSTRIES, INC. AND SUSIDIARIES 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 June 2000 and November 2002. On February 23, 1995, the National Labor Relations Board (NLRB) conducted an election in response to a petition filed by a local union (Union) to represent the hourly employees at the Company's Macon, Georgia plant. The ballots of certain employees were challenged as ineligible. The Union filed charges asserting that the Company committed various unfair labor practices which affected the election results and that the challenged ballots should be counted. On October 17, 1996 the NLRB upheld the unfair labor practice charges and on November 5, 1996 the NLRB determined that the results of the election were in favor of the Union. Management, based upon the opinion of counsel, does not believe a final decision upholding the Union certification or the unfair labor practice charges would have a material adverse effect on the Company. 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, 1999, 1998 and 1997 approximately $1,308,000, $1,327,000 and $400,000 has been recorded as sales discounts in connection with post-acquisition sales of $32,500,000, $33,642,000 and $12,896,000, 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. 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. -46- 48 MCCLAIN INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- 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 aggregate limitation of $500,000 annually. 18. FOURTH QUARTER ADJUSTMENTS During the quarter ended September 30, 1997, the Company recorded various adjustments of approximately $2,500,000 principally related to the valuation of inventories and lease accounting. The aggregate effect of such adjustments was to decrease net income for the fourth quarter of 1997 by approximately $1,650,000 ($0.35 per share). * * * * * - 47- 49 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)
48 50
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.
49 51
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 52 10.39 McClain Industries, Inc. 1999 Retainer Stock Plan for Non-Employee Directors 67 10.40 Amended and Restated Loan Agreement dated July 9, 1999 between Standard Federal Bank 73 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 109 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 114 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 120 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 126 9, 1999 between Standard Federal Bank and McClain Group Leasing, Inc. 22 List of Subsidiaries (9) 27 Financial Data Schedule 130
(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
50 52 (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
51 EX-10.38 2 MCCLAIN INDUSTRIES, INC. 1999 INCENTIVE STOCK PLAN 1 EXHIBIT 10.38 MCCLAIN INDUSTRIES, INC. 1999 INCENTIVE STOCK PLAN ARTICLE I. PURPOSE AND ADOPTION OF THE PLAN 1.01 PURPOSE. The purpose of the McClain Industries, Inc. 1999 Incentive Stock Plan (the "Plan") is to provide certain employees, directors, consultants and advisors of McClain Industries, Inc. (the "Company") with an additional incentive to promote the Company's financial success and to provide an incentive which the Company may use to induce able persons to enter into or remain in service of the Company or a Subsidiary. 1.02 ADOPTION AND TERM. The Plan was approved by the Board on, and is effective as of, February 8, 1999, subject to approval of the Company's stockholders on or before February 7, 2000, and will remain in effect until all shares authorized under the terms of the Plan have been issued, unless earlier terminated or abandoned by action of the Board; provided, however, that no Incentive Stock Option may be granted after February 7, 2009. Awards may be granted under the Plan before it is approved by the Company's stockholders but no award granted under the Plan may be exercised unless and until the Plan is approved by the Company's stockholders. ARTICLE II. DEFINITIONS 2.01 ADMINISTRATOR means the group of persons having authority to administer the Plan pursuant to Section 3.01. 2.02 AWARD means any one or combination of Non-Qualified Stock Options, Performance Based Options, Incentive Stock Options, Stock Appreciation Rights, Restricted Share Rights or any other award made under the terms of the Plan. 2.03 AWARD AGREEMENT means a written agreement between the Company and Participant or a written acknowledgment from the Company specifically setting forth the terms and conditions of an Award granted under the Plan. 2.04 AWARD PERIOD means, with respect to an Award, the period of time set forth in the Award Agreement during which specified conditions set forth in the Award Agreement must be satisfied. 2.05 BENEFICIARY means (a) an individual, trust or estate who or which, by will or by operation of the laws of descent and distribution, succeeds to the rights and obligations of the Participant under the Plan and Award Agreement upon the Participant's death; or (b) an individual, who by designation of the Participant, succeeds to the rights and obligations of the Participant under the Plan and Award Agreement upon the Participant's death. 2.06 BOARD means the Board of Directors of the Company. 2.07 CHANGE OF CONTROL EVENT means (a) an event or series of events by which any Person or other entity or group (as such term is used in Section 13(d) and 14(d) of the Exchange Act) of Persons or other entities acting in concert as a partnership or other group (a "Group of Persons") (other than Persons who are, or Groups of Persons entirely made up of, (i) management personnel of the Company or (ii) any affiliates of any such management personnel) 2 shall, as a result of a tender or exchange offer or offers, an open market purchase or purchases, a privately negotiated purchase or purchases or otherwise, become the beneficial owner (within the meaning of Rule 13d-3 under the Exchange Act, except that a Person shall be deemed to have "beneficial ownership" of all securities that such Person has the right to acquire, whether such right is exercisable immediately or only after the passage of time), directly or indirectly, of 50% or more of the combined voting power of the then outstanding voting stock of the Company; (b) the Company consolidates with, or merges with or into, another Person (other than a Subsidiary in a transaction which is not otherwise a Change of Control Event), or sells, assigns, conveys, transfers, leases or otherwise disposes of all or substantially all of its assets to any Person, or any Person consolidates with, or merges with or into the Company, in any such event pursuant to a transaction in which the outstanding voting stock of the Company is converted into or exchanged for cash, securities or other property; (c) during any consecutive two-year period, individuals who at the beginning of such period constituted the Board (together with any new directors whose election by such Board or whose nomination for election by the stockholders of the Company, was approved by a vote of 66-2/3% of the directors then still in office who were either directors at the beginning of such period or whose election or nomination for election was previously so approved) cease for any reason to constitute a majority of the Board then in office; or (d) any liquidation or dissolution of the Company (other than a liquidation into a Subsidiary that is not otherwise a Change of Control Event). 2.08 CODE means the Internal Revenue Code of 1986, as amended. References to a section of the Code shall include that section and any comparable section or sections of any future legislation that amends, supplements or supersedes that section. 2.09 COMMON STOCK means the Common Stock of the Company, no par value. 2.10 COMPANY means McClain Industries, Inc., a Michigan corporation. 2.11 DATE OF GRANT means the date designated by the Administrator as the date as of which it grants an Award, which shall not be earlier than the date on which the Administrator approves the granting of such Award. 2.12 DIRECTOR means a member of the Board of Directors of the Company. 2.13 EXCHANGE ACT means the Securities Exchange Act of 1934, as amended. 2.14 EXERCISE PRICE means, with respect to a Stock Appreciation Right, the amount established by the Administrator, in accordance with Section 7.03 hereunder, and set forth in the Award Agreement, which is to be subtracted from the Fair Market Value on the date of exercise in order to determine the amount of the Incremental Value to be paid to the Participant. 2.15 EXPIRATION DATE means the date specified in an Award Agreement as the expiration date of such Award. 2.16 FAIR MARKET VALUE means, the last reported sale price per share of Common Stock on such date or, in case no such sale takes place on such date, the average of the closing bid and asked prices on such date, in either case as reported in the principal consolidated transaction reporting system with respect to securities listed or admitted to trading on a national securities exchange or included for quotation on the Nasdaq National Market, or if the Common Stock is not so listed or admitted to trading or included for quotation, the average of the highest bid and lowest asked prices for the Common Stock on such date as reported on the NASDAQ OTC Bulletin Board Service or by the National Quotation Bureau, Incorporated or any comparable service, or, if the Common Stock is not quoted by any such organization, the fair market value of a share of Common Stock as determined in good faith by the Administrator. If, 2 3 as the case may be, the relevant date is not a Trading Day, the determination shall be made as of the next preceding Trading Day. 2.17 INCENTIVE STOCK OPTION means a stock option described in Section 422 of the Code. 2.18 INCREMENTAL VALUE has the meaning given such term in Section 7.01 of the Plan. 2.19 NON-EMPLOYEE DIRECTOR PARTICIPANT means a Participant that is a "non-employee director" of the Company within the meaning of Rule 16b-3. 2.20 NON-QUALIFIED STOCK OPTION means a stock option which is not an Incentive Stock Option. 2.21 OFFICER means a president, vice president, treasurer, secretary, controller, and any other person who performs functions corresponding to the foregoing officers for the Company, any member of the Board or any person performing similar functions with respect to the Company, and any other participant who is deemed to be an officer or director of the Company for purposes of Section 16 of the Exchange Act and the rules thereunder, as currently in effect or as amended from time to time. 2.22 OPTIONS means all Non-Qualified Stock Options, Incentive Stock Options and Performance Based Options granted at any time under the Plan. 2.23 PARTICIPANT shall have the meaning set forth in Article V. 2.24 PERFORMANCE BASED OPTION means a stock option which, upon exercise or at any other time, would not result in or give rise to "applicable employee remuneration" within the meaning of Section 162(m) of the Code. 2.25 PLAN means the McClain Industries, Inc. 1999 Incentive Stock Plan, as described herein and as it may be amended from time to time. 2.26 PURCHASE PRICE, with respect to options, shall have the meaning set forth in Section 6.02. 2.27 RESTRICTED SHARE RIGHT means a right to receive Common Stock subject to restrictions imposed under the terms of an Award granted pursuant to Article IX. 2.28 RULE 16B-3 means Rule 16b-3 promulgated by the Securities and Exchange Commission under Section 16 of the Exchange Act, as currently in effect and as it may be amended from time to time, and any successor rule. 2.29 STOCK APPRECIATION RIGHT means an Award granted in accordance with Article VII. 2.30 SUBSIDIARY shall mean any corporation or other entity in which the Company has a direct or indirect ownership interest of 50% or more of the total combined voting power of all classes of outstanding voting equity interests. 2.31 TERMINATION OF EMPLOYMENT means the voluntary or involuntary termination of a Participant's employment with the Company for any reason, including death, disability, retirement or as the result of the divestiture of the Participant's employer or any other similar 3 4 transaction in which the Participant's employer ceases to be the Company or a Subsidiary of the Company. Whether an authorized leave of absence or absence on military or government service, absence due to disability, or absence for any other reason shall constitute Termination of Employment shall be determined in each case by the Administrator in its sole discretion. 2.32 TRADING DAY means a day on which public trading of securities occurs and is reported in the principal consolidated reporting system referred to in Section 2.16 above, or if the Common Stock is not listed or admitted to trading on a national securities exchange or included for quotation on the Nasdaq National Market, any business day. ARTICLE III. ADMINISTRATION 3.01 ADMINISTRATION. The Plan shall be administered by the Board or, to the extent determined by the Board, a committee (the "Compensation Committee") consisting of not less than two non-employee directors of the Company (within the meaning of Rule 16b-3) to be appointed by, and to serve at the pleasure of, the Board (in either case, the "Administrator"). It is the intention of the Company that, with respect to Awards designated as Performance Based Options, each of the members of the Compensation Committee shall also be "outside directors" within the meaning of Section 162(m) of the Code. The Administrator shall administer the Plan in accordance with this provision and shall have the sole discretionary authority to interpret the Plan, to establish and modify administrative rules for the Plan, to impose such conditions and restrictions on Awards as it determines appropriate, to cancel Awards (including those made pursuant to other plans of the Company) and to substitute new options (including options granted under other plans of the Company) with the consent of the recipient, and to take such steps in connection with the Plan and Awards granted thereunder as it may deem necessary or advisable. The Administrator may, with respect to Participants who are not Officers or Directors, delegate such of its powers and authority under the Plan as it deems appropriate to designated officers or employees of the Company. 3.02 INDEMNIFICATION. Members of the Administrator shall be entitled to indemnification and reimbursement from the Company for any action or any failure to act in connection with service as Administrator to the full extent provided for or permitted by the Company's articles of incorporation or bylaws or by any insurance policy or other agreement intended for the benefit of the Company's officers, directors or employees or by any applicable law. ARTICLE IV. COMMON STOCK ISSUABLE PURSUANT TO THE PLAN 4.01 SHARES ISSUABLE. Shares to be issued under the Plan may be authorized and unissued shares or issued shares which have been reacquired by the Company. Except as provided in Section 4.03, the Awards granted to any Participant and to all Participants in the aggregate under the Plan shall be limited so that the sum of the following shall never exceed one million (1,000,000) shares of Common Stock: (i) all shares which shall be issued upon the exercise of outstanding Options or other Awards granted under the Plan, (ii) all shares for which payment of Incremental Value shall be made by reason of the exercise of Stock Appreciation Rights at any time granted under the Plan, and (iii) the number of shares otherwise issuable under an Award which are applied by the Company to payment of the withholding or tax liability discussed in Section 11.04. 4.02 SHARES SUBJECT TO TERMINATED AWARDS. In the event that any Award at any time granted under the Plan shall be surrendered to the Company, be terminated or expire before it shall have been fully exercised, or an award of Stock Appreciation Rights is exercised for cash, 4 5 then all shares formerly subject to such Award as to which such Award shall not have been exercised shall be available for any Award subsequently granted in accordance with the Plan. Shares of Common Stock subject to Options, or portions thereof, which have been surrendered in connection with the exercise of tandem Stock Appreciation Rights shall not be available for subsequent Awards under the Plan, and shares of Common Stock issued in payment of such Stock Appreciation Rights shall be charged against the number of shares of Common Stock available for the grant of Awards. Shares which are reacquired by the Company or shares issuable subject to Restricted Share Rights which are forfeited pursuant to forfeiture provisions in the Award Agreement shall be available for subsequently granted Awards only if the forfeiting Participant received no benefits of ownership (such as dividends actually paid to the Participant) other than voting rights of the forfeited shares. Any shares of Common Stock issued by the Company pursuant to its assumption or substitution of outstanding grants from acquired companies shall not reduce the number of shares available for Awards under this Plan unless issued under this Plan. 4.03 ADJUSTMENTS TO REFLECT CAPITAL CHANGES. (a) RECAPITALIZATION. The number and kind of shares subject to outstanding Awards, the Purchase Price or Exercise Price for such shares, and the number and kind of shares available for Awards subsequently granted under the Plan shall be appropriately adjusted to reflect any stock dividend, stock split, combination or exchange of shares, merger, reorganization, consolidation, split-up, spin-off or other change in capitalization with a similar substantive effect upon the Plan or the Awards granted under the Plan. The Administrator shall have the power to determine the nature and amount of the adjustment to be made in each case. (b) SALE OR REORGANIZATION. After any reorganization, merger or consolidation in which the Company is a surviving corporation, each Participant shall, at no additional cost, be entitled upon exercise of an Award to receive (subject to any required action by stockholders), in lieu of the number of shares of Common Stock receivable or exercisable pursuant to such Award, a number and class of shares of stock or other securities to which such Participant would have been entitled pursuant to the terms of the reorganization, merger or consolidation if, at the time of such reorganization, merger or consolidation, such Participant had been the holder of record of a number of shares of Common Stock equal to the number of shares receivable or exercisable pursuant to such Award. Comparable rights shall accrue to each Participant in the event of successive reorganizations, mergers or consolidations of the character described above. (c) OPTIONS TO PURCHASE STOCK OF ACQUIRED COMPANIES. After any reorganization, merger or consolidation in which the Company or a Subsidiary of the Company shall be a surviving corporation, the Administrator may grant substituted Options under the provisions of the Plan, pursuant to Section 424 of the Code, replacing old options granted under a plan of another party to the reorganization, merger or consolidation, where such party's stock may no longer be issued following such merger or consolidation. The foregoing adjustments and manner of application of the foregoing provisions shall be determined by the Administrator in its sole discretion. Any adjustments may provide for the elimination of any fractional shares which might otherwise have become subject to any Awards. ARTICLE V. PARTICIPATION 5.01 ELIGIBLE PARTICIPANTS. Participants in the Plan shall be the employees, directors, consultants and advisors of the Company or any Subsidiary, as determined and selected from 5 6 time to time by the Administrator, in its sole and absolute discretion. The Administrator's designation of a Participant in any year shall not require the Administrator to designate such person to receive Awards in any other year. The Administrator shall consider such factors as it deems pertinent in selecting Participants and in determining the type and amount of their respective Awards. ARTICLE VI. OPTION AWARDS 6.01 POWER TO GRANT OPTIONS. The Administrator may grant, to such Participants as the Administrator may select, Options entitling the Participant to purchase Common Stock from the Company at such price, in such quantity and on such terms and subject to such conditions, not inconsistent with the terms of this Plan, as may be established by the Administrator. The terms of any Option granted under this Plan shall be set forth in an Award Agreement. 6.02 PURCHASE PRICE OF OPTIONS. Notwithstanding anything to the contrary in Section 6.01 above, the Purchase Price of each share of Common Stock which may be purchased upon exercise of any Option granted under the Plan shall not be less than fifty percent (50%) of the Fair Market Value on the Date of Grant; provided, however, that the Purchase Price for shares of Common Stock purchased pursuant to Stock Options designated by the Administrator as Incentive Stock Options shall be equal to or greater than the Fair Market Value on the Date of Grant as required under Section 422 of the Code and provided further that the Purchase Price for shares of Common Stock purchased pursuant to Stock Options designated by the Administrator as Performance Based Options shall be equal to or greater than the Fair Market Value on the Date of Grant. 6.03 DESIGNATION OF INCENTIVE STOCK OPTIONS. Except as otherwise expressly provided in the Plan, the Administrator may designate, at the Date of Grant of each Option to a Participant that is an employee of the Company or a Subsidiary, that the Option is an Incentive Stock Option under Section 422 of the Code. (a) INCENTIVE STOCK OPTION SHARE LIMITATION. No Participant may be granted Incentive Stock Options under the Plan (or any other plans of the Company) which would result in stock with an aggregate Fair Market Value (measured on the Date of Grant) of more than $100,000 first becoming exercisable in any one calendar year, or which would entitle such Participant to purchase a number of shares greater than the maximum number permitted by Section 422 of the Code as in effect on the Date of Grant. (b) OTHER INCENTIVE STOCK OPTION TERMS. Whenever possible, each provision in the Plan and in every Option granted under this Plan which is designated by the Administrator as an Incentive Stock Option shall be interpreted in such a manner as to entitle the Option to the tax treatment afforded by Section 422 of the Code. If any provision of this Plan or any Option designated by the Administrator as an Incentive Stock Option shall be held not to comply with requirements necessary to entitle such Option to such tax treatment, then (i) such provision shall be deemed to have contained from the outset such language as shall be necessary to entitle the Option to the tax treatment afforded under Section 422 of the Code, and (ii) all other provisions of this Plan and the Award Agreement shall remain in full force and effect. If any agreement covering an Option designated by the Administrator to be an Incentive Stock Option under this Plan shall not explicitly include any terms required to entitle such Incentive Stock Option to the tax treatment afforded by Section 422 of the Code, all such terms shall be deemed implicit in the designation of such Option and the Option shall be deemed to have been granted subject to all such terms. 6 7 6.04 DESIGNATION OF PERFORMANCE BASED OPTIONS. Except as otherwise expressly provided in the Plan, the Administrator may designate, at the Date of Grant of each Option to a Participant that is an employee of the Company or a Subsidiary, that the Option is a Performance Based Option. A Performance Based Option shall have a Purchase Price not less than the Fair Market Value on the Date of Grant and shall contain such other terms and conditions as the Administrator may deem necessary so that, upon exercise or at any other time, the Performance Based Option does not result in or give rise to "applicable employee remuneration" within the meaning of Section 162(m) of the Code. 6.05 RIGHTS AS A STOCKHOLDER. The Participant or any transferee of an Option pursuant to Section 8.02 or Section 11.05 shall have no rights as a stockholder with respect to any shares of Common Stock covered by an Option until the Participant or transferee shall have become the holder of record of any such shares, and no adjustment shall be made for dividends and cash or other property or distributions or other rights with respect to any such shares of Common Stock for which the record date is prior to the date on which the Participant or a transferee of the Option shall have become the holder of record of any such shares covered by the Option. ARTICLE VII. STOCK APPRECIATION RIGHTS 7.01 POWER TO GRANT STOCK APPRECIATION RIGHTS. The Administrator is authorized to grant to any Participant, on such terms established by the Administrator on or prior to the Date of Grant and subject to and not inconsistent with the provisions of this Plan, the right to receive the payment from the Company, payable as provided in Section 7.04, of an amount equal to the Incremental Value of the Stock Appreciation Rights, which shall be an amount equal to the remainder derived from subtracting (i) the Exercise Price for the right established in the Award Agreement from (ii) the Fair Market Value of a share of Common Stock on the date of exercise. The terms of any Stock Appreciation Right granted under the Plan shall be set forth in an Award Agreement. 7.02 TANDEM STOCK APPRECIATION RIGHTS. The Administrator may grant to any Participant a Stock Appreciation Right consistent with the provisions of this Plan covering any share of Common Stock which is, at the Date of Grant of the Stock Appreciation Right, also covered by an Option granted to the same Participant, either prior to or simultaneously with the grant to such Participant of the Stock Appreciation Right, provided: (i) any Option covering any share of Common Stock shall expire and not be exercisable upon the exercise of any Stock Appreciation Right with respect to the same share; (ii) any Stock Appreciation Right covering any share of Common Stock shall not be exercisable upon the exercise of any related Option with respect to the same share; and (iii) an Option and Stock Appreciation Right covering the same share of Common Stock may not be exercised simultaneously. 7.03 EXERCISE PRICE. The Exercise Price established under any Stock Appreciation Right granted under this Plan shall be determined by the Administrator and, in the case of a tandem Stock Appreciation Right, shall not be less than the Purchase Price of the related Option. Upon exercise of the Stock Appreciation Rights, the number of shares subject to exercise under a related Option shall automatically be reduced by the number of shares of Common Stock represented by the Option or portion thereof which is surrendered as a result of the exercise of such Stock Appreciation Rights. 7.04 PAYMENT OF INCREMENTAL VALUE. Any payment which may become due from the Company by reason of Participant's exercise of a Stock Appreciation Right may be paid to the Participant as determined by the Administrator (i) all in cash, (ii) all in Common Stock, or 7 8 (iii) in any combination of cash and Common Stock. In the event that all or a portion of the payment is made in Common Stock, the number of shares of the Common Stock delivered in satisfaction of such payment shall be determined by dividing the amount of the payment by the Fair Market Value on the date of exercise. The Administrator may determine whether payment upon exercise of a Stock Appreciation Right will be made in cash or in stock, or a combination thereof, upon or at any time prior to the exercise of such Stock Appreciation Right. No fractional share of Common Stock shall be issued to make any payment; if any fractional shares would be issuable, the mix of cash and Common Stock payable to the Participant shall be adjusted as directed by the Administrator to avoid the issuance of any fractional share. ARTICLE VIII. TERMS OF OPTIONS AND STOCK APPRECIATION RIGHTS 8.01 DURATION OF OPTIONS AND STOCK APPRECIATION RIGHTS. Options and Stock Appreciation Rights shall terminate after the first to occur of the following events: (a) Expiration Date of the Award as provided in the Award Agreement; or (b) Termination of the Award as provided in Section 8.02; or (c) In the case of an Incentive Stock Option, ten years from the Date of Grant; or (d) Solely in the case of tandem Stock Appreciation Rights, upon the Expiration Date of the related Option. 8.02 EXERCISE ON DEATH, TERMINATION OF EMPLOYMENT OR REMOVAL OF DIRECTOR. (a) Unless otherwise provided in the Award Agreement, in the event of the death of a Participant while an employee of the Company or a Subsidiary of the Company, the right to exercise all unexpired Awards shall be accelerated and shall accrue as of the date of death, and the Participant's Awards may be exercised by his Beneficiary at any time within one year after the date of the Participant's death. Unless otherwise provided in the Award Agreement, in the event of the death of a Participant while a director of the Company or a Subsidiary of the Company, the right to exercise all unexpired Awards shall be accelerated and shall accrue as of the date of death, and the Participant's Awards may be exercised by his Beneficiary at any time within one year after the date of the Participant's death. (b) Unless otherwise provided in the Award Agreement, in the event of a Participant's Termination of Employment at any time for any reason (including disability or retirement) other than death or for "cause" (as defined in paragraph (d) below), an Award may be exercised, but only to the extent it was otherwise exercisable, on the date of Termination of Employment, within ninety days after the date of Termination of Employment. In the event of the death of the Participant within the ninety-day period following Termination of Employment, his Award may be exercised by his Beneficiary within the one year period provided in subparagraph (a) above. Unless otherwise provided in the Award Agreement, in the event that a Non-Employee Director Participant no longer serves on the Board for any reason, an Award may be exercised, but only to the extent it was otherwise exercisable, on the date that such Non-Employee Director Participant ceases to be a Director, within ninety days after the date such Non-Employee Director Participant ceases to be a director. In the event of the death of the Non-Employee Director Participant within the ninety-day period following the date he ceases 8 9 to be a Director, his Award may be exercised by his Beneficiary within the one year period provided in subparagraph (a) above. (c) With respect to an Award which is intended to constitute an Incentive Stock Option, upon Termination of Employment, such Award shall be exercisable as provided in Section 422 of the Code. (d) In the event that a Participant's Termination of Employment is for "cause", all Awards shall terminate immediately upon Termination of Employment. A Participant's employment shall be deemed to have been terminated for "cause" if such termination is determined, in the sole discretion of the Administrator, to have resulted from an act or omission by the Participant constituting active and deliberate dishonesty, as established by a final judgment or actual receipt of an improper benefit or profit in money, property or services, or from the Participant's continuous failure to perform his or her duties under any employment agreement in effect between the Participant and the Company in any material manner (or, in the absence of such an agreement, the consistent failure or refusal of the Participant to perform according to reasonable expectations and standards set by the Board and/or management consistent with Participant's title and position) after receipt of notice of such failure from the Company specifying how the Participant has so failed to perform. 8.03 ACCELERATION OF EXERCISE TIME. The Administrator, in its sole discretion, shall have the right (but shall not in any case be obligated) to permit purchase of shares under any Award prior to the time such Award would otherwise become exercisable under the terms of the Award Agreement. 8.04 EXTENSION OF EXERCISE TIME. The Administrator, in its sole discretion, shall have the right (but shall not in any case be obligated) to permit any Award granted under this Plan to be exercised after its Expiration Date or after the ninety day period following Termination of Employment or service on the Board, subject, however, to the limitations described in Section 8.01 (c) and (d). 8.05 CONDITIONS FOR EXERCISE. An Award Agreement may contain such waiting periods, exercise dates and restrictions on exercise (including, but not limited to, periodic installments which may be cumulative) as may be determined by the Administrator at the Date of Grant. No Stock Appreciation Right may be exercised prior to six months from the Date of Grant. 8.06 CHANGE OF CONTROL EVENT. Unless otherwise provided in the Award Agreement, and subject to such other terms and conditions as the Administrator may establish in the Award Agreement, upon the occurrence of a Change of Control Event, irrespective of whether or not an Award is then exercisable, the Participant shall have the right to exercise in full any unexpired Award to the extent not theretofore exercised or terminated; provided, however, that any Stock Appreciation Right so exercised must have a Date of Grant at least six months prior to the date of exercise. 8.07 EXERCISE PROCEDURES. Each Option and Stock Appreciation Right granted under the Plan shall be exercised by written notice to the Company which must be received by the officer of the Company designated in the Award Agreement on or before the Expiration Date of the Award. The Purchase Price of shares purchased upon exercise of an Option granted under the Plan shall be paid in full in cash by the Participant pursuant to the Award Agreement; provided, however, that the Administrator may (but need not) permit payment to be made by delivery to the Company of either (a) shares of Common Stock (including shares issuable to the Participant pursuant to the exercise of the Option), or (b) any combination of cash and shares of 9 10 Common Stock, or (c) such other consideration as the Administrator deems appropriate and in compliance with applicable law (including payment in accordance with a cashless exercise program under which, if so instructed by the Participant, shares of Common Stock may be issued directly to the Participant's broker or dealer upon receipt of the Purchase Price in cash from the broker or dealer.) In the event that any Common Stock shall be transferred to the Company to satisfy all or any part of the Purchase Price, the part of the Purchase Price deemed to have been satisfied by such transfer of Common Stock shall be equal to the product derived by multiplying the Fair Market Value as of the date of exercise times the number of shares transferred. The Participant may not transfer to the Company in satisfaction of the Purchase Price (y) a number of shares which when multiplied times the Fair Market Value as of the date of exercise would result in a product greater than the Purchase Price or (z) any fractional share of Common Stock. Any part of the Purchase Price paid in cash upon the exercise of any Option shall be added to the general funds of the Company and used for any proper corporate purpose. ARTICLE IX. RESTRICTED STOCK AWARDS 9.01 RESTRICTED SHARE AWARDS. The Administrator may grant to any Participant an Award of Restricted Share Rights entitling such person to receive shares of Common Stock in such quantity, and on such terms, conditions and restrictions (whether based on performance standards, periods of service or otherwise) as the Administrator shall determine on or prior to the Date of Grant. The terms of any Award of Restricted Share Rights granted under the Plan shall be set forth in an Award Agreement. 9.02 DURATION OF RESTRICTED SHARE RIGHTS. In no event shall any Restricted Share Rights granted entitle the holder to receive shares of Common Stock free of all restrictions on transfer at any time prior to the expiration of two years from the Date of Grant, and each Award Agreement shall provide that the Participant shall remain employed by the Company or a Subsidiary for that two year period (subject to the Company's or Subsidiary's right to terminate such employment). 9.03 FORFEITURE OF RESTRICTED SHARE RIGHTS. Subject to Section 9.05, all Restricted Share Rights shall be forfeited and all Restricted Share Awards shall terminate unless the Participant continues in the service of the Company or a Subsidiary until the expiration of the forfeiture and satisfies any other conditions set forth in the Award Agreement. If the Award Agreement shall so provide, in the case of death, disability or retirement (as defined in the Award Agreement) of the Participant, all of the shares covered by the Restricted Share Rights shall immediately vest and any restrictions shall lapse as of the date of such death, disability or retirement. 9.04 DELIVERY OF SHARES UPON VESTING. Upon the lapse of the restrictions established in the Award Agreement, the Participant shall be entitled to receive, without payment of any cash or other consideration, certificates for the number of shares covered by the Award. 9.05 WAIVER OR MODIFICATION OF FORFEITURE PROVISIONS. The Administrator has full power and authority to modify or waive any or all terms, conditions or restrictions (other than the minimum restriction period set forth in Section 9.02) applicable to any Restricted Share Rights granted to a Participant under the Plan; provided that no modification shall, without consent of the Participant, adversely affect the Participant's rights thereunder and no modification shall reduce the employment requirement to less than three years, except in the case of death, disability or retirement. 10 11 9.06 RIGHTS AS A STOCKHOLDER. No person shall have any rights as a stockholder with respect to any shares subject to Restricted Share Rights until such time as the person shall have been issued a certificate for such shares. ARTICLE X. OTHER STOCK BASED AWARDS 10.01 GRANT OF OTHER AWARDS. Other Awards of Common Stock or other securities of the Company and other Awards that are valued in whole or in part by reference to, or are otherwise based on, Common Stock ("Other Awards") may be granted either alone or in addition to or in conjunction with Options or Stock Appreciation Rights under the Plan. Subject to the provisions of the Plan, the Administrator shall have the sole and complete authority to determine the persons to whom and the time or times at which Other Awards shall be made, the number of shares of Common Stock or other securities, if any, to be granted pursuant to such Other Awards, and all other conditions of such Other Awards. Any Other Award shall be confirmed by an Award Agreement executed by the Administrator and the Participant, which agreement shall contain such provisions as the Administrator determines to be necessary or appropriate to carry out the intent of this Plan with respect to the Other Award. 10.02 TERMS OF OTHER AWARDS. In addition to the terms and conditions specified in the Award Agreement, Other Awards made pursuant to this Article X shall be subject to the following: (a) Any shares of Common Stock subject to such Other Awards may not be sold, assigned, transferred or otherwise encumbered prior to the date on which the shares are issued, or, if later, the date on which any applicable restriction, performance or deferral period lapses; and (b) If specified by the Administrator and the Award Agreement, the recipient of an Other Award shall be entitled to receive, currently or on a deferred basis, interest or dividends or dividend equivalents with respect to the Common Stock or other securities covered by the Other Award; and (c) The Award Agreement with respect to any Other Award shall contain provisions providing for the disposition of such Other Award in the event of Termination of Employment prior to the exercise, realization or payment of such Other Award, with such provisions to take account of the specific nature and purpose of the Other Award. ARTICLE XI. TERMS APPLICABLE TO ALL AWARDS 11.01 AWARD AGREEMENT. The grant and the terms and conditions of the Award shall be set forth in an Award Agreement between the Company and the Participant. No person shall have any rights under any Award granted under the Plan unless and until the Administrator and the Participant to whom the Award is granted shall have executed and delivered an Award Agreement expressly granting the Award to such person and setting forth the terms of the Award. 11.02 PLAN PROVISIONS CONTROL AWARD TERMS. The terms of the Plan shall govern all Awards granted under the Plan, and in no event shall the Administrator have the power to grant any Award under the Plan which is contrary to any of the provisions of the Plan. In the event any provision of any Award granted under the Plan shall conflict with any term in the Plan as constituted on the Date of Grant of such Award, the term in the Plan as constituted on the Date of Grant of such Award shall control. Except as provided in Section 4.03, the terms of any 11 12 Award granted under the Plan may not be changed after the granting of such Award without the express approval of the Participant. 11.03 MODIFICATION OF AWARD AFTER GRANT. Each Award granted under the Plan to a Participant other than an Officer may be modified after the date of its grant by express written agreement between the Company and the Participant, provided that such change (i) shall not be inconsistent with the terms of the Plan and (ii) shall be approved by the Administrator. 11.04 TAXES. The Company shall be entitled, if the Administrator deems it necessary or desirable, to withhold (or secure payment from the Participant in lieu of withholding) the amount of any withholding or other tax required by law to be withheld or paid by the Company with respect to any amount payable and/or shares issuable under such Participant's Award, or with respect to any income recognized upon a disqualifying disposition of shares received pursuant to the exercise of an Incentive Stock Option, and the Company may defer payment or issuance of the cash or stock upon exercise or vesting of an Award unless indemnified to its satisfaction against any liability for such tax. The amount of such withholding or tax payment shall be determined by the Administrator and, unless otherwise provided by the Administrator, shall be payable by the Participant at the time of issuance or payment in accordance with the following rules: (a) A Participant shall have the right to elect to meet his or her withholding requirement by: (1) having the Company withhold from such Award the appropriate number of shares of Common Stock, rounded out to the next whole number, the Fair Market Value of which is equal to such amount, or, in the case of the cash payment, the amount of cash, as is determined by the Company to be sufficient to satisfy applicable tax withholding requirements; or (2) direct payment to the Company in cash of the amount of any taxes required to be withheld with respect to such Award. (b) In the event that an Award or property received upon exercise of an Award has already been transferred to the Participant on the date upon which withholding requirements apply, the Participant shall pay directly to the Company the cash amount determined by the Company to be sufficient to satisfy applicable federal, state or local withholding requirements. The Participant shall provide to the Company such information as the Company shall require to determine the amounts to be withheld and the time such withholding requirements become applicable. (c) If permitted under applicable federal income tax laws, a Participant may elect to be taxed in the year in which an Award is exercised or received, even if it would not otherwise have become taxable to the Participant. If the Participant makes such an election, the Participant shall promptly notify the Company in writing and shall provide the Company with a copy of the executed election form as filed with the Internal Revenue Service no later than thirty days from the date of exercise or receipt. Promptly following such notification, the Participant shall pay directly to the Company the cash amount determined by the Company to be sufficient to satisfy applicable federal, state or local withholding tax requirements. 11.05 LIMITATIONS ON TRANSFER. A Participant's rights and interest under the Plan may not be assigned or transferred other than by will or the laws of descent and distribution. Notwithstanding the foregoing, or any other provision of this Plan, a Participant who holds Non-Qualified Stock Options may transfer such Options to: (a) his or her spouse, children, grandchildren, parents, brothers and/or sisters (collectively, "Immediate Family"), (b) a trust or trusts for the exclusive benefit of such Participant's Immediate Family, (c) a partnership or limited liability company in which such Participant's Immediate Family are the only equity holders, or (d) such other persons or entities as determined by the Administrator, in its sole and 12 13 absolute discretion. Options so transferred may thereafter be transferred only to the Participant who originally received the Options or to an individual, trust or entity to whom the Participant could have initially transferred the Option pursuant to this Section 11.05. Options which are transferred pursuant to this Section 11.05 shall be exercisable by the transferee according to the same terms and conditions as applied to the Participant. 11.06 SURRENDER OF AWARDS. Any Award granted under the Plan may be surrendered to the Company for cancellation on such terms as the Administrator and Participant approve, including, but not limited to, terms which provide that upon such surrender the Company will pay to the Participant cash or Common Stock, or a combination of cash and Common Stock. 11.07 ADJUSTMENTS FOR POOLING-OF-INTERESTS ACCOUNTING. If the Company enters into a transaction which is intended to be accounted for using the pooling-of-interests method of accounting and it is determined by the Board that any Award granted under the Plan could reasonably be expected to preclude such accounting treatment, then the Board may modify (to the minimum extent required) or revoke (if necessary) such Award(s) or any provision thereof to the extent that the Board determines that such modification or revocation is necessary to enable the transaction to qualify for pooling-of-interests accounting treatment. ARTICLE XII. GENERAL PROVISIONS 12.01 AMENDMENT AND TERMINATION OF PLAN. (a) AMENDMENT. The Board shall have complete power and authority to amend the Plan at any time and to add any other stock based Award or other incentive compensation programs to the Plan as it deems necessary or appropriate and no approval by the stockholders of the Company or by any other person, committee or entity of any kind shall be required to make any amendment; provided, however, that the Board shall not, without the requisite affirmative approval of the stockholders of the Company, make any amendment (i) which requires stockholder approval under any applicable law, including Rule 16b-3 or the Code; or (ii) which, unless approved by the requisite affirmative approval of stockholders of the Company, would cause, result in or give rise to "applicable employee remuneration" within the meaning of Section 162(m) of the Code with respect to any Performance Based Option. No termination or amendment of the Plan may, without the consent of the Participant to whom any Award shall theretofore have been granted under the Plan, adversely affect the right of such individual under such Award. For the purposes of this section, an amendment to the Plan shall be deemed to have the affirmative approval of the stockholders of the Company if such amendment shall have been submitted for a vote by the stockholders at a duly called meeting of such stockholders at which a quorum was present and the majority of votes cast with respect to such amendment at such meeting shall have been cast in favor of such amendment, or if the holders of outstanding stock having not less than a majority of the outstanding shares consent to such amendment in writing in the manner provided under the Company's bylaws. (b) TERMINATION. The Board shall have the right and the power to terminate the Plan at any time. If the Plan is not earlier terminated, the Plan shall terminate when all shares authorized under the Plan have been issued. No Award shall be granted under the Plan after the termination of the Plan, but the termination of the Plan shall not have any other effect and any Award outstanding at the time of the termination of the Plan may be exercised after termination of the Plan at any time prior to the expiration date of such Award to the same extent such award would have been exercisable if the Plan had not been terminated. 13 14 12.02 NO RIGHT TO EMPLOYMENT OR TO CONTINUE AS DIRECTOR. No employee or other person shall have any claim or right to be granted an Award under this Plan. Neither the Plan nor any action taken hereunder shall be construed as giving any employee any right to be retained in the employ of the Company or a Subsidiary of the Company. Neither the Plan nor any action taken hereunder shall be construed as giving any Director any right to be retained as a Director, or to limit in any way the right of the stockholders of the Company to remove such person as a Director. 12.03 COMPLIANCE WITH RULE 16B-3. It is intended that the Plan be applied and administered in compliance with Rule 16b-3. If any provision of the Plan would be in violation of Rule 16b-3 if applied as written, such provision shall not have effect as written and shall be given effect so as to comply with Rule 16b-3, as determined by the Administrator. The Board is authorized to amend the Plan and to make any such modifications to Award Agreements to comply with Rule 16b-3, as it may be amended from time to time, and to make any other such amendments or modifications as it deems necessary or appropriate to better accomplish the purposes of the Plan in light of any amendments made to Rule 16b-3. 12.04 SECURITIES LAW RESTRICTIONS. The shares of Common Stock issuable pursuant to the terms of any Awards granted under the Plan may not be issued by the Company without registration or qualification of such shares under the Securities Act of 1933, as amended, and under various state securities laws or without an exemption from such registration requirements. Unless the shares to be issued under the Plan have been registered and/or qualified as appropriate, the Company shall be under no obligation to issue shares of Common Stock upon exercise of an Award unless and until such time as there is an appropriate exemption available from the registration or qualification requirements of federal and state law as determined by the Administrator in its sole discretion. The Administrator may require any person who is granted an award hereunder to agree with the Company to represent and agree in writing that if such shares are issuable under an exemption from registration requirements, the shares will be "restricted" securities which may be resold only in compliance with applicable securities laws, and that such person is acquiring the shares issued upon exercise of the Award for investment, and not with the view toward distribution. 12.05 NONEXCLUSIVITY OF THE PLAN. Neither the adoption of the Plan by the Board nor the submission of the Plan to the stockholders of the Company for approval shall be construed as creating any limitations on the power of the Board to adopt such other incentive arrangements as it may deem desirable, including, without limitation, the granting of stock or stock options otherwise than under the Plan. 12.06 CAPTIONS. The captions (i.e., all section headings) used in the Plan are for convenience only, do not constitute a part of the Plan, and shall not be deemed to limit, characterize or affect in any way any provisions of the Plan, and all provisions of the Plan shall be construed as if no captions have been used in the Plan. 12.07 SEVERABILITY. Whenever possible, each provision in the Plan and every Award at any time granted under the Plan shall be interpreted in such a manner as to be effective and valid under applicable law, but if any provision of the Plan or any Award at any time granted under the Plan shall be held to be prohibited or invalid under applicable law, then (a) such provision shall be deemed amended to accomplish the objectives of the provision as originally written to the fullest extent permitted by law and (b) all other provisions of the Plan and every other Award at any time granted under the Plan shall remain in full force and effect. 12.08 NO STRICT CONSTRUCTION. No rule of strict construction shall be implied against the Company, the Administrator, or any other person in the interpretation of any of the terms of 14 15 the Plan, any Award granted under the Plan or any rule or procedure established by the Administrator. 12.09 CHOICE OF LAW. The Plan shall be governed by and construed in accordance with the laws of the State of Michigan, without regard to its conflict of law provisions. EX-10.39 3 MCCLAIN INDUSTRIES, INC. 1999 RETAINER STOCK PLAN 1 EXHIBIT 10.39 PROSPECTUS MCCLAIN INDUSTRIES, INC. 1999 RETAINER STOCK PLAN FOR NON-EMPLOYEE DIRECTORS This Prospectus provides information to the non-employee directors of McClain Industries, Inc. and its subsidiaries (hereinafter sometimes collectively referred to as "McClain", the "Company", "we", or "us") concerning the McClain Industries, Inc. 1999 Retainer Stock Plan for Non-Employee Directors (the "Plan"). This Prospectus covers a maximum of 100,000 shares of common stock, no par value, of the Company (the "Common Stock"), and such additional shares as may be offered pursuant to the anti-dilution provisions of the Plan. This offer is made at the price and on the terms and conditions contained in the Plan and in the individual award agreements with participants to whom grants are made. This Prospectus may not be used for reoffers or resales of Common Stock acquired under the Plan by "affiliates" (directors, officers and other controlling persons) of the Company. Such affiliates may resell such shares without registration under the Securities Act of 1933 (the "Securities Act") pursuant to Rule 144 promulgated under the Securities Act. See "Securities Law Restrictions." Participants should also give careful consideration to the short-swing profit provisions of Section 16 of the Securities Exchange Act of 1934 (the "Exchange Act"). All directors who acquire shares under the Plan should only sell such shares after consideration of the laws prohibiting trading on the basis of inside information and their personal tax situation. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. No person has been authorized by us to give any information or to make any representation not contained in or incorporated by reference in this Prospectus in connection with the offering described in this Prospectus, and any information or representation not contained or incorporated by reference in this Prospectus must not be relied upon as having been authorized by us. Neither the delivery of this Prospectus nor any sale made hereunder shall create an implication that there has been no change in our affairs since the date of this Prospectus. The date of this Prospectus is July 27,1999. 2 TABLE OF CONTENTS
PAGE The Company.......................................................................................................1 Where You Can Find More Information...............................................................................1 The Plan..........................................................................................................2 General..................................................................................................2 Administration...........................................................................................3 Eligibility..............................................................................................3 Shares Issueable.........................................................................................3 Amendment of the Plan....................................................................................4 Securities Law Restrictions..............................................................................4
3 THE COMPANY We are a Michigan company, incorporated in 1968, becoming a publicly traded company in 1973. We also own and operate facilities in Alabama, Georgia, Ohio, and Oklahoma. We are one of the nation's leading manufacturers of a diversified line of dump truck bodies and solid waste handling equipment. We also sell truck chassis at the retail level, and operate a steel tube mill to help us meet some of our steel tubing needs. In addition to manufacturing, we provide coiled steel cutting and warehousing services for our operations, and for third party customers on a limited basis. Our headquarters are located at 6200 Elmridge Road, Sterling Heights, Michigan, and our telephone number is (810) 264-3611. WHERE YOU CAN FIND MORE INFORMATION We are subject to the informational requirements of the Exchange Act and file annual, quarterly and current reports, proxy statements and other information with the Securities and Exchange Commission (the "SEC"). These reports, proxy statements and other information may be inspected and copied at the Public Reference Room maintained by the SEC at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the following Regional Offices of the SEC: 7 World Trade Center, Thirteenth Floor, New York, New York 10048 and 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of these materials may also be obtained by mail, upon payment of the SEC's customary fees, by writing to the Public Reference Section of the SEC at 450 Fifth Street, N.W., Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further information on the public reference facilities. These materials may also be accessed electronically by means of the SEC's web site on the Internet at http://www.sec.gov. We have filed with the SEC a registration statement on Form S-8 (together with any amendments thereto, the "Registration Statement") under the Securities Act, relating to the shares of Common Stock offered pursuant to this Prospectus. This document does not contain all of the information set forth in the Registration Statement and the exhibits filed by us, certain portions of which have been omitted pursuant to the rules and regulations of the SEC. The Registration Statement and its exhibits may be inspected without charge at the offices of the SEC at 450 Fifth Street, N.W., Washington, D.C. 20549, and copies thereof may be obtained from the SEC at prescribed rates. The following documents filed with the Commission are incorporated to this Prospectus by reference: 1. McClain Industries, Inc.'s ("McClain") Annual Report on Form 10-K for the year ended September 30, 1998, filed with the Commission on December 23,1998. 2. McClain's Quarterly Report on Form 10-Q for the quarter ended December 31, 1998, filed with the Commission on February 12, 1999, as amended by Form 10-Q/A filed with the Commission on March 19, 1999. 3. McClain's Quarterly Report on Form 10-Q for the quarter ended March 31, 1999, filed with the Commission on May 7, 1999. 1 4 4. McClain's Current Report on Form 8-K, dated February 9, 1999, filed with the Commission on February 10, 1999. 5. The description of the Common Stock contained in McClain's Registration Statement on Form 8-A filed by McClain with the Commission on May 3, 1974 under Section 12 of the Exchange Act. In addition, all documents filed by us pursuant to Sections 13(a), 13(c), 14 and 15(d) of the Exchange Act subsequent to the date of the Registration Statement and prior to the filing of a post-effective amendment which indicates that all securities offered have been sold or which deregisters all securities then remaining unsold, shall be deemed to be incorporated to this Prospectus by reference and to be a part of this Prospectus from the date of filing of such documents. Any statement contained in this Prospectus or in a document incorporated, or deemed to be incorporated, by reference herein shall be deemed to be modified or superseded for purposes of this Prospectus to the extent that a statement contained in this Prospectus or in any subsequently filed document which also is, or is deemed to be, incorporated by reference modifies or supersedes such statement. Except as so modified or superseded, such statement shall not be deemed to constitute a part of this Prospectus. We will provide without charge to each person to whom this Prospectus is delivered, upon written or oral request, a copy of any of the information that has been incorporated by reference in the Registration Statement of which this Prospectus is a part (not including exhibits to the information that is incorporated by reference unless such exhibits are specifically incorporated by reference into the information that the Registration Statement incorporates) and any Prospectus supplements which may be issued in the future. We will also provide without charge copies of our Annual Report to stockholders, and all other reports, proxy statements or other communications distributed to our security holders generally. Requests for copies should be directed to Mr. Carl Jaworski, Secretary, McClain Industries, Inc., Box 180913, Utica, Michigan, 48318, (810) 264-3611, or by facsimile (810) 264-7191. THE PLAN This Prospectus is designed to give information about the Plan to non-employee directors of the Company. While this Prospectus describes the Plan in general, an eligible director's rights are governed by the terms of the Plan and not this Prospectus. For more information or answers to specific questions about the Plan or its administration, individuals should call Mr. Carl Jaworski, our Secretary, at (810) 264-3611. GENERAL The following is intended to summarize and highlight certain important provisions of the Plan, and is qualified in its entirety by the more detailed information contained in the Plan itself. Eligible directors are urged to obtain and carefully review the Plan before investing. A copy of the Plan will be provided on written request. The Plan was initially adopted by our Board on February 8, 1999, and approved by our 2 5 stockholders at our annual meeting of stockholders on May 7, 1999. The Plan will remain in effect until all shares authorized under the terms of the Plan have been issued, unless our Board terminates or abandons the Plan; provided, however, that no shares of Common Stock may be issued after December 31, 2009. The Plan gives non-employee directors the right to receive shares of the Company's Common Stock as full or partial payment of their retainer fee paid for serving as a director of the Company, and fees paid to them for attending Board and committee meetings (the "Fees"), thereby increasing non-employee directors' proprietary interest in the Company. The total number of shares of Common Stock issuable under the Plan may not exceed one hundred thousand (100,000) shares. ADMINISTRATION The Plan is administered by either the entire Board, or at the discretion of the Board, by a committee consisting of at least two members of the Board. The Administrator of the Plan has the power to devise and implement rules and provide for the operation of the Plan, and to interpret and otherwise implement the Plan in all respects. ELIGIBILITY Any director of the Company who is not an employee of the Company at any time during any fiscal year in which shares of Common Stock are to be issued under the Plan is automatically eligible to participate in the Plan. Under the Plan, eligible directors may elect to receive payment of all or any portion of the Fees if the election is made no later than thirty (30) days prior to a payment date for Fees (the "Election Date"). Elections by eligible directors: (i) Must be made in writing; (ii) Must be delivered to the Company's Secretary prior to the Election Date; (iii)Shall specify the percentage or dollar amount of Fees to be paid in shares of Common Stock; (iv) Will continue in force until rescinded or modified. Any elections or modifications of elections made after the Election Date will be effective for the next occurring payment date. SHARES ISSUEABLE The Plan authorizes the issuance of up to 100,000 shares of the Company's Common Stock, however, the number of shares authorized is subject to adjustment to reflect any stock dividend, stock split, combination or exchange of shares, merger, reorganization, consolidation, split-up, spin-off or other change in capitalization with a similar substantive effect upon shares of Common Stock. 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. Currently, the Board has authorized that each non-employee director is to receive 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 3 6 committee meeting attended on a day other than a regular or special Board meeting date. Under the Plan, Fees may not be increased more often than annually. The number of shares of Common Stock to be issued to an eligible director will be determined by dividing the dollar amount of the Fees such director elected 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. AMENDMENT OF THE PLAN The Plan may be amended by the Board at any time without the approval of the Company's stockholders or any other person, committee or entity of any kind, except as required under any applicable law, rule or regulation. Also, the Board has the power to suspend or terminate the Plan at any time, and during such times no shares may be issued. SECURITIES LAW RESTRICTIONS Under regulations of the SEC in effect on the date of this Prospectus, our "affiliates" (as that term is defined in Rule 405 of the Securities Act) may resell shares of Common Stock acquired under the Plan only by complying with the filing requirements of the Securities Act, the volume limitations of Rule 144 or another applicable exemption from registration. The SEC staff has taken the position that the directors and executive officers of a corporation should be assumed to be "affiliates" of the corporation. 4 EX-10.40 4 AMENDED AND RESTATED LOAN AGREEMENT 1 EXHIBIT 10.40 AMENDED AND RESTATED LOAN AGREEMENT BETWEEN STANDARD FEDERAL BANK AND MCCLAIN INDUSTRIES, INC., MCCLAIN E-Z PACK INC., MCCLAIN GALION, INC., SHELBY STEEL PROCESSING COMPANY, MCCLAIN TUBE COMPANY D/B/A QUALITY TUBE, MCCLAIN INTERNATIONAL FSC, AND MCCLAIN SOUTHLAND CO. THIS AMENDED AND RESTATED LOAN AGREEMENT is made and delivered this 9 day of July, 1999, by and among McClain Industries, Inc., a Michigan corporation; McClain E-Z Pack Inc., a Michigan corporation; McClain Galion, Inc., a Michigan corporation; Shelby Steel Processing Company, a Michigan corporation; McClain Tube Company d/b/a Quality Tube, a Michigan corporation; McClain International FSC, a U.S. Virgin Islands corporation; and McClain Southland Co., a Florida corporation (collectively, "Borrowers"), whose address/principal office is 6200 Elmridge, Sterling Heights, Michigan 48310, and Standard Federal Bank, a federal savings bank ("Standard Federal"), whose address is 2600 West Big Beaver Road, Troy, Michigan 48084. RECITALS: A. The Borrowers are the resulting corporations following the merger and consolidation of the Borrowers and McClain of Alabama, Inc., a Michigan corporation; McClain of Georgia, Inc., a Georgia corporation; McClain of Ohio, Inc., a Michigan corporation; McClain of Oklahoma, Inc., a Michigan corporation; McClain Epco, Inc., a New York corporation; Galion Holding Company, a Michigan corporation; Galion Dump Bodies, Inc., a Michigan corporation; McClain Group Sales, Inc., a Michigan corporation; and McClain Group Sales of Florida, Inc., a Florida corporation, McClain of Michigan, Inc., a Michigan corporation. B. The Borrowers entered into a Loan Agreement, dated April 16, 1998, as amended March 8, 1999 and May 14, 1999 and July 9,1999, with Standard Federal (the "1998 Loan Agreement"), pursuant to which Standard Federal has made available to the Borrowers the following credit facilities: a Line of Credit, Loan No. 5200026569, in the principal amount of $25,000,000.00, as evidenced by a Promissory Note (Line of Credit), dated April 16, 1998, as amended March 8, 1999 and May 14, 1999; a Swing Line of Credit, Loan No. 5200054388, in the principal amount of $5,000,000.00, as evidenced by a Promissory Note (Swing Line of Credit); a Term Loan, Loan No. 5200026577, in the original principal amount of $15,000,000.00, as evidenced by a Promissory Note (Term Loan), dated April 16, 1998; and a Line of Credit Converting to Term Loan, Loan No. 5200026593, in the original principal amount of $1,500,000.00, as evidenced by a Promissory Note (Line of Credit Converting to Term Loan), dated April 16, 1998. C. The credit facilities provided for in the Loan Agreement are secured by a Security Agreement, dated September 15, 1994, and by a Security Agreement, dated July 19, 1995 (the "McClain Security Agreements"), and by a Security Agreement, dated September 15, 1994, and by a Security Agreement, dated June 22, 1995 (the "Galion Security Agreements"), and by a Commercial Mortgage, dated September 26, 1988, covering property located in River Rouge, Michigan, as amended April 16, 1998 (the "River Rouge Mortgage"), and by a Real Estate Mortgage with Power of Sale, dated October 13, 1988, covering property located in Cleveland County, Oklahoma, as amended April 16, 1998 (the "Oklahoma Mortgage"), and by a Commercial Mortgage, Assignment of Lease and Rents, Security Agreement and Financing Statement, dated 1 2 February 6, 1995, covering property located in Sterling Heights, Michigan, as amended April 16, 1998 (the "Sterling Heights Mortgage"), and by a Commercial Mortgage, Assignment of Lease and Rents, Security Agreement and Financing Statement, dated February 6, 1995, covering property located in Comstock Township, Michigan, as amended April 16, 1998 (the "Comstock Township Mortgage"), and by an Open-End Commercial Mortgage and Assignment of Lease and Rents, dated June 29, 1993, as amended, covering property located in Winesburg, Ohio, as amended April 16, 1998 (the "Winesburg Mortgage"), and by an Open-End Commercial Mortgage and Assignment of Lease and Rents, dated June 29, 1993, as amended, covering property located in Galion, Ohio, as amended April 16, 1998 (the "Galion Mortgage"). D. The Borrowers have requested that the credit facilities described above be modified and restructured into the new credit facilities described in this Loan Agreement, and Standard Federal is willing to supply such financing subject to the terms and conditions set forth in this Loan Agreement. Therefore, the 1998 Loan Agreement is hereby amended and restated in its entirety as follows: NOW, THEREFORE, in reliance upon the representations herein provided and in consideration of the premises and the mutual promises herein contained, the Borrowers and Standard Federal hereby agree as follows: SECTION 1. DEFINITIONS 1.1 The following additional terms shall have the meanings stated below when used in this Loan Agreement: "Advance Date" shall mean September 1, 1999. "Base LIBOR Rate" shall mean, with respect to a LIBOR Borrowing for an Interest Period, LIBOR as of 11:00 a.m. two (2) London Business Days prior to the first day of such Interest Period for deposits with maturities approximately equal to such Interest Period and in an amount approximately equal to the amount of such LIBOR Borrowing. "Borrowing" shall mean an advance of all or any portion of the Line of Credit, the Swing Line of Credit or the Equipment Line of Credit and any principal amount outstanding under the Term Loan and the Equipment Line of Credit. "Borrowing Notice" shall mean a notice by Borrowers to Standard Federal that Borrowers wish to make a Borrowing. "Business Day" shall mean a day on which the main office of Standard Federal is open for business. "Collateral Reserve" shall mean, initially an amount equal to One Million Four Hundred Thousand and 00/100 Dollars ($1,400,000.00). The Collateral Reserve shall be reduced by an amount equal to the amount of all payments made after the date of this Loan Agreement to purchase, redeem or apply to principal on certain Industrial Development Revenue Bonds (the "Bonds") issued in the original amount of $5,225,000.00 by The Industrial Development Board of the City of Demopolis, Alabama (the "Issuer") pursuant to a Trust Indenture dated as of April 1, 1997 between LaSalle National Bank, as Trustee, and the Issuer, with respect to which Standard Federal has issued an irrevocable letter of credit in favor of the Trustee to secure payment of the principal and purchase price of, and interest on, the Bonds. "Consolidated Funded Debt" shall mean, as of any date, the sum of the following (without duplication): (i) all Indebtedness of the Borrowers as of such date, other than Consolidated Current Liabilities, (ii) all 2 3 Indebtedness which would be classified as "funded indebtedness" or "long-term indebtedness" on a consolidated balance sheet of the Borrowers prepared as of such date in accordance with generally accepted accounting principles, (iii) all Indebtedness, whether secured or unsecured, of Borrowers, having a final maturity (or which is renewable or extendable at the option of the obligor for a period ending) more than one year after the date of creation thereof, notwithstanding the fact that payments in respect thereof (whether installment, serial maturity or sinking fund payments, or otherwise) are required to be made by the obligor less than one year after the date of the creation thereof and notwithstanding the fact that any amount thereof is at the time included also in current liabilities of such obligor, (iv) all Indebtedness of the Borrowers outstanding under a revolving credit or similar agreement providing for borrowings (and renewals and extensions thereof) over a period of more than one year, notwithstanding the fact that any such Indebtedness is created within one year of the expiration of such agreement, (v) the present value (discounted at the implicit rate, if known, or 10% per annum otherwise) of all obligations is respect of Capital Leases of the Borrowers and (vi) all obligations under Guaranties of Borrowers. "Indebtedness" shall mean all indebtedness, obligations and liabilities, including, without limitation, all "liabilities" which would be reflected on a balance sheet prepared in accordance with generally accepted accounting principles, all obligations in respect of any Guaranty and all obligations in respect of any Capital Lease. "Consolidated Current Liabilities" shall mean, as of any date, the current liabilities which would be reflected on a consolidated balance sheet of the Borrowers prepared as of such date in accordance with generally accepted accounting principles, but excluding current maturities of Consolidated Funded Debt. "Capital Lease" shall mean, as of any date, any lease of property, real or personal, which would be capitalized on a balance sheet of the lessee prepared as of such date in accordance with generally accepted accounting principles, together with any other lease by such lessee which is in substance a financing lease, including without limitation, any lease under which (i) such lessee has or will have an option to purchase the property subject thereto at a nominal amount or an amount less than a reasonable estimate of the fair market value of such property as of the date such lease is entered into or (ii) the term of the lease approximates or exceeds the expected useful life of the property leased thereunder. "Guaranty" shall mean any contract, agreement or understanding pursuant to which any Indebtedness of another person or entity is guaranteed or in effect guaranteed in any manner, whether directly or indirectly. "Earnings Before Interest and Taxes Plus Depreciation and Amortization" shall mean the Borrowers' net income, computed in accordance with generally accepted accounting principles as in effect as of the date hereof consistently applied, before provision for federal and state income taxes, plus interest, depreciation and amortization expense, as reflected in the financial statements to be furnished as required herein. "Effective Date" shall mean the date designated by Borrowers in a Borrowing Notice as the date the Borrowing covered by such Borrowing Notice shall be funded and shall also mean, where applicable, the first day of the Interest Period applicable to a LIBOR Borrowing. An Effective Date for a Prime Rate Borrowing must be a Business Day. An Effective Date for a LIBOR Borrowing must be a London Business Day. "Eligible Accounts Receivable" shall mean accounts receivable of the Borrower, net of any credit or allowance given to the account debtor, any contra offset arising from a liability of the Borrower to the account debtor and any accounts payable of the Borrower that may reduce the amount of accounts receivable which could be realized upon by the Borrower or Standard Federal, as such accounts receivable are disclosed in the statements timely furnished to Standard Federal as required herein, that: (a) arise out of the sale by the Borrower of finished goods inventory and/or the rendition by the Borrower of services, (b) are the valid, binding and legally enforceable obligations of the account debtors obligated 3 4 thereon and each such account debtor is not (i) a debtor under any proceeding under the Bankruptcy Code or any other comparable bankruptcy or insolvency law applicable under the law of any other country or political subdivision thereof, or (ii) an assignor for the benefit of creditors, (c) are not evidenced by a promissory note or other instrument or by chattel paper, unless the same has been endorsed and delivered to Standard Federal, (d) are subject to a perfected security interest in favor of Standard Federal, and are free and clear of any other security interests or liens other than liens which have been approved in writing by Standard Federal, (e) are not owed by account debtors which Standard Federal has notified the Borrower do not have a satisfactory credit standing (as determined in the reasonable judgment of Standard Federal), (f) are not evidenced by invoices or other writings which Standard Federal has notified the Borrower are in form or substance not satisfactory to Standard Federal (as determined in the reasonable judgment of Standard Federal), (g) are not doubtful as to collectibility or disputed as to existence or amount, and (h) are not Ineligible Accounts. "Ineligible Accounts" means accounts receivable which: (1) are unpaid more than 90 days after the invoice date, (2) are inter-company or owing from any affiliated or related company or other entity, (3) are owing from an account debtor located outside the United States of America, unless the account debtor is located in Puerto Rico or any Canadian province other than Quebec and United States law governs the contract, (4) are owing from an account debtor who is obligated on accounts receivable owed to the Borrower more than twenty-five percent (25.0%) of the aggregate unpaid balance of which have been past due for longer than the relevant period specified in clause (1) above, unless Standard Federal has approved the continued eligibility thereof, (5) arise under a government contract, the assignment of which is subject to the Assignment of Claims Act of 1940, as amended, or any other similar federal or state statute or regulation governing the assignment of contracts with a governmental agency, unless a properly completed assignment of claims which complies with the applicable statute is on file with Standard Federal, (6) are subject to extended sales terms which give the account debtor a right to delay payment, (7) constitute a retainage portion of an account receivable which will not be payable until performance is completed and accepted by the account debtor, (8) constitute a progress billing where the obligation of the account debtor is contingent upon further performance or delivery by the Borrower, (9) arise from projects where performance is guaranteed by a surety by the issuance of a bond, (10) arise from tooling invoices, unless supported by a signed purchase order and, for completed tooling, signed proof of performance, (11) arise from consignment or guaranteed sales, (12) are generated in advance of the work being performed, services being provided or goods being delivered, such as a bill and hold, (13) for which an invoice has not been generated, (14) constitute interest, finance charges or service charges assessed on unpaid accounts receivable, 4 5 (15) are otherwise unacceptable to StandarD Federal. "Equipment Credit Limit" shall mean the principal amount of One Million Five Hundred Thousand and 00/100 Dollars ($1,500,000.00). "Equipment Line of Credit" shall mean the revolving line of credit converting to a term loan made available by Standard Federal to the Borrowers on the terms and conditions contained in this Loan Agreement. "Equipment Line of Credit Note" shall mean the Promissory Note (Line of Credit Converting to Term Loan)(Equipment Line of Credit) of even date herewith and all renewals and amendments thereof, evidencing the Equipment Line of Credit. "Funded Debt Ratio" shall mean the ratio of the Borrowers' Consolidated Funded Debt to Earnings Before Interest and Taxes Plus Depreciation and Amortization as of the end of each quarter of each fiscal year of the Borrowers, rounded to two decimal places. "Interest Period" shall mean, with respect to a LIBOR Borrowing, a period of one (1) month, two (2) months or three (3) months, commencing on the Effective Date with respect to such LIBOR Borrowing. If any Interest Period would otherwise end on a day which is not a London Business Day, such Interest Period shall be extended to end on the next succeeding London Business Day. "Interest Rate Selection Notice" shall mean a notice in the form attached to this Loan Agreement as Exhibit A, by which the Borrowers shall notify Standard Federal that a Borrowing hereunder shall be a LIBOR Borrowing, specifying the Interest Period and Effective Date applicable to such LIBOR Borrowing and the principal amount of the LIBOR Borrowing. "LIBOR" shall mean, with respect to an Interest Period, the British Bankers' Association ("BBA") interest settlement rate based on an average of rates quoted by BBA designated banks as being, in BBA's view, the offered rate at which deposits in U.S. Dollars are being quoted to prime banks in the London interbank market at 11:00 a.m. (London time) two (2) London Business Days prior to the first day of such Interest Period, such deposits being for a period of time equal or comparable to such Interest Period and in an amount equal or comparable to the principal amount of the Borrowing to which the Interest Period relates, as such rates are determined by the BBA and displayed on the Reuter's Screen. "LIBOR Borrowing" shall mean a Line LIBOR Borrowing or a Term LIBOR Borrowing. "LIBOR Borrowing Fail" shall mean a LIBOR Borrowing which is not made on the date specified in a Borrowing Notice for any reason other than default by Standard Federal in funding the Borrowing. "LIBOR Rate" shall mean, with respect to an Interest Period, the quotient of: (i) the Base LIBOR Rate applicable to that Interest Period, divided by (ii) one (1) minus the Reserve Requirement (expressed as a decimal) applicable to the Interest Period. The LIBOR Rate shall be rounded up to 4 decimal places where the fifth decimal place is 5 or more. "Line LIBOR Borrowing" shall mean the principal amount of any portion of any Borrowing bearing interest at the Line of Credit LIBOR Rate. 5 6 "Line of Credit" shall mean the revolving line of credit made available by Standard Federal to the Borrowers on the terms and conditions contained in this Loan Agreement. "Line of Credit Cap" shall mean, initially, Thirty Five Million and 00/100 Dollars ($35,000,000.00). The Line of Credit Cap shall reduce by $833,333.33 on the first day of each month, beginning August 1, 1999 and continuing through July 1, 2000, after which date the Line of Credit Cap shall be Twenty Five Million and 00/100 Dollars ($25,000,000.00). "Line of Credit LIBOR Rate" shall mean, with respect to a Line LIBOR Borrowing and an Interest Period, a rate per annum determined in accordance with the following table:
Funded Debt Ratio Line of Credit LIBOR Rate ----------------- ------------------------- 4.25 to 1.00 or greater Add 2.15 (215 basis points) to the LIBOR Rate 3.50 to 1.00 up to 4.24 to 1.00 Add 2.00 (200 basis points) to the LIBOR Rate 3.00 to 1.00 up to 3.49 to 1.00 Add 1.75 (175 basis points) to the LIBOR Rate 2.99 to 1.00 or less Add 1.50 (150 basis points) to the LIBOR Rate
"Line of Credit Limit" shall mean: (A) the lesser of: (a) the Line of Credit Cap, or (b) an amount equal to the sum of: (i) an amount equal to 80% of Eligible Accounts Receivable, less: (1) a Six Hundred Thousand and 00/100 Dollar ($600,000.00) static reserve, and (2) the Collateral Reserve, plus (ii) an amount equal to the lesser of: (1) Fifteen Million and 00/100 Dollars ($15,000,000.00), or (2) an amount equal to 50% of Qualified Inventory, exclusive of Truck Chassis Inventory, plus (iii) an amount equal to the lesser of: (1) the Truck Chassis Inventory Cap, or (2) an amount equal to 50% of Truck Chassis Inventory, minus (B) principal amounts outstanding under the Swing Line of Credit. "Line of Credit Maturity Date" shall mean May 1, 2001, or any extension or renewal thereof. "Line of Credit Note" shall mean the Promissory Note of even date herewith and all renewals and amendments thereof, evidencing the Line of Credit. "Loan Documents" shall mean this Loan Agreement, the Line of Credit Note, the Swing Line of Credit Note, the Term Note, the Equipment Line of Credit Note, the McClain Security Agreements, the Galion Security Agreements, the River Rouge Mortgage, the Oklahoma Mortgage, the Sterling Heights Mortgage, the Comstock Township Mortgage, the Winesburg Mortgage, the Galion Mortgage, and amendments thereto, and such other loan documents as Standard Federal shall require to evidence, secure and document the Line of Credit, the Swing Line of Credit, the Term Loan and the Equipment Line of Credit. "London Business Day" shall mean a Business Day on which dealings in dollar deposits are carried out in the London Interbank market and on which banks, generally, in New York, New York are open for business. "Prepayment Premium" shall mean a premium payable in connection with a Principal Prepayment or a LIBOR Borrowing Fail. In the case of a Principal Prepayment, the Prepayment Premium shall be an amount equal to the positive difference, if any, between (i) the aggregate amount of interest which would otherwise be payable on the prepaid principal amount during the Prepayment Interest Period, as herein defined, and (ii) the aggregate amount of interest Standard Federal would earn if the prepaid principal amount were reinvested for 6 7 the Prepayment Interest Period at the Treasury Rate. In the case of a LIBOR Borrowing Fail, the Prepayment Premium shall be an amount equal to the positive difference, if any, between (i) the aggregate amount of interest which would otherwise be payable on the principal amount of the LIBOR Borrowing during the Prepayment Interest Period, and (ii) the aggregate amount of interest Standard Federal would earn if the principal amount of the LIBOR Borrowing were reinvested for the Prepayment Interest Period at the Treasury Rate. In the case of a Principal Prepayment, the term "Prepayment Interest Period" shall mean the period from the prepayment date to the last day of the current Interest Period applicable to the prepaid Borrowing. In the case of a LIBOR Borrowing Fail, the term "Prepayment Interest Period" shall mean the period from the Effective Date specified in the Borrowing Notice applicable to the LIBOR Borrowing to the last day of the Interest Period specified in such Borrowing Notice. The term "Treasury Rate" means the yield on U.S. Treasury securities at constant maturity as interpolated by the U.S. Treasury from the daily yield curve, based on the closing market bid yields on actively-traded U.S. Treasury securities in the over-the-counter market, as such yields are stated under the heading referred to as "U.S. Government Securities, Treasury Constant Maturities" in Document H.15(519), presently published by the Board of Governors of the Federal Reserve System and titled "Federal Reserve Statistical Release." The Treasury Rate used to calculate a Prepayment Premium shall be the constant maturity yield value read from the yield curve at the fixed maturity which is the same as, or is the next closest period which is longer than the Prepayment Interest Period. If the publishing of the Treasury Rate is discontinued during the term of the Line of Credit, then the Treasury Rate shall be based upon the index which is published by the Board of Governors of the Federal Reserve System in replacement thereof or, if no such replacement index is published, the index which, in Standard Federal's sole determination most nearly corresponds to the Treasury Rate. The Treasury Rate used to calculate a Prepayment Premium shall be computed utilizing the Treasury Rate for the day which is two Business Days prior to the due date of the Prepayment Premium. "Prime-Based Rate" shall mean a rate per annum equal to the Wall Street Journal Prime Rate, which rate shall increase or decrease automatically when and to the extent that the Wall Street Journal Prime Rate shall be increased or decreased. "Prime Rate Borrowing" shall mean the principal amount of any portion of any Borrowing bearing interest at the Prime-Based Rate. "Principal Prepayment" shall mean a payment of principal with respect to a LIBOR Borrowing on a day which is not the last day of an Interest Period applicable to such LIBOR Borrowing. "Qualified Inventory" shall mean the inventory of the Borrower, as such inventory is disclosed in the statements timely furnished to Standard Federal as required herein, that: (a) is subject to a perfected security interest in favor Standard Federal, and is free and clear of any other security interests or liens other than liens which have been approved in writing by Standard Federal, (b) is not so identified to a contract to sell that it constitutes an account, (c) is of good and merchantable quality free from any defects which might adversely affect the market value thereof, (d) was not in any material respect produced in violation of the Fair Labor Standards Act and subject to the so-called "hot goods" provision contained in Title 29 U.S.C. ss. 2159(a)(1), (e) is located at any of the locations of inventory identified in the McClain Security Agreements or the Galion Security Agreements (other than any such location which is not owned by the 7 8 Borrower and as to which Borrower has not obtained a bailee letter in form and substance satisfactory to Standard Federal), (f) is not Ineligible Inventory. "Ineligible Inventory" means inventory which: (1) consists of work-in-process, (2) has been acquired by the Borrower on consignment or has been placed out on consignment by the Borrower, unless such inventory is subject to a first priority perfected security interest in favor of Standard Federal, (3) is in transit so is not physically located at any of the locations of inventory identified in the Security Agreement hereinafter referenced, (4) is located outside of the United States, (5) is otherwise unacceptable to Standard Federal, including, without limitation, packaging, boxes, labels, racks, returned items (defects, overshipments, trials, warranty work), perishable products, custom made items, seasonal items that are out of season, obsolete items, inventory which has been sent to premises not owned by the Borrower for machining, plating, painting or processing, miscellaneous supplies, scrap materials, semi-processed items, subassemblies. "Rate Conversion Date" shall mean the date on which a Prime Rate Borrowing shall convert to a LIBOR Borrowing. "Regulation D" shall mean Regulation D of the Board of Governors of the Federal Reserve System from time to time in effect and shall include any successor or other regulation or official interpretation of the Board of Governors relating to reserve requirements applicable to member banks of the Federal Reserve System. "Reserve Requirement" shall mean, with respect to an Interest Period, the daily average during such Interest Period of the aggregate reserve requirement (including all basic, supplemental, marginal and other reserves and taking into account any transitional adjustments or other scheduled changes in reserve requirements during such Interest Period) which may be imposed on Standard Federal under Regulation D on Eurocurrency liabilities, in the case of LIBOR Borrowings. "Reuter's Screen" means the display designated as page "LIBO" on the Reuter Monitor System or such other display on the Reuter Monitor System as shall display LIBOR. "Revolving Credit Period" means the period from the date of this Loan Agreement through the Line of Credit Maturity Date. "Swing Line of Credit" shall mean the revolving swing line of credit made available by Standard Federal to the Borrowers on the terms and conditions contained in this Loan Agreement. "Swing Line of Credit Limit" shall mean the lesser of: (a) Five Million and 00/100 Dollars ($5,000,000.00), or (b) an amount equal to: (A) the sum of: (i) an amount equal to 80% of Eligible Accounts Receivable, less: (1) a Six Hundred Thousand and 00/100 Dollar ($600,000.00) static reserve, and (2) the Collateral Reserve, plus (ii) an amount equal to the lesser of: (1) Fifteen Million and 00/100 Dollars 8 9 ($15,000,000.00), or (2) an amount equal to 50% of Qualified Inventory, exclusive of Truck Chassis Inventory, plus (iii) an amount equal to the lesser of: (1) the Truck Chassis Inventory Cap, or (2) an amount equal to 50% of Truck Chassis Inventory, minus (B) principal amounts outstanding under the Line of Credit; provided, however, that in no event shall the total of principal amounts outstanding under the Line of Credit and principal amounts outstanding under the Swing Line of Credit exceed the Line of Credit Cap. "Swing Line of Credit Maturity Date" shall mean May 1, 2001, or any extension or renewal thereof. "Swing Line of Credit Note" shall mean the Promissory Note of even date herewith and all renewals and amendments thereof, evidencing the Swing Line of Credit. "Swing Revolving Credit Period" shall mean the period from the date of the Swing Line of Credit Note through the Swing Line of Credit Maturity Date. "Term Date" shall mean July 1, 2000. "Term LIBOR Borrowing" shall mean the principal amount of any portion of any Borrowing bearing interest at the Term LIBOR Rate. "Term LIBOR Rate" shall mean, with respect to a Term LIBOR Borrowing and an Interest Period, a rate per annum determined in accordance with the following table:
Funded Debt Ratio Term LIBOR Rate ----------------- --------------- 4.25 to 1.00 or greater Add 2.45 (245 basis points) to the LIBOR Rate 3.50 to 1.00 up to 4.24 to 1.00 Add 2.30 (230 basis points) to the LIBOR Rate 3.00 to 1.00 up to 3.49 to 1.00 Add 2.05 (205 basis points) to the LIBOR Rate 2.99 to 1.00 or less Add 1.80 (180 basis points) to the LIBOR Rate
"Term Loan" shall mean the term loan extended by Standard Federal to the Borrowers in the principal amount of Twenty Million and 00/100 Dollars ($20,000,000.00) on the terms and conditions contained in this Loan Agreement. "Term Note" means the Promissory Note (Term Loan) of even date herewith and all renewals and amendments thereof, evidencing the Term Loan. "Truck Chassis Inventory" shall mean the Qualified Inventory of the Borrower which is comprised of truck chassis, as reasonably determined by Standard Federal. "Truck Chassis Inventory Cap" shall mean, initially, Ten Million and 00/100 Dollars ($10,000,000.00). The Truck Chassis Inventory Cap shall reduce by $833,333.33 on the first day of each month, beginning August 1, 1999 and continuing through July 1, 2000, after which date the Truck Chassis Inventory Cap shall be $-0-. "Unused Line" shall mean the amount available for draw but not advanced from time to time on either the Line of Credit or the Swing Line of Credit. 9 10 "Unused Line Fee" shall mean a fee in the amount of 0.25% per annum of the Unused Line. The amount of the Unused Line Fee payable on the first day of each month will be determined by multiplying the average daily balance of the Unused Line for the calendar month which ends one month prior to the due date of such Unused Line Fee by .020833%. "Wall Street Journal Prime Rate" shall mean the "Prime Rate" published by the Wall Street Journal as the base rate on corporate loans posted by at least 75% of the nation's 30 largest banks as the same may be changed from time to time. If more than one Prime Rate is published, the highest rate published shall be deemed the Wall Street Journal Prime Rate. If the publishing of the Wall Street Journal Prime Rate is discontinued, then the Prime-Based Rate shall be based upon the index which is published by The Wall Street Journal in replacement thereof based on similar base rates on corporate loans or, if no such replacement index is published, the index which, in Standard Federal's sole determination, most nearly corresponds to the Wall Street Journal Prime Rate. SECTION 2. LINE OF CREDIT 2.1 Standard Federal hereby makes available the Line of Credit to the Borrowers, which shall not exceed at any one time outstanding the Line of Credit Limit. 2.2 The Line of Credit herein extended shall be subject to the terms and conditions of the Line of Credit Note. Notwithstanding the principal amount of the Line of Credit Note as stated on the face thereof, the amount of principal actually owing on the Line of Credit Note at any given time shall be the aggregate of all advances theretofore made to the Borrowers hereunder, less all payments of principal theretofore made by the Borrowers to Standard Federal hereunder. The books and records of Standard Federal shall be presumptive evidence of the amount of principal and interest owing hereunder at any time in the absence of manifest error. This Loan Agreement and the Line of Credit Note are of equal materiality and shall each be construed in such manner as to give full force and effect to all provisions of both documents. 2.3 Standard Federal shall, from time to time during the Revolving Credit Period, make advances to Borrowers under the Line of Credit upon request therefor by Borrowers made in accordance with the requirements of this Loan Agreement, provided that upon giving effect to such advance no Event of Default (as defined in the Line of Credit Note or this Loan Agreement) and no event which with notice and/or the passage of time would become an Event of Default shall exist at the time the advance is to be made; and provided further that upon giving effect to such advance and at the time the advance is to be made all of the representations and warranties of Borrowers contained in this Loan Agreement and all other documents executed in connection with the Line of Credit are true and correct; and provided further that at the time the advance is to be made Standard Federal shall not have previously or concurrently declared all amounts owing under the Line of Credit Note to be immediately due and payable; and provided further the amount requested shall not cause the total amount outstanding under the Line of Credit to exceed the Credit Limit. During the Revolving Credit Period, the Line of Credit shall be a revolving credit so that the Borrowers may borrow, re-pay and re-borrow principal amounts under the provisions of this Section. 2.4 Line LIBOR Borrowings under the Line of Credit shall bear interest at the Line of Credit LIBOR Rate and Prime Rate Borrowings under the Line of Credit shall bear interest at the Prime-Based Rate. Borrowers shall have the option to designate whether Borrowings shall consist of Line LIBOR Borrowings or Prime Rate Borrowings, to be exercised as hereinafter described. Interest shall be calculated on the basis of a year of 360 days for the actual number of days amounts are outstanding. 10 11 2.5 As provided in the Line of Credit Note, interest accrued on Prime Rate Borrowings and Line LIBOR Borrowings as of the end of each month during the Revolving Credit Period shall be payable monthly, in arrears, on the first day of the following month. 2.6 If at any time the amount outstanding under the Line of Credit shall exceed the Line Credit Limit, Borrowers shall, on demand, forthwith pay to Standard Federal such sums as are necessary to reduce the amount outstanding to an amount not greater than the Line Credit Limit. 2.7 Borrowers shall pay to Standard Federal, on the first day of each month, commencing on the first payment date after the date hereof, and continuing on the same day of each consecutive month thereafter until the termination of the Line of Credit and all sums owing for principal and interest with respect to the Line of Credit are paid in full, the Unused Line Fee. 2.8 In all events, unless terminated earlier in accordance with the provisions of this Loan Agreement, the Line of Credit shall terminate on the Line of Credit Maturity Date. Standard Federal and the Borrowers may, but shall not be obligated to, agree to extend the Line of Credit Maturity Date and any extension thereof, upon a review of the Line of Credit. If, at the time of any review of the Line of Credit, the Borrowers and Standard Federal do not mutually agree to extend the Line of Credit Maturity Date, the Line of Credit Maturity Date shall not be extended and the entire outstanding principal balance under the Line of Credit Note, together with all accrued interest and any other amounts which are payable under the Line of Credit, shall be due and payable in full on the Line of Credit Maturity Date. 2.9 Borrowers acknowledge and agree that in making, extending or renewing the Line of Credit, Standard Federal is relying on the representations, covenants and agreements of the Borrowers contained in this Loan Agreement and such Line of Credit shall be subject to the terms and provisions hereof. SECTION 3. SWING LINE OF CREDIT 3.1 Standard Federal hereby makes available the Swing Line of Credit to the Borrowers, which shall not exceed at any one time outstanding the Swing Line of Credit Limit. 3.2 The Swing Line of Credit herein extended shall be subject to the terms and conditions of the Swing Line of Credit Note. Notwithstanding the principal amount of the Swing Line of Credit Note as stated on the face thereof, the amount of principal actually owing on the Swing Line of Credit Note at any given time shall be the aggregate of all advances theretofore made to the Borrowers hereunder, less all payments of principal theretofore made by the Borrowers to Standard Federal hereunder. The books and records of Standard Federal shall be presumptive evidence of the amount of principal and interest owing hereunder at any time in the absence of manifest error. This Loan Agreement and the Swing Line of Credit Note are of equal materiality and shall each be construed in such manner as to give full force and effect to all provisions of both documents. 3.3 Standard Federal shall, from time to time during the Swing Revolving Credit Period, make advances to Borrowers under the Swing Line of Credit upon request therefor by Borrowers made in accordance with the requirements of this Loan Agreement, provided that upon giving effect to such advance no Event of Default (as defined in the Swing Line of Credit Note or this Loan Agreement) and no event which with notice and/or the passage of time would become an Event of Default shall exist at the time the advance is 11 12 to be made; and provided further that upon giving effect to such advance and at the time the advance is to be made all of the representations and warranties of Borrowers contained in this Loan Agreement and all other documents executed in connection with the Swing Line of Credit are true and correct; and provided further that at the time the advance is to be made Standard Federal shall not have previously or concurrently declared all amounts owing under the Swing Line of Credit Note to be immediately due and payable; and provided further the amount requested shall not cause the total amount outstanding under the Swing Line of Credit to exceed the Swing Line of Credit Limit. During the Swing Revolving Credit Period, the Swing Line of Credit shall be a revolving credit so that the Borrowers may borrow, re-pay and re-borrow principal amounts under the provisions of this Section. 3.4 Borrowings under the Swing Line of Credit shall bear interest at the Prime-Based Rate. Interest shall be calculated on the basis of a year of 360 days for the actual number of days amounts are outstanding. 3.5 As provided in the Swing Line of Credit Note, interest accrued on Borrowings as of the end of each month during the Swing Revolving Credit Period shall be payable monthly, in arrears, on the first day of the following month. 3.6 If at any time the amount outstanding under the Swing Line of Credit shall exceed the Swing Line of Credit Limit, Borrowers shall, on demand, forthwith pay to Standard Federal such sums as are necessary to reduce the amount outstanding to an amount not greater than the Swing Line of Credit Limit. 3.7 Standard Federal at any time in its sole and absolute discretion may, on behalf of the Borrowers, make Borrowings under the Line of Credit to re-pay principal amounts outstanding under the Swing Line of Credit, regardless of whether any conditions precedent which may otherwise be applicable to Borrowings under the Line of Credit have been satisfied. Borrowings under the Line of Credit for such purpose shall be made in accordance with the provisions of Section 2. Borrowers hereby duly authorize Standard Federal to act on their behalf for the purpose of providing Borrowing Notices for such Borrowings and otherwise doing all things necessary to effect such Borrowings. Unless otherwise directed by the Borrowers in accordance with the procedures for LIBOR Borrowings outlined in this Loan Agreement, Borrowings under the Line of Credit for the purpose of paying principal amounts outstanding under the Swing Line of Credit shall be Prime Rate Borrowings. 3.8 In all events, unless terminated earlier in accordance with the provisions of this Loan Agreement, the Swing Line of Credit shall terminate on the Swing Line of Credit Maturity Date. Standard Federal and the Borrowers may, but shall not be obligated to, agree to extend the Swing Line of Credit Maturity Date and any extension thereof, upon a review of the Swing Line of Credit. If, at the time of any review of the Swing Line of Credit, the Borrowers and Standard Federal do not mutually agree to extend the Swing Line of Credit Maturity Date, the Swing Line of Credit Maturity Date shall not be extended and the entire outstanding principal balance under the Swing Line of Credit Note, together with all accrued interest and any other amounts which are payable under the Swing Line of Credit, shall be due and payable in full on the Swing Line of Credit Maturity Date. 3.9 Borrowers acknowledge and agree that in making, extending or renewing the Swing Line of Credit, Standard Federal is relying on the representations, covenants and agreements of the Borrowers contained in this Loan Agreement and such Swing Line of Credit shall be subject to the terms and provisions hereof. 12 13 SECTION 4. TERM LOAN 4.1 Standard Federal hereby extends to the Borrowers the Term Loan. 4.2 The Term Loan herein extended shall be subject to the terms and conditions of the Term Note. The Term Loan shall be payable and shall bear interest as set forth in the Term Note. This Loan Agreement and the Term Note are of equal materiality and shall each be construed in such manner as to give full force and effect to all provisions of both documents. 4.3 The Term Note shall provide that Standard Federal shall, from time to time prior to the Advance Date, make advances to Borrowers upon request by Borrowers, made in accordance with the provisions of and subject to the terms and conditions contained in the Term Note. The initial advance shall be in the amount of Eighteen Million Five Hundred Thousand and 00/100 Dollars ($18,500,000.00). Additional advances shall be made in amounts not in excess of the lesser of: (a) Eighty percent (80.0%) of the increase in value of the Borrowers' facilities located in Galion, Ohio and Winesburg, Ohio resulting from construction which is currently in progress (the "Construction"), as such increase in value is reasonably determined by Standard Federal, or (b) Ninety percent (90.0%) of the costs of such Construction. 4.4 Accrued interest shall be payable monthly until the Advance Date. From and after the Term Date, Standard Federal shall make no further advances of principal and the principal balance outstanding as of the Advance Date shall be repaid in consecutive monthly payments of principal, each in the amount determined by dividing the outstanding principal balance as of the Advance Date by Eighty Four (84), plus interest accrued to the due date of each such payment, and a final payment on the maturity date in an amount equal to the then unpaid principal and accrued interest. 4.5 Term LIBOR Borrowings under the Term Loan shall bear interest at the Term LIBOR Rate and Prime Rate Borrowings under the Term Loan shall bear interest at the Prime-Based Rate. Borrowers shall have the option to designate whether Borrowings shall consist of Term LIBOR Borrowings or Prime Rate Borrowings, to be exercised as hereinafter described. Interest shall be calculated on the basis of a year of 360 days for the actual number of days amounts are outstanding. SECTION 5. EQUIPMENT PURCHASE LINE OF CREDIT 5.1 Standard Federal hereby extends to the Borrowers the Equipment Line of Credit which shall not exceed at any one time outstanding the Equipment Credit Limit. 5.2 The Equipment Line of Credit herein extended shall be subject to the terms and conditions of the Equipment Line of Credit Note. The Equipment Line of Credit shall be payable and shall bear interest as set forth in the Equipment Line of Credit Note. This Loan Agreement and the Equipment Line of Credit Note are of equal materiality and shall each be construed in such manner as to give full force and effect to all provisions of both documents. 5.3 The Equipment Line of Credit Note shall provide that Standard Federal shall, from time to time prior to the Term Date, make advances to Borrowers upon request by Borrowers, made in accordance with the provisions of and subject to the terms and conditions contained in the Equipment Line of Credit Note. 13 14 5.4 Accrued interest shall be payable monthly until the Term Date. From and after the Term Date, Standard Federal shall make no further advances of principal and the Equipment Line of Credit shall convert to a term loan. The outstanding principal balance outstanding as of the Term Date shall be repaid in consecutive monthly payments of principal, each in the amount determined by dividing the outstanding principal balance as of the Term Date by Sixty (60), plus interest accrued to the due date of each such payment, and a final payment on the maturity date in an amount equal to the then unpaid principal and accrued interest. 5.5 If at any time the amount outstanding under the Equipment Line of Credit shall exceed the Equipment Credit Limit, Borrowers shall, on demand, forthwith pay to Standard Federal such sums as are necessary to reduce the amount outstanding to an amount not greater than the Equipment Credit Limit. 5.6 Each advance under the Equipment Line of Credit shall be used solely for the purchase of equipment. Each advance shall be in an amount not in excess of Eighty Five percent (85.0%) of the cost to the Borrowers of the equipment to be purchased with such advance. Standard Federal shall make advances under the Equipment Line of Credit only upon receipt by it in a form satisfactory to it of a true and authentic copy of the dealer invoice for the equipment purchased or to be purchased with the advance. 5.7 Prior to the Term Date, principal amounts outstanding under the Equipment Line of Credit shall consist of either Line LIBOR Borrowings or Prime Rate Borrowings, at Borrowers' option to be exercised as herein provided. On and after the Term Date, principal amounts outstanding under the Equipment Line of Credit shall consist of either Term LIBOR Borrowings or Prime Rate Borrowings, at Borrowers' option to be exercised as herein provided. Line LIBOR Borrowings under the Equipment Line of Credit shall bear interest at the Line of Credit LIBOR Rate. Term LIBOR Borrowings under the Equipment Line of Credit shall bear interest at the Term LIBOR Rate. Prime Rate Borrowings under the Equipment Line of Credit shall bear interest at the Prime-Based Rate. Borrowers shall have the option to designate whether Borrowings shall consist of LIBOR Borrowings or Prime Rate Borrowings, to be exercised as hereinafter described. Interest shall be calculated on the basis of a year of 360 days for the actual number of days amounts are outstanding. SECTION 6. MANNER OF EFFECTING BORROWINGS 6.1 To effect a Borrowing under the Line of Credit, the Swing Line of Credit or the Equipment Line of Credit, Borrowers shall give Standard Federal a Borrowing Notice. 6.2 A Borrowing Notice may be made in writing, by telefacsimile or by telephone by an authorized representative of the Borrowers and shall specify the aggregate amount of the requested Borrowing and the Effective Date of the Borrowing. Any Borrowing Notice by telephone may be recorded by Standard Federal for accuracy. A Borrowing Notice for a LIBOR Borrowing must be accompanied by one or more Interest Rate Selection Notices, specifying the principal amount and the Interest Period applicable to each LIBOR Borrowing. 6.3 To effect a LIBOR Borrowing, the Borrowers must furnish Standard Federal an Interest Rate Selection Notice. 6.4 Interest Rate Selection Notices must be given no later than 11:00 a.m. Detroit time on a day which is at least two (2) London Business Days prior to the Effective Date of a LIBOR Borrowing. A Borrowing Notice for a Prime Rate Borrowing must be given no later than 3:00 p.m. Detroit time on the Effective Date of such Borrowing. 14 15 6.5 Prior to making a Request for Borrowing or giving an Interest Rate Selection Notice, the Borrowers may (without specifying whether the anticipated Borrowing will be a Prime Rate Borrowing or a LIBOR Borrowing) request that Standard Federal provide the Borrowers with the most recent LIBOR available to Standard Federal for each Interest Period requested by Borrowers. Standard Federal shall endeavor to provide such quoted rates to the Borrowers on the date of the request. 6.6 LIBOR Borrowings shall be made only in minimum increments of Five Hundred Thousand and 00/100 Dollars ($500,000.00). 6.7 If the Borrowers wish to roll a LIBOR Borrowing into anther LIBOR Borrowing at the end of the Interest Period applicable to such LIBOR Borrowing, they shall give Standard Federal an Interest Rate Selection Notice no later than 11:00 a.m. Detroit time on the day which is two (2) London Business Days prior to the termination of the applicable Interest Period. The Interest Rate Selection Notice shall specify the Interest Period(s) to be applicable to principal amounts which will continue as LIBOR Borrowings. Each Interest Rate Selection Notice shall be irrevocable and effective upon the giving thereof to Standard Federal. If the Borrowers shall fail to give Standard Federal an Interest Rate Selection Notice by 11:00 a.m. Detroit time on the day which is two (2) London Business Days prior to the termination of an Interest Period with respect to any LIBOR Borrowing, specifying the interest option to be applicable to such Borrowing as of the end of such Interest Period, the LIBOR Borrowing shall convert to a Prime Rate Borrowing at the end of the Interest Period. 6.8 The Borrowers may convert Prime Rate Borrowings to LIBOR Borrowings at any time by giving an Interest Rate Selection Notice to Standard Federal specifying the Rate Conversion Date. The Interest Rate Selection Notice must be given no later than 11:00 a.m. Detroit time on the day which is two (2) London Business Days prior to the Rate Conversion Date. Each Interest Rate Selection Notice shall specify the principal amount of the Prime Rate Borrowing to be converted to a LIBOR Borrowing and the Interest Period to be applicable to such LIBOR Borrowing. Each Interest Rate Selection Notice shall be irrevocable and effective upon the giving thereof to Standard Federal. SECTION 7 SPECIAL PRICING AND PROTECTION PROVISIONS 7.1 If the Borrowers make a Principal Prepayment or a LIBOR Borrowing Fail occurs, Borrowers will pay to Standard Federal the Prepayment Premium. In the case of a Principal Prepayment, the Prepayment Premium shall be due at the time the Principal Prepayment is made. In the case of a LIBOR Borrowing Fail, the Prepayment Premium shall be due on the Effective Date specified in the applicable Borrowing Notice. 7.2 If, with respect to an Interest Period for any LIBOR Borrowing, Standard Federal determines, in its sole discretion, that, by reason of circumstances affecting the interbank Eurodollar market generally, deposits in United States dollars (in the applicable amounts) are not being offered to banks in the interbank Eurodollar market for such Interest Period, or the Line of Credit LIBOR Rate will not adequately and fairly reflect the cost to Standard Federal of maintaining or funding the LIBOR Borrowing for such Interest Period, Standard Federal shall promptly give notice thereof to Borrowers. Thereafter, until Standard Federal gives notice to the Borrowers that such circumstances no longer exist, (a) the obligation of Standard Federal to fund LIBOR Borrowings shall be suspended and (b) the Borrowers shall either (i) repay in full the then-outstanding principal amount of LIBOR Borrowings, together with accrued interest thereon on the last day of the then-current Interest Period applicable to such LIBOR Borrowings, or (ii) convert such LIBOR Borrowings to Prime 15 16 Rate Borrowings on the last day of the then-current Interest Period applicable to each LIBOR Borrowing. 7.3 If, after the date of this Loan Agreement, the adoption of any applicable law, rule or regulation, or any change therein, or any change in the interpretation or administration thereof by any governmental authority, central bank or comparable agency charged with the interpretation or administration thereof, or compliance by Standard Federal with any request or directive (whether or not having the force of law) of any such authority, central bank or comparable agency shall make it unlawful or impossible for Standard Federal to make, maintain or fund LIBOR Borrowings, Standard Federal shall promptly give notice thereof to the Borrowers. Thereafter, (a) the obligation of Standard Federal to fund LIBOR Borrowings shall be suspended and (b) the Borrowers shall either (i) repay in full the then-outstanding principal amount of LIBOR Borrowings, together with accrued interest thereon, or (ii) convert such LIBOR Borrowings to Prime Rate Borrowings, either: (1) on the last day of the then-current Interest Period applicable to such LIBOR Borrowings, if Standard Federal may lawfully continue to maintain and fund such LIBOR Borrowings until such date, or (2) immediately, if Standard Federal may not lawfully continue to fund and maintain such LIBOR Borrowings until such date, in which case Borrowers will pay the Prepayment Premium. 7.4 If any governmental authority or regulatory agency, central bank or other comparable authority, shall at any time impose, modify or deem applicable any reserve (including, without limitation, the Reserve Requirement or any other reserve imposed by the Board of Governors of the Federal Reserve System), special deposit or similar requirement against assets of, deposits with or for the account of, or credit extended by, Standard Federal, or shall impose on Standard Federal or the interbank Eurodollar market any other condition, guideline or request affecting LIBOR Borrowings, the Note or Standard Federal's obligation to make advances of LIBOR Borrowings, and the result of any of the foregoing, in the reasonable judgment of Standard Federal shall be to increase the cost to Standard Federal of making or maintaining LIBOR Borrowings, or to reduce the amount of any sum received or receivable by Standard Federal under this Loan Agreement, or under the Note, by an amount deemed by Standard Federal to be material, then, within five (5) days after demand by Standard Federal, Borrowers shall pay to Standard Federal as additional interest such additional amount or amounts as will compensate Standard Federal for such increased cost or reduction. Standard Federal will promptly notify the Borrowers of any event of which it has knowledge, occurring after the date hereof, which will entitle Standard Federal to compensation pursuant to this Section. A certificate of Standard Federal claiming compensation under this Section and setting forth the additional amount or amounts to be paid to it hereunder shall be conclusive in the absence of manifest error. Standard Federal will, on request, provide evidence supporting such certificate. If Standard Federal demands compensation under this Section, then Borrowers may at any time, upon at least five (5) days prior notice to Standard Federal, either (i) pay such compensation to Standard Federal, (ii) repay in full the then outstanding LIBOR Borrowings of Standard Federal, together with accrued interest thereon to the date of prepayment, or (iii) convert such LIBOR Borrowings to Prime Rate Borrowings in accordance with the provisions of this Loan Agreement; provided, however, that if the Borrowers prepay or convert LIBOR Borrowings they shall be liable for any applicable Prepayment Premium. Standard Federal's determination of amounts payable under this Section shall be calculated as though Standard Federal funded the applicable LIBOR Borrowings through the purchase of a eurodollar deposit of the type, maturity and amount corresponding to the deposit used as a reference in determining the Base LIBOR Rate with respect to such LIBOR Borrowing, whether or not Standard Federal in fact purchased such deposit. If the additional amounts payable under this Section shall be construed or so operate as to require the Borrowers to pay, or be charged, interest at a rate which is in excess of the maximum allowed by applicable law, then any and all such excess shall be and the same is hereby waived by Standard Federal, and any and all such excess paid shall be automatically credited against and in reduction of the principal outstanding under the Note, as applicable. In such event, Standard Federal shall have the option 16 17 to immediately terminate Borrowers' right to request LIBOR Borrowings, and the unpaid balance of any outstanding LIBOR Borrowings, with accrued interest at the highest rate permitted to be charged by stipulation in writing between Standard Federal and Borrowers, at the option of Standard Federal, shall immediately become due and payable. The obligations of the Borrowers under this Section shall survive payment of the Line of Credit and termination of this Loan Agreement. 7.5 If Standard Federal shall determine that the adoption, amendment or revision of any applicable law, rule or regulation affecting Standard Federal's capital requirements or adequacy, or the interpretation or administration thereof by any governmental authority or regulatory agency, central bank or other comparable authority, or compliance by Standard Federal with any applicable law, rule or regulation affecting Standard Federal's capital requirements or adequacy, or any request, interpretation or directive (whether or not having the force of law) of any governmental authority or regulatory agency, central bank or other comparable authority which affects Standard Federal's capital requirements, has or would have the effect of reducing the rate of return on Standard Federal's capital to a level below the rate of return Standard Federal would have realized in the absence of such adoption, amendment, revision, interpretation, administration or compliance (taking into account Standard Federal's policies with respect to capital adequacy) by an amount considered by Standard Federal to be material, then, beginning five (5) days after demand by Standard Federal, Borrowers shall pay to Standard Federal as additional interest or as fees, as determined by Standard Federal in its sole discretion, such additional amount or amounts as will compensate Standard Federal for such reduction in its rate of return. Such adjustments in interest or fees shall be imposed effective five (5) days after Standard Federal's demand and shall apply to the then outstanding principal balance of the Line of Credit and to subsequent advances under this Loan Agreement. In determining such amount or amounts, Standard Federal may use any reasonable averaging and attribution methods. Standard Federal will promptly notify the Borrowers of any event of which it has knowledge, occurring after the date hereof, which will entitle Standard Federal to compensation pursuant to this Section. A certificate of Standard Federal claiming compensation under this Section and setting forth the additional amount or amounts to be paid to it hereunder shall be conclusive in the absence of manifest error. Standard Federal will, on request, provide evidence supporting such certificate. SECTION 8. CONDITIONS TO MAKING LOANS 8.1 The following are conditions precedent to the obligation of Standard to make the Line of Credit, the Swing Line of Credit, the Term Loan and the Equipment Line of Credit and hereunder: 8.1.1 The Borrowers shall have delivered or shall have had delivered to Standard Federal, in form and substance satisfactory to Standard Federal and its counsel, each of the following: 8.1.1.1 A duly executed copy of this Loan Agreement; 8.1.1.2 A duly executed copy of the Loan Documents; 8.1.1.3 Such credit applications, financial statements, authorizations, and such information concerning the Borrowers and its business, operations, and condition (financial and otherwise) as Standard Federal may reasonably request; 8.1.1.4 Certified copies of resolutions of the Boards of Directors of the Borrowers approving the execution and delivery of the Loan Documents required hereunder; 17 18 8.1.1.5 A certificate of the Secretary or an Assistant Secretary of the Borrowers certifying the names and true signatures of the officers of the Borrowers authorized to sign the Loan Documents required hereunder; 8.1.1.6 Copies of each of the Articles of Incorporation of the Borrowers, certified by the Secretary of State of each Borrower's state of incorporation as of a recent date; 8.1.1.7 Copies of each of the Articles of Incorporation and Bylaws of the Borrowers, certified by the Secretary or an Assistant Secretary of the Borrowers as of the date of this Loan Agreement as being accurate and complete; 8.1.1.8 Certificates of good standing of the Borrowers from the Secretary of State of each of the Borrowers' state of incorporation as of a recent date; 8.1.1.9 Certificates of authority and good standing of the Borrowers for each state in which the Borrowers are qualified to do business; 8.1.1.10 A certificate of compliance of the chief financial officer or treasurer of the Borrowers in form satisfactory to Standard Federal dated as of the date of this Loan Agreement; 8.1.1.11 Such certificates, binders or other evidence of all insurance required of the Borrowers under this Loan Agreement as Standard Federal may reasonably require; and 8.1.1.12 Acknowledgement copies of all UCC-1 financing statements filed with respect to the Collateral accompanied by a search report showing such financing statements as duly filed and evidencing that the security interest of Standard Federal in the Collateral is prior to all other security interests of record. 8.1.2 All acts and conditions (including, without limitation, the obtaining of any necessary regulatory approvals and the making of any required filings, recordings, or registrations) required to be done and performed and to have happened precedent to the execution, delivery, and performance of the Loan Documents required hereunder and to constitute the same legal, valid, and binding obligations, enforceable in accordance with their respective terms, shall have been done and performed and shall have happened in due and strict compliance with all applicable laws. 8.1.3 All documentation, including, without limitation, documentation for corporate and legal proceedings in connection with the transactions contemplated by the Loan Documents shall be satisfactory in form and substance to Standard Federal and its counsel and all fees and charges, including recording and filing fees, shall have been paid as required hereunder. 8.2 As conditions precedent to Standard Federal's obligation to make the Term Loan and to fund any request for an advance under the Line of Credit, the Swing Line of Credit or the Equipment Line of Credit, at and as of the date of the funding thereof: 18 19 8.2.1 The representations and warranties of the Borrowers contained in the Loan Documents shall be accurate and complete in all respects as if made on and as of such date; 8.2.2 The Borrowers shall have paid all fees and expenses, including any recording fees and charges, required hereunder; 8.2.3 There shall not have occurred an Event of Default or any event which with the passage of time of the giving of notice or both would constitute an Event of Default. SECTION 9. REPRESENTATIONS AND WARRANTIES The Borrowers represent and warrant to Standard Federal that as of the date of acceptance of this Loan Agreement, as of the time any advance is to be made hereunder and, unless expressly provided otherwise herein or agreed to by a writing signed by Standard Federal, at all times any amounts are outstanding hereunder: 9.1 The Borrowers and each of its subsidiaries, if any, are corporations duly organized, validly existing and in good standing under the laws of the state of their incorporation; the Borrowers and each of its subsidiaries (if any) have the legal power and authority to own their properties and assets and to carry out their business as now being conducted and each is qualified to do business in the state of its incorporation and in every jurisdiction where the nature of its business or the property owned or operated by it makes such qualification necessary and is otherwise in compliance with all applicable laws, statutes, regulations, rules and requirements of any federal, state, judicial, regulatory or administrative body having jurisdiction of the Borrowers or any of its assets; the Borrowers have the legal power and authority to execute and perform this Loan Agreement, to borrow money in accordance with its terms, to execute and deliver the Line of Credit Note, the Swing Line of Credit Note, the Term Note, the Equipment Line of Credit Note and other documents contemplated hereby, to grant to Standard Federal mortgages and security interests in the Collateral, as hereby contemplated, and to do any and all other things required of it hereunder; and this Loan Agreement, the Line of Credit Note, the Swing Line of Credit Note, the Term Note, the Equipment Line of Credit Note and all other documents contemplated hereby, when executed by the Borrowers duly authorized officers will constitute its valid and binding legal obligations enforceable in accordance with their terms. 9.2 The execution, delivery and performance of this Loan Agreement, the borrowings hereunder and the execution and delivery of the Line of Credit Note, the Swing Line of Credit Note, the Term Note, the Equipment Line of Credit Note and other documents contemplated hereby: (a) have been duly authorized by all requisite corporate action, (b) do not require governmental approval or the approval of any person not a party to this Loan Agreement, (c) will not result (with or without notice and/or the passage of time) in any conflict with or breach or violation of or default under, any provision of law, the Articles of Incorporation or Bylaws of the Borrowers or any indenture, agreement or other instrument to which the Borrowers are a party, or by which it or any of its properties or assets are bound, and (d) will not result in the creation or imposition of any lien, charge or encumbrance of any nature whatsoever upon any of the properties or assets of the Borrowers other than in favor of Standard Federal and as contemplated hereby. 9.3 There is not pending or, to the best of the knowledge of the Borrowers, threatened, any litigation, proceeding or governmental investigation which could materially and adversely affect the business of the Borrowers or its subsidiaries, if any, or its ability to perform its covenants hereunder. 19 20 9.4 Borrowers have good and marketable title to its properties given as security as herein described, and, except for liens in favor of Standard Federal, liens for taxes not delinquent or being contested in good faith and liens created in connection with worker's compensation, unemployment insurance and social security, or to secure the performance of bids, tenders or contracts (other than for the repayment of borrowed money), leases, statutory obligations, surety and appeal bonds, and other obligations of like nature made in the ordinary course of business, none of the Borrowers' or any of its subsidiaries' (if any) assets are subject to any mortgage, pledge, lien, security interest, or other encumbrance of any kind or character except as have been disclosed to Standard Federal in writing. The Borrowers own all material patents, trademarks, service marks, trade names, copyrights, licenses and other rights, free from any material restrictions, that are necessary for the operation of its business as presently conducted. 9.5 All financial data which has been or shall hereafter be furnished to Standard Federal for the purposes of, or in connection with, this Loan Agreement, including particularly, but without limitation, the audited consolidated financial statements of McClain Industries, Inc. and the Form 10-Q's filed with the Securities and Exchange Commission by McClain Industries, Inc. pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934, and the transactions contemplated hereby has been and/or shall be prepared in accordance with generally accepted accounting principles consistently applied, and does or will fairly present the financial condition of the Borrowers as of the dates, and the results of its operations for the periods, for which the same is furnished to Standard Federal. 9.6 There has been no material adverse change in the business, properties or condition (financial or otherwise) of the Borrowers or their subsidiaries (if any) since the date of the latest financial statements provided to Standard Federal and there are no material debts, liabilities or obligations (absolute or contingent) of the Borrowers except as reflected in such financial statements (or in the notes thereto). 9.7 The Borrowers are not in default in the repayment of any indebtedness for money borrowed by any of them nor has there occurred any event which, with or without notice or the passage of time or both, would constitute a default by the Borrowers under any agreement or instrument pertaining to any indebtedness for money borrowed by any of them. 9.8 Borrowers have filed all reports and tax returns required by governmental authority to be filed by them prior to the date hereof and Borrowers have received no notice that such reports or returns have been rejected, declared insufficient, or otherwise challenged by such governmental authority. 9.9 McClain E-Z Pack Inc., a Michigan corporation; McClain Galion, Inc., a Michigan corporation; Shelby Steel Processing Company, a Michigan corporation; McClain Tube Company d/b/a Quality Tube, a Michigan corporation; McClain International FSC, a U.S. Virgin Islands corporation; McClain Southland Co., a Florida corporation; and McClain Group Leasing, Inc., a Michigan corporation, are each wholly-owned subsidiaries of McClain Industries, Inc., a Michigan corporation, and have no subsidiaries. McClain Industries, Inc., as of the date of this Loan Agreement, owns no other subsidiaries. 9.10 None of the proceeds of the Line of Credit, the Swing Line of Credit, the Term Loan or the Equipment Line of Credit will be used for the purpose of purchasing or carrying any "margin stock" as defined in Regulation U or G of the Board of Governors of the Federal Reserve System (12 C.F.R. Part 221 and 207), or for the purpose of reducing or retiring any indebtedness which was originally incurred to purchase or carry a margin stock or for any other purpose which might constitute this transaction a "purpose credit" within the meaning of such Regulation U or G. Borrowers are not engaged in the business of extending credit for the 20 21 purpose of purchasing or carrying margin stocks. Neither Borrowers nor any person acting on behalf of Borrowers have taken or will take any action which might cause the Line of Credit Note, the Swing Line of Credit Note, the Term Note, the Equipment Line of Credit Note or any of the other documents executed in conjunction therewith, including this Loan Agreement, to violate Regulations U or G or any other regulations of the Board of Governors of the Federal Reserve System or to violate Section 7 of the Securities Exchange Act of 1934 or any rule or regulation thereunder, in each case as now in effect or as the same may hereinafter be in effect. Borrowers and its subsidiaries, if any, own no "margin stock" except for that described in the financial statements provided to Standard Federal and, as of the date hereof, the aggregate value of all "margin stock" owned by Borrowers and its subsidiaries, if any, does not exceed 25% of all of the value of all of Borrowers' and its subsidiaries', if any, assets. Neither the Borrowers nor any affiliate of any of the Borrowers shall use any portion of the proceeds of the Loans, nor have any letter of credit issued by Standard Federal, either directly or indirectly, for the purpose of purchasing any securities underwritten by ABN AMRO Investment Services, Inc., an affiliate of Standard Federal. 9.11 Except as disclosed in the environmental reports listed in attached Schedule 9.11, copies of which the Borrowers have previously furnished to Standard Federal, neither the Borrowers nor, to the best of Borrowers' knowledge after due inquiry, any other person or entity, has caused or permitted any waste, oil, pesticides, or any substance or material of any kind which is currently known or suspected to be toxic or hazardous, including but not limited to any substance defined as a "Hazardous Waste" in Title 40, Part 261 of the Code of Federal Regulations, (hereinafter referred to as "Hazardous Material") to be discharged, dispersed, released, disposed of, or allowed to escape on, under or at any property owned, occupied or operated by any of the Borrowers in violation of any Hazardous Materials Laws (as hereinafter defined), nor has any property owned, occupied or operated by any of the Borrowers, or any part thereof, ever been used by the Borrowers or, to the best of Borrowers' knowledge after due inquiry, any prior owner or any other person, as a dump, storage or disposal site for any Hazardous Material, nor has there occurred any other violation of the federal Comprehensive Environmental Response, Compensation and Liability Act of 1980, 42 U.S.C. ss.9601 et seq., or any other federal, state or local statute, law, ordinance, code, rule, regulation, order or decree regulating, relating to or imposing liability or standards of conduct concerning, any Hazardous Material ("Hazardous Materials Laws") with respect to any property owned, occupied or operated by any of the Borrowers. No asbestos or asbestos-containing materials have been installed, used, incorporated into, or disposed of on any property owned, occupied or operated by any of the Borrowers. No polychlorinated biphenyls ("PCBs") are located on or in any property owned, occupied or operated by any of the Borrowers, in the form of electrical transformers, fluorescent light fixtures with ballasts, cooling oils, or any other device or form. All underground storage tanks located on any property owned, occupied or operated by any of the Borrowers have been installed and are being operated in full compliance with all applicable Hazardous Materials Laws. The Borrowers: (a) have not received any notice of any release, threatened release, escape, seepage, leakage, spillage, discharge or emission of any Hazardous Materials in, under or upon any property owned, occupied or operated by any of the Borrowers or of any violation of any Hazardous Materials Law, and (b) do not know of any basis for any such notice or violation. 9.12 No "reportable event," as defined in the Employee Retirement Income Security Act of 1974 and any amendments thereto ("ERISA"), has occurred and is continuing with respect to any employee pension and/or profit sharing benefit plan maintained by or on behalf of the Borrowers for the benefit of any of its employees. The Pension Benefit Guaranty Corporation ("PBGC") has not instituted proceedings to terminate any such employee pension and/or profit sharing plan or to appoint a trustee to administer such plan. The Borrowers have maintained and funded and caused each of its subsidiaries, if any, to maintain and fund all employee pension and/or profit sharing plans in accordance with their terms and with all applicable provisions 21 22 of ERISA. Neither the Borrowers nor any duly appointed administrator of any employee pension and/or profit sharing plan: (a) have incurred any liability to PBGC with respect to any such plan other than for premiums not yet due or payable, (b) have instituted or intends to institute proceedings to terminate any such plan under Section 4042 or 4041A of Erisa, or (c) have withdrawn from any Multi-Employer Pension Plan (as that term is defined in Section 3(37) of ERISA). 9.13 There is no material fact that the Borrowers have not disclosed to Standard Federal which could have a material adverse effect on the properties, business, prospects or condition (financial or otherwise) of the Borrowers or any of its subsidiaries. For purposes of this Section, a "material adverse effect" means any circumstance or event which (a) could have any adverse effect whatsoever upon the validity, performance or enforceability of any material provision of the Loan Documents, (b) is or might be material and adverse to the financial condition or business operations of the Borrowers or any subsidiary, (c) could impair the ability of the Borrowers to fulfill their obligations under the Loan Documents, or (d) causes an Event of Default or any event which, with notice or lapse of time or both, could become an Event of Default. Neither the financial statements furnished by the Borrowers, nor any certificate or statement delivered herewith or heretofore by Borrowers in connection with the negotiations of this Loan Agreement, contains any untrue statement of a material fact or omits to state any material fact necessary to keep the statements contained herein or therein, under the circumstances in which they were made, from being misleading. 9.14 Each request for an advance under the Line of Credit or the Swing Line of Credit shall constitute, without the necessity of specifically containing a written statement, a representation and warranty by Borrowers that no Event of Default exists and that all representations and warranties contained in this Section or in any mortgage, guaranty, security agreement or other document given to secure or relating to the Line of Credit Note, the Swing Line of Credit Note, the Term Note, the Equipment Line of Credit Note or this Loan Agreement are true and correct at and as of the time the advance is to be made. SECTION 10. AFFIRMATIVE COVENANTS OF BORROWERS 10.1 Prior to Standard Federal's disbursement of any advances under the Line of Credit, the Swing Line of Credit or the Equipment Line of Credit, or closing of the Term Loan, the Borrowers shall; (a) furnish to Standard Federal, if Standard Federal so requires, certified copies of their Articles of Incorporation, Bylaws and Certificates of Good Standing, which Articles of Incorporation and Good Standing Certificates are to be certified by the appropriate officials of the Borrowers' states of incorporation; (b) furnish to Standard Federal if Standard Federal so requires a statement of the Borrowers and the chief financial officers of the Borrowers certifying that they are unaware of the occurrence of an Event of Default or of any event which with notice and/or the passage of time could become an Event of Default; and (c) furnish Standard Federal such other instruments, documents, opinions or certificates as Standard Federal or its counsel shall reasonably require. All actions, proceedings, instruments and documents required or requested hereunder shall be satisfactory to and approved by Standard Federal and/or its counsel prior to the disbursement of advances under the Line of Credit, the Swing Line of Credit or the Equipment Line of Credit or closing of the Term Loan. 10.2 From the date hereof until all amounts owing under the Line of Credit, the Swing Line of Credit, the Term Loan and the Equipment Line of Credit are paid in full and all obligations under the Line of Credit Note, the Swing Line of Credit Note, the Term Note, the Equipment Line of Credit Note, this Loan Agreement and all other documents executed in connection with the Line of Credit, the Swing Line of Credit, the Term Loan and the Equipment Line of Credit are fully paid, performed and satisfied and so long as Standard Federal has any commitment to make advances hereunder, the Borrowers covenant and agree they will: 22 23 10.2.1 Furnish to Standard Federal as soon as available and, in any event, within 120 days after the close of each fiscal year of the Borrowers, or, in the event the Borrowers obtain an extension of the filing date from the Securities Exchange Commission, by such extended date, detailed financial statements of the Borrowers as of the close of such fiscal year, containing a consolidated balance sheet of the Borrowers and their subsidiaries, if any, and statements of income and cash flows of the Borrowers and their subsidiaries, if any, for such fiscal year prepared in accordance with generally accepted accounting principles and in a manner consistent with prior such statements containing such comments and financial details as are usually included in similar reports. Such statements shall be accompanied by an opinion thereon (which shall not be qualified by reason of any limitation imposed by Borrowers) of independent certified public accountants selected by Borrowers and acceptable to Standard Federal as to the fairness of the statements included in the report and to the effect that the examination of such accounts in connection with such financial statements has been made in accordance with generally accepted auditing standards and, accordingly, includes such tests of the accounting records and such other auditing procedures as were considered necessary in the circumstances. 10.2.2 Furnish to Standard Federal as soon as available and, in any event, within 90 days after the close of each quarter of each fiscal year, or, in the event the Borrowers obtain an extension of the filing date from the Securities Exchange Commission, by such extended date, detailed financial statements of the Borrowers as of the close of such fiscal period containing a consolidated balance sheet of the Borrowers and its subsidiaries, if any, and statements of income and cash flows of the Borrowers and its subsidiaries, if any, for such fiscal period and for the portion of the fiscal year ending with such period in reasonable detail and form acceptable to Standard Federal and certified by the chief financial officers of the Borrowers as being true and correct and as having been prepared in accordance with generally accepted accounting principles consistently applied, subject to year-end adjustments, if any. 10.2.3 Furnish to Standard Federal, within a reasonable time not to exceed 20 days after the end of each calendar month, a statement of accounts receivable, in a form acceptable to Standard Federal, certified as correct by Borrowers or a principal officer of Borrowers showing the agings thereof and the payment, write-off or other disposition of former accounts receivable the disposition of which has not previously been reported to Standard Federal, and such other information and data as Standard Federal may reasonably require. Borrowers will further specifically disclose any facts known to Borrowers which facts would tend to render doubtful the collectibility of any account receivable disclosed in such statements or which would indicate that the existence or amount of such account is disputed by the debtor thereon. 10.2.4 Furnish to Standard Federal, within a reasonable time not to exceed 20 days after the end of each calendar month, a statement of inventory of the Borrowers, in a form acceptable to Standard Federal, certified as correct by Borrowers or a principal officer of Borrowers showing the method of reporting and all additions to and dispositions of inventory since the previous inventory report and such other information and data as Standard Federal may reasonably require. 10.2.5 Furnish to Standard Federal, within 60 days after the close of each quarter of each fiscal year, a covenant compliance report, in a form prepared by and acceptable to Standard 23 24 Federal, certified as correct by Borrower or a principal officer or general partner of Borrower, containing a certification of the Borrowers' compliance with the financial covenants contained herein as of the close of such fiscal period. 10.2.6 Furnish to Standard Federal, promptly after sending, filing or publishing the same, copies of all proxy statements, financial statements and reports that the Borrowers send to its public shareholders and copies of all regular, periodic and special reports and all registration statements and amendments thereto that the Borrowers file with the Securities and Exchange Commission or any other governmental authority and any Exchange, and copies of all press releases issued by Borrowers. 10.2.7 Permit representatives of Standard Federal to conduct semi-annual field audits of the Collateral at Borrower's expense during which such representatives will be permitted to visit and inspect any of the Borrower's properties and examine and make abstracts from and copies of any of its books and records, and to discuss the business, operations, properties, and financial and other condition of the Borrower and any of its subsidiaries with officers and employees of such parties, and with their independent certified public accountants. 10.2.8 Promptly inform Standard Federal of the occurrence of any Event of Default or of any event (including without limitation any pending or threatened litigation or other proceedings before any governmental body or agency) which could have a materially adverse effect upon the Borrowers' business, properties, financial condition or ability to comply with its obligations hereunder or under the Line of Credit Note, the Swing Line of Credit Note, the Term Note or the Equipment Line of Credit Note. 10.2.9 Furnish such other information as Standard Federal may reasonably request and permit Standard Federal and its agents, attorneys and employees to inspect all of the books, records and properties of the Borrowers at any reasonable time. 10.2.10 Maintain adequate insurance with responsible companies in such amounts and against such risks and hazards as are normally insured against by similar businesses, and provide Standard Federal evidence of such insurance upon request; policies of casualty insurance shall contain a customary mortgagee clause requiring payment of proceeds to Borrowers and to Standard Federal as their interests may appear and all other insurance shall contain a customary loss payable clause requiring payment of proceeds to Borrowers and to Standard Federal as their interests may appear and all insurance policies shall provide that no cancellation, reduction in amount, change in coverage or expiration thereof shall be effective until at least 30 days prior written notice has been given by the insurer to Standard Federal; and pay when due all taxes, assessments, fees and similar charges of every kind and nature lawfully assessed upon the Borrowers and/or its property, except to the extent being contested in good faith; and in the event the Borrowers fail to maintain such insurance or to pay promptly any taxes or charges when due, then and in such event Standard Federal, in its sole discretion, may, but shall not be required to, pay the same and any amounts expended by Standard Federal for such purpose shall become a part of the Line of Credit and shall bear interest at the rate applicable to the outstanding principal balance owing under the Line of Credit Note. 10.2.11 Preserve and keep in full force and effect their own and their material, operating 24 25 subsidiaries' (if any) corporate existence in good standing and maintain voting control in their present controlling shareholders; keep current all filings of assumed name certificates for each name under which and each county in which the Borrowers do business and promptly inform Standard Federal of any assumed names under which they do business which were not used by the Borrowers on the date of this Loan Agreement; continue to conduct and operate their businesses substantially as presently conducted and operated in accordance with all applicable laws and regulations; maintain and protect all franchises and trade names and preserve all the remainder of their property used or useful in the conduct of their business and keep the same in good repair and condition; pay their indebtedness and obligations when due under normal terms and maintain proper books of record and account, and; otherwise remain in compliance with all applicable laws, statutes, regulations, rules and requirements of any federal, state, judicial, regulatory or administrative body having jurisdiction of the Borrowers or any of their assets, except to the extent noncompliance is immaterial and would not have a material adverse effect on Borrowers. 10.2.12 Maintain on a consolidated statement basis "Tangible Net Worth" of not less than $26,000,000.00. "Tangible Net Worth" shall mean total assets less trademarks, franchises, copyrights, licenses, prepaids, goodwill, similar intangible assets and all liabilities (excluding debt subordinated to Standard Federal upon terms and conditions acceptable to Standard Federal) of the Borrowers. 10.2.13 On a consolidated statement basis maintain the ratio of "Liabilities" to "Tangible Net Worth" of not more 3.25 to 1.00, as of the end of each quarter of each fiscal year. "Liabilities" shall mean all liabilities of the Borrowers and their consolidated subsidiaries, if any, as defined in accordance with generally accepted accounting principles as in effect as of the date of this Loan Agreement, consistently applied. 10.2.14 On a consolidated statement basis, maintain an Interest Coverage Ratio of not less than 2.00 to 1.00 as of the end of each quarter of each fiscal year. The "Interest Coverage Ratio" shall mean the ratio of the Borrowers' Earnings Before Interest and Taxes Plus Depreciation and Amortization to Interest Expense, for the four fiscal quarters preceding the end of the fiscal quarter as of which the Interest Coverage Ratio is measured. "Earnings Before Interest and Taxes Plus Depreciation and Amortization" shall mean the Borrowers' net income, computed in accordance with generally accepted accounting principles as in effect as of the date hereof consistently applied, before provision for federal and state income taxes, plus interest, depreciation and amortization expense, as reflected in the financial statements to be furnished as required herein. "Interest Expense" shall mean the Borrowers' interest expense, as determined in accordance with generally accepted accounting principles. 10.2.15 On a consolidated statement basis, maintain a Debt Service Coverage Ratio of not less than 1.25 to 1.00, as of the end of each fiscal quarter. The term "Debt Service Coverage Ratio" shall mean the ratio of the Borrowers' Earnings Before Interest and Taxes Plus Depreciation and Amortization to Debt Service Expense, for the four fiscal quarters preceding the end of the fiscal quarter as of which the Debt Service Coverage Ratio is measured. "Earnings Before Interest and Taxes Plus Depreciation and Amortization" shall mean the Borrowers' net income, computed in accordance with generally accepted accounting principles as in effect as of the date hereof consistently applied, before provision for federal and state income taxes, plus interest, depreciation and amortization expense, as reflected in the financial statements to be furnished as required herein. 25 26 "Debt Service Expense" shall mean the Borrowers' interest expense, plus the current portion of any long-term debt, plus the portion attributable to principal of all payments on Capital Leases (computed at the implicit rate, if known, or 10% per annum otherwise), computed in accordance with generally accepted accounting principles as in effect as of the date hereof consistently applied. "Capital Lease" shall mean, as of any date, any lease of property, real or personal, which would be capitalized on a balance sheet of the lessee prepared as of such date in accordance with generally accepted accounting principles, together with any other lease by such lessee which is in substance a financing lease, including without limitation, any lease under which (i) such lessee has or will have an option to purchase the property subject thereto at a nominal amount or an amount less than a reasonable estimate of the fair market value of such property as of the date such lease is entered into or (ii) the term of the lease approximates or exceeds the expected useful life of the property leased thereunder. 10.2.16 Maintain on a consolidated statement basis the ratio of "Current Assets" to "Current Liabilities" of not less than 2.25 to 1.00, as of the end of each fiscal quarter. "Current Assets" shall include all assets considered current in accordance with generally accepted accounting principles as in effect as of the date of this Loan Agreement, consistently applied, less all amounts due Borrowers from any of their directors, officers, employees, shareholders, or any company controlled by any of their shareholders. "Current Liabilities" shall include all liabilities considered current in accordance with generally accepted accounting principles as in effect as of the date of this Loan Agreement, consistently applied. 10.2.17 At all times meet and cause each of its subsidiaries, if any, to meet the minimum funding requirements of ERISA with respect to all employee pension and/or profit sharing plans subject to ERISA and, with respect to any such employee benefit plan, promptly notify Standard Federal in writing of any reportable event, as defined in ERISA, or any proposed termination (voluntary or otherwise) which could give rise to material termination liability within the meaning of ERISA ss.4062. The parties hereto acknowledge that the financial covenants set forth in subsections 10.2.12 through 10.2.16 above, are based on the financial statements of McClain Industries, Inc. and all of its subsidiaries. 10.3 The Borrowers will not make any change in their accounting policies or financial reporting practices and procedures, except changes in accounting policies which are required or permitted by generally accepted accounting principles and/or the United States Securities and Exchange Commission and changes in financial reporting practices and procedures which are required or permitted by generally accepted accounting principles. 10.4 The Borrowers shall allow Standard Federal and its participants in the Line of Credit, the Swing Line of Credit, the Term Loan and the Equipment Line of Credit and staff or independent accountants or auditors selected by Standard Federal and its participants to conduct, at Borrowers' expense, a full udit of the Collateral and the Borrowers' financial statements and their books and records, semi-annually during the term of the Line of Credit, the Swing Line of Credit, the Term Loan and the Equipment Line of Credit. Standard Federal shall schedule such audits during normal business hours of the Borrowers and shall provide Borrowers not less than two (2) business days notice of the commencement of each audit. The Borrowers shall make adequate facilities available on their premises at Borrowers' expense to enable Standard Federal to conduct the audits herein described and shall make available all of their books, records and other documents and information as may be reasonably requested to facilitate the audits. 26 27 SECTION 11. NEGATIVE COVENANTS 11.1 From the date hereof until all amounts owing under the Line of Credit, the Swing Line of Credit, the Term Loan and the Equipment Line of Credit are paid in full and all obligations under the Line of Credit Note, the Swing Line of Credit Note, the Term Note and the Equipment Line of Credit Note, this Loan Agreement and all other documents executed in connection with the Line of Credit, the Swing Line of Credit, the Term Loan and the Equipment Line of Credit are fully paid, performed and satisfied and so long as Standard Federal has any commitment to make advances hereunder, the Borrowers covenant and agree that they will not do and will not permit any subsidiary, if any, to do any of the following without the prior written approval of Standard Federal: 11.1.1 Create, incur, assume or permit to exist (a) any mortgage, pledge, security interest, lien or charge of any kind upon any of their property or assets whether now owned or hereafter acquired other than in favor of Standard Federal, except as required or permitted by Standard Federal, or (b) any indebtedness or liability for borrowed money, except indebtedness to Standard Federal or indebtedness subordinated to the prior payment in full of the Borrowers' indebtedness to Standard Federal which is approved in writing by Standard Federal, except as otherwise required or permitted in writing by Standard Federal. 11.1.2 Make loans, advances or extensions of credit to any Entity (which in this Loan Agreement means any individual, partnership, corporation or other legal entity), other than a parent or subsidiary of the Borrowers, in excess of $100,000.00 in principal amount, except for sales on open account and in ordinary course of business; or guarantee or in any way become responsible for obligations of any other Entity except by endorsement of negotiable instruments for deposit or collection in the ordinary course of business; or subordinate any indebtedness due it from an Entity to indebtedness of any other creditor of such Entity. 11.1.3 Sell, lease or transfer, during any fiscal year, except inventory in the ordinary course of business, any substantial portion of its assets; or consolidate with or merge into any other Entity, or permit another to merge into it; or acquire by lease or purchase all or substantially all the business or assets of any Entity; or enter into any lease-back arrangement with any Entity. 11.1.4 Permit the aggregate amount of all Capital Expenditures made by the Borrowers during any fiscal year ending after the date hereof to exceed $3,000,000.00. "Capital Expenditures" shall mean any expenditure for an asset which will be used in a year or years subsequent to the year in which the expenditure is made and which asset is properly classifiable in relevant financial statements as property, equipment or improvements, fixed assets, or a similar type of capitalized assets in accordance with generally accepted accounting principles. SECTION 12. SECURITY 12.1 In order to secure: (1) the full and timely performance of the Borrowers' covenants set forth herein and in the Line of Credit Note, the Swing Line of Credit Note, the Term Note and the Equipment Line of Credit Note, (2) the repayment of any and all indebtedness of the Borrowers to Standard Federal arising pursuant to the Line of Credit Note, the Swing Line of Credit Note, the Term Note, the Equipment Line of Credit Note (including any renewals or substitutions thereof), this Loan Agreement and any mortgage, guaranty, 27 28 Credit Note, the Swing Line of Credit Note, the Term Note, the Equipment Line of Credit Note or this Loan Agreement, and (3) all other indebtedness and liabilities of the Borrowers to Standard Federal arising under this Loan Agreement, the Line of Credit Note, the Swing Line of Credit Note, the Term Note or the Equipment Line of Credit Note, whether direct or indirect, absolute or contingent, due or to become due, now existing or hereafter arising: 12.1.1 The Borrowers hereby grant unto Standard Federal a security interest in the following property and the proceeds thereof: (i) any and all securities or other property received by the Borrowers with respect to, on account of or in exchange for any item of Collateral; (ii) all stock and/or liquidating dividends (whether the same be in the form of cash or other property) paid upon, on account of or with respect to any item of Collateral; and (iii) all bank deposits, instruments, negotiable documents, chattel paper and any and all other property of the Borrowers of any kind whatsoever which shall at any time be in the possession or under the control of Standard Federal; and 12.1.2 The Borrowers have granted to Standard Federal a security interest of first priority in all personal property of the Borrowers as provided in the McClain Security Agreements and the Galion Security Agreements, the provisions of which are hereby incorporated herein by reference; and 12.1.3 The Borrowers have granted to Standard Federal mortgage interests, as provided in the River Rouge Mortgage, the Oklahoma Mortgage, the Sterling Heights Mortgage, the Comstock Township Mortgage, the Winesburg Mortgage, and the Galion Mortgage, the provisions of which are hereby incorporated herein by reference (herein, together with the property described above, referred to as the "Collateral" or "item(s) of Collateral"). The Borrowers shall execute and deliver to Standard Federal, in conjunction with the execution of this Loan Agreement, such amendment to the foregoing Collateral documents as Standard Federal and its counsel may determine are necessary or appropriate to confirm that such collateral properly secures the credit facilities provided for herein. 12.2 The Borrowers shall execute and deliver to Standard Federal any and all documents (including financing statements) as Standard Federal may require to insure the perfection and priority of its liens and security interests in the Collateral and furnish, if Standard Federal so requires, proof of hazard insurance policies relating to the Collateral. SECTION 13. EVENTS OF DEFAULT The occurrence of any of the events enumerated below shall constitute an Event of Default for purposes of this Loan Agreement: 13.1 FAILURE TO PAY MONIES DUE. If any indebtedness of the Borrowers to Standard Federal on the Line of Credit, the Swing Line of Credit, the Term Loan and the Equipment Line of Credit is not paid when due, regardless of whether such indebtedness has arisen pursuant to the terms of the Line of Credit Note, the Swing Line of Credit Note, the Term Note, the Equipment Line of Credit Note, this Loan Agreement or any mortgage, security agreement, guaranty, instrument or other agreement executed in conjunction herewith. 13.2 MISREPRESENTATION. If any warranty or representation made by or for the Borrowers and/or any endorser or guarantor of the Line of Credit Note, the Swing Line of Credit Note, the Term Note or the Equipment Line of Credit Note in connection with the loan(s) evidenced thereby, or if any financial data or any other information now or hereafter furnished to Standard Federal by or on behalf of the Borrowers and/or any endorser or guarantor of the Line of Credit Note, the Swing Line of Credit Note, the Term Note or the 28 29 Equipment Line of Credit Note shall prove to be false, inaccurate or misleading in any material respect. 13.3 NONCOMPLIANCE WITH AFFIRMATIVE COVENANTS AND OTHER AGREEMENTS. If the Borrowers shall fail to perform any of its obligations and covenants under Section 9 of this Loan Agreement, or shall fail to comply with any of the other provisions of this Loan Agreement, other than under Section 10 hereof, or the Line of Credit Note, the Swing Line of Credit Note, the Term Note, the Equipment Line of Credit Note, or any other agreement with Standard Federal to which it may be a party, other than the payment of principal and interest. 13.4 NONCOMPLIANCE WITH NEGATIVE COVENANTS. If the Borrowers shall fail to perform any of its obligations and covenants described in Section 10 of this Loan Agreement. 13.5 BUSINESS SUSPENSION. If the Borrowers and/or any endorser or guarantor of the Line of Credit Note, the Swing Line of Credit Note, the Term Note or the Equipment Line of Credit Note shall voluntarily suspend transaction of its business. 13.6 BANKRUPTCY, ETC. If the Borrowers and/or any endorser or guarantor of the Line of Credit Note, the Swing Line of Credit Note, the Term Note or the Equipment Line of Credit Note: (a) makes a general assignment for the benefit of creditors; (b) shall file a voluntary petition in bankruptcy or for a reorganization to effect a plan or other arrangement with creditors; or shall file an answer to a creditor's petition or other petition against Borrowers and/or any endorser or guarantor of the Line of Credit Note, the Swing Line of Credit Note, the Term Note or the Equipment Line of Credit Note for relief in bankruptcy or for a reorganization which answer admits the material allegations thereof; or if any order for relief shall be entered by any court of bankruptcy jurisdiction with respect to the Borrowers and/or any endorser or guarantor of the Line of Credit Note, the Swing Line of Credit Note, the Term Note or the Equipment Line of Credit Note, or if bankruptcy, reorganization or liquidation proceedings are instituted against Borrowers and/or any endorser or guarantor of the Line of Credit Note, the Swing Line of Credit Note, the Term Note or the Equipment Line of Credit Note and remain undismissed for 60 days; (c) has entered against it any order by any court approving a plan for the reorganization of the Borrowers or any endorser or guarantor of the Line of Credit Note, the Swing Line of Credit Note, the Term Note or the Equipment Line of Credit Note or any other plan or arrangement with creditors of the Borrowers or any endorser or guarantor of the Line of Credit Note, the Swing Line of Credit Note, the Term Note or the Equipment Line of Credit Note; (d) shall apply for or permit the appointment of a receiver, trustee or custodian for any substantial portion of the Borrowers' and/or any endorser's or guarantor's properties or assets; or (e) becomes unable to meet its debts as they mature or becomes insolvent. 13.7 JUDGMENTS AND WRITS. If there shall be entered against the Borrowers and/or any endorser or guarantor of the Line of Credit Note, the Swing Line of Credit Note, the Term Note or the Equipment Line of Credit Note one or more judgments or decrees which are not insured against or satisfied or appealed from and bonded within the time or times limited by applicable rules of procedure for appeal as of right or if a writ of attachment or garnishment against the Borrowers and/or any endorser or guarantor of the Line of Credit Note, the Swing Line of Credit Note, the Term Note or the Equipment Line of Credit Note shall be issued and levied in an action claiming $100,000.00 or more and not released, bonded or appealed from within 30 days after the levy thereof. 13.8 MERGER. If the Borrowers shall merge or consolidate with another entity without the prior written consent of Standard Federal. 29 30 13.9 CHANGE OF CONTROL OR MANAGEMENT. If the Borrowers or a controlling portion of its voting stock or a substantial portion of its assets comes under the practical, beneficial or effective control of any person or persons other than those having such control as of the date of execution of the Line of Credit Note, the Swing Line of Credit Note, the Term Note and the Equipment Line of Credit Note, whether by reason of merger, consolidation, sale or purchase of stock or assets or otherwise, if any such change of control, in the sole and absolute discretion of Standard Federal, adversely impacts upon the ability of the Borrowers to carry on its business as theretofore conducted. 13.10 OTHER DEFAULTS. If the Borrowers and/or any endorser or guarantor of the Line of Credit Note, the Swing Line of Credit Note, the Term Note or the Equipment Line of Credit Note shall default in the due payment of any material indebtedness to whomsoever owed, or shall default in the observance or performance of any material term, covenant or condition in any mortgage, security agreement, guaranty, instrument, lease or agreement to which the Borrowers and/or any endorser or guarantor of the Line of Credit Note, the Swing Line of Credit Note, the Term Note or the Equipment Line of Credit Note is a party. 13.11 REPORTABLE EVENT. If there shall occur any "reportable event", as defined in the Employee Retirement Income Security Act of 1974 and any amendments thereto, which is determined to constitute grounds for termination by the Pension Benefit Guaranty Corporation of any employee pension benefit plan maintained by or on behalf of the Borrowers for the benefit of any of its employees or for the appointment by the appropriate United States District Court of a trustee to administer such plan and such reportable event is not corrected and such determination is not revoked within 30 days after notice thereof has been given to the plan administrator or the Borrowers; or the institution of proceedings by the Pension Benefit Guaranty Corporation to terminate any such employee benefit pension plan or to appoint a trustee to administer such plan; or the appointment of a trustee by the appropriate United States District Court to administer any such employee benefit pension plan. SECTION 14. REMEDIES UPON EVENT OF DEFAULT 14.1 Upon the occurrence of any Event of Default described in Sections 13.2, 13.3 or 13.10 hereof which is not cured or waived in writing by Standard Federal within 15 days after written notice to the Borrowers of such default; or upon the occurrence of any Event of Default described in Section 13.1 which continues unremedied for 10 days, or upon the occurrence of any Event of Default described in Sections 13.4, 13.5, 13.6, 13.7, 13.8, 13.9 or 13.11, Standard Federal's commitment to lend hereunder, if any, shall terminate and Standard Federal may, without notice, declare the entire unpaid and outstanding principal balance of the Line of Credit, the Swing Line of Credit, the Term Loan and the Equipment Line of Credit and all accrued interest to be due and payable in full forthwith, without presentment, demand or notice of any kind, all of which are hereby expressly waived by Borrowers, and thereupon Standard Federal shall have and may exercise any one or more of the rights and remedies provided herein or in the Line of Credit Note, the Swing Line of Credit Note, the Term Note or the Equipment Line of Credit Note or in any mortgage, guaranty, security agreement or other document relating hereto or granted secured parties under the Michigan Uniform Commercial Code, including the right to take possession of and dispose of the Collateral, or otherwise provided by applicable law, and to offset against the Line of Credit, the Swing Line of Credit, the Term Loan and the Equipment Line of Credit any amount owing by Standard Federal to the Borrowers. SECTION 15. MISCELLANEOUS. 15.1 No default shall be waived by Standard Federal except in writing and a waiver of any default 30 31 shall not be a waiver of any other default or of the same default on a future occasion. No single or partial exercise of any right, power or privilege hereunder, or any delay in the exercise hereof, shall preclude other or further exercise of the rights of the parties to this Loan Agreement. 15.2 No forbearance on the part of Standard Federal in enforcing any of its rights under this Loan Agreement, nor any renewal, extension or rearrangement of any payment or covenant to be made or performed by the Borrowers hereunder shall constitute a waiver of any of the terms of this Loan Agreement or of any such right. 15.3 This Loan Agreement shall be construed in accordance with the law of the State of Michigan. 15.4 All covenants, agreements, representations and warranties made in connection with this Loan Agreement and any document contemplated hereby shall survive the borrowing hereunder and shall be deemed to have been relied upon by Standard Federal. All statements contained in any certificate or other document delivered to Standard Federal at any time by or on behalf of the Borrowers pursuant hereto shall constitute representations and warranties by the Borrowers. 15.5 The Borrowers agree that it will pay all costs and expenses incurred by Standard Federal in enforcing Standard Federal's rights under this Loan Agreement and the documents contemplated hereby, including without limitation any and all reasonable fees and disbursements of legal counsel to Standard Federal. 15.6 This Loan Agreement shall inure to the benefit of and shall be binding upon the parties hereto and their respective heirs, personal representatives, successors and assigns; provided, however, that the Borrowers shall not assign or transfer its rights or obligations hereunder without the prior written consent of Standard Federal. 15.7 If any provision of this Loan Agreement shall be held or deemed to be or shall, in fact, be inoperative or unenforceable as applied in any particular case in any or all jurisdictions, or in all cases because it conflicts with any other provision or provisions hereof or any constitution or statute or rule of public policy, or for any other reason, such circumstances shall not have the effect of rendering the provision in question inoperative or unenforceable in any other case or circumstance, or of rendering any other provision or provisions herein contained invalid, inoperative, or unenforceable to any extent whatever. The invalidity of any one or more phrases, sentences, clauses or sections contained in this Loan Agreement, shall not affect the remaining portions of this Loan Agreement, or any part thereof. 31 32 IN WITNESS WHEREOF, the Borrowers and Standard Federal have caused this Loan Agreement to be executed as of the day and year first written above. BORROWERS: MCCLAIN INDUSTRIES, INC., a Michigan corporation /s/ Sara J. Brorby By: /s/ Mark S. Mikelait - --------------------------------- -------------------------------------- Witness Mark S. Mikelait Sara J. Brorby Its: Treasurer ---------------------------- 38-1867649 ----------------------------------------- Taxpayer Identification Number MCCLAIN E-Z PACK INC., a Michigan corporation /s/ Sara J. Brorby By: /s/ Mark S. Mikelait - --------------------------------- -------------------------------------- Witness Mark S. Mikelait Sara J. Brorby Its: Treasurer ---------------------------- 38-3060202 ----------------------------------------- Taxpayer Identification Number MCCLAIN GALION, INC., a Michigan corporation /s/ Sara J. Brorby By: /s/ Mark S. Mikelait - --------------------------------- -------------------------------------- Witness Mark S. Mikelait Sara J. Brorby Its: Treasurer ---------------------------- 38-3060260 ----------------------------------------- Taxpayer Identification Number SHELBY STEEL PROCESSING COMPANY, a Michigan corporation /s/ Sara J. Brorby By: /s/ Mark S. Mikelait - --------------------------------- -------------------------------------- Witness Mark S. Mikelait Sara J. Brorby Its: Treasurer ---------------------------- 38-2205216 ----------------------------------------- Taxpayer Identification Number 32 33 MCCLAIN TUBE COMPANY d/b/a QUALITY TUBE, a Michigan corporation /s/ Sara J. Brorby By: /s/ Mark S. Mikelait - --------------------------------- -------------------------------------- Witness Mark S. Mikelait Sara J. Brorby Its: Treasurer ---------------------------- 38-3191647 ----------------------------------------- Taxpayer Identification Number MCCLAIN INTERNATIONAL FSC, a U.S. Virgin Islands corporation /s/ Sara J. Brorby By: /s/ Kenneth D. McClain - --------------------------------- -------------------------------------- Witness Kenneth D. McClain Sara J. Brorby Its: President --------------------------- ----------------------------------------- Taxpayer Identification Number MCCLAIN SOUTHLAND CO, INC., a Florida corporation /s/ Sara J. Brorby By: /s/ Mark S. Mikelait - --------------------------------- -------------------------------------- Witness Mark S. Mikelait Sara J. Brorby Its: Treasurer --------------------------- 59-3241829 ----------------------------------------- Taxpayer Identification Number 33 34 STANDARD FEDERAL: STANDARD FEDERAL BANK, a federal savings bank /s/ Sara J. Brorby By: - --------------------------------- -------------------------------------- Witness Sara J. Brorby Its: Vice President --------------------------- 34 35 EXHIBIT A [FORM OF INTEREST RATE SELECTION NOTICE] STANDARD FEDERAL BANK Member ABN AMRO Group 2600 West Big Beaver Road P.O. Box 3703 Troy, Michigan 48007-3703 248/643-9600 Loan No.: ---------------------- Borrowing No.: ---------------------- INTEREST RATE SELECTION NOTICE TO: STANDARD FEDERAL BANK In accordance with the provisions of the Amended and Restated Loan Agreement, dated (the "Loan Agreement"), executed in connection with the referenced loan, the undersigned hereby notifies you that it has selected the Interest Period commencing on the Effective Date stated below with respect to the Borrowing outstanding under the referenced Borrowing No. in the principal amount indicated below (capitalized terms used in this notice shall have the meanings given such terms in the Loan Agreement): Interest Period: ----------------------------- Effective Date: ----------------------------- Principal Amount: ----------------------------- LIBOR: ----------------------------- LIBOR Rate: ----------------------------- Last Day of Interest Period: ----------------------------- BORROWER: McClain Industries, Inc., and subsidiaries By: EXHIBIT - DO NOT SIGN --------------------------------------- Its: -------------------------------------- 35 36 SCHEDULE 9.11 1. Final Report Phase I Environmental Assessment Peabody-Galion Corporation, Winesburg, Holmes County, Ohio, prepared by Stearns & Wheler, Environmental Engineers and Scientists, dated February, 1993, Project No. 2471. 2. Final Report Phase II Site Investigation, Galion Site, Winesburg, Ohio, prepared by Stearns & Wheler, Environmental Engineers and Scientists, dated September, 1993, Project No. 2471. 3. Phase II Site Investigation Peabody-Galion Site, Galion, Ohio, prepared by Stearns & Wheler, Environmental Engineers and Scientists, dated January, 1993, Project No. 2429. 36 EX-10.41 5 PROMISSORY NOTE (LINE OF CREDIT) 1 EXHIBIT 10.41 Note No. ---------------------- STANDARD FEDERAL BANK PROMISSORY NOTE (Line of Credit) { } New {X} Renewal $35,000,000.00 Troy, Michigan - ---------------------- ------------------------------- Due Date: May 1, 2001 Dated: - ---------------------- ------------------------------- FOR VALUE RECEIVED, on the Due Date unless accelerated earlier as provided herein, the undersigned, jointly and severally (collectively, "Borrower"), promise to pay to the order of Standard Federal Bank, a federal savings bank ("Standard Federal"), at its office set forth below, or at such other place as Standard Federal may designate in writing, the principal sum of Thirty Five Million and 00/100 Dollars ($35,000,000.00) or such lesser amount as may from time to time be outstanding by reason of having been advanced hereunder in accordance with the provisions of an Amended and Restated Loan Agreement, dated, between the Borrower and Standard Federal (the "Loan Agreement"), plus interest as hereinafter provided on all amounts from time to time outstanding hereunder, all in lawful money of the United States of America. Capitalized terms not otherwise defined herein shall have the meanings given such terms in the Loan Agreement. The principal outstanding under this Note from time to time shall bear interest ("Effective Interest Rate"), on a basis of a year of 360 days for the actual number of days amounts are outstanding hereunder, at Borrower's option, to be exercised in accordance with the procedures outlined in the Loan Agreement, at the Prime-Based Rate or the Line of Credit LIBOR Rate. Accrued interest shall be payable on the first day of each month beginning on August 1, 1999. This Note is given as evidence of any and all indebtedness of the Borrower to Standard Federal arising as a result of advances or other credit which may be made under this Note from time to time in accordance with the provisions of the Loan Agreement. Any and all indebtedness may be repaid by the Borrower in whole or in part from time to time prior to the Due Date. Standard Federal shall, from time to time prior to the Due Date, make advances to Borrower hereunder upon request therefor by Borrower, provided that, upon giving effect to such advance: (a) no Event of Default (as hereinafter defined) and no event which with notice and/or the passage of time would become an Event of Default shall exist at the time the advance is to be made; (b) all representations and warranties of Borrower theretofore made are true and correct; (c) Standard Federal shall not have previously or concurrently declared all amounts owing hereunder to be immediately due and payable; (d) the amount requested shall not cause the total amount outstanding hereunder to exceed the Line of Credit Limit, as defined in the Loan Agreement; and (e) all other requirements for the making of advances provided for in the Loan Agreement have been satisfied. The principal amount of indebtedness owing pursuant to this Note shall change from time to time, decreasing in an amount equal to any and all payments of principal made by the Borrower and increasing by an amount equal to any and all advances made by Standard Federal to the Borrower pursuant to the terms hereof, and the books and records of Standard Federal shall be conclusive evidence of the amount of principal and 1 2 interest owing hereunder at any time. All payments made hereunder shall be applied first against costs and expenses required to be paid hereunder, then against accrued interest to the extent thereof and the balance shall be applied against the outstanding principal amount hereof. Nothing herein contained, nor any transaction relating thereto, or hereto, shall be construed or so operate as to require the Borrower to pay, or charge, interest at a greater rate than the maximum allowed by the applicable law relating to this Note. Should any interest, or other charges, charged, paid or payable by the Borrower in connection with this Note, or any other document delivered in connection herewith, result in the charging, compensation, payment or earning of interest in excess of the maximum allowed by applicable law, then any and all such excess shall be and the same is hereby waived by Standard Federal, and any and all such excess paid shall be automatically credited against and in reduction of the principal due under this Note. If Standard Federal shall reasonably determine that the Effective Interest Rate (together with all other charges or payments related hereto that may be deemed interest) stipulated under this Note is, or may be, usurious or otherwise limited by law, the unpaid balance of this Note, with accrued interest at the highest rate permitted to be charged by stipulation in writing between Standard Federal and Borrower, at the option of Standard Federal, shall immediately become due and payable. The Borrower represents and warrants that it is duly organized, validly existing and in good standing and is duly authorized to make and perform this Note, which constitutes its valid and binding legal obligation enforceable in accordance with its terms. All financial data furnished to Standard Federal in connection with this Note fairly present the financial condition of the Borrower and its subsidiaries, if any, as of the dates thereof and there has been no material adverse change in the condition (financial or otherwise) of the Borrower since such dates. An Event of Default shall be deemed to have occurred hereunder if any indebtedness of the Borrower to Standard Federal hereunder is not paid when due, regardless of whether such indebtedness has arisen pursuant to the terms of this Note, the Loan Agreement or any mortgage, security agreement, guaranty, instrument or other agreement executed in conjunction herewith, or if an Event of Default shall otherwise occur under the Loan Agreement. Upon the occurrence of any Event of Default, after the giving of any notice and the expiration of any grace, cure or notice period provided for in the Loan Agreement, if any, and if no such notice or grace, cure or notice period is so provided for in the Loan Agreement, then immediately, Standard Federal may declare the entire unpaid and outstanding principal balance hereunder and all accrued interest to be due and payable in full forthwith, without presentment, demand or notice of any kind and may exercise any one or more of the rights and remedies provided herein or in the Loan Agreement or in any mortgage, guaranty, security agreement or other document relating hereto or by applicable law. The remedies provided for hereunder are cumulative to the remedies for collection of the amounts owing hereunder as provided by law or by the Loan Agreement, or by any mortgage, guaranty, security agreement or other document relating hereto. Nothing herein is intended, nor should it be construed, to preclude Standard Federal from pursuing any other remedy for the recovery of any other sum to which Standard Federal may be or become entitled for breach of the terms of this Note or the Loan Agreement, or any mortgage, guaranty, security agreement or other instrument relating hereto. Borrower agrees, in case of an Event of Default under the terms of this Note or under any loan agreement, security or other agreement executed in connection herewith, to pay all costs of Standard Federal for collection of the Note and all other liabilities of Borrower to Standard Federal and enforcement of rights hereunder, including reasonable attorney fees and legal expenses including participation in Bankruptcy 2 3 proceedings. During any period(s) this Note is in default, or after the Due Date, or after acceleration of maturity, the outstanding principal amount hereof shall bear interest at a rate equal to two percent (2.0%) per annum greater than the interest rate otherwise charged hereunder. If any required payment is not made within ten (10) days after the date it is due, then, at the option of Standard Federal, a late charge of not more than four cents ($.04) for each dollar of the payment so overdue may be charged. In addition to any other security interests granted to Standard Federal, Borrower hereby grants Standard Federal a security interest in all of Borrower's bank deposits, instruments, negotiable documents, and chattel paper which at any time are in the possession or control of Standard Federal. After the occurrence of an Event of Default hereunder, Standard Federal may hold and apply at any time its own indebtedness or liability to Borrower in payment of any indebtedness hereunder. Acceptance by Standard Federal of any payment in an amount less than the amount then due shall be deemed an acceptance on account only, and the failure to pay the entire amount then due shall be and continue to be an Event of Default. Upon any Event of Default, neither the failure of Standard Federal promptly to exercise its right to declare the outstanding principal and accrued unpaid interest hereunder to be immediately due and payable, nor the failure of Standard Federal to demand strict performance of any other obligation of the Borrower or any other person who may be liable hereunder shall constitute a waiver of any such rights, nor a waiver of such rights in connection with any future default on the part of the Borrower or any other person who may be liable hereunder. Borrower and all endorsers and guarantors hereof, hereby jointly and severally waive presentment for payment, demand, notice of non-payment, notice of protest or protest of this Note, diligence in collection or bringing suit, and hereby consent to any and all extensions of time, renewals, waivers, or modifications that may be granted by Standard Federal with respect to payment or any other provisions of this Note, and to the release of any collateral or any part thereof, with or without substitution. The liability of the Borrower shall be absolute and unconditional, without regard to the liability of any other party hereto. This Note is executed pursuant to the Loan Agreement and is secured by a Security Agreement, dated September 15, 1994, and by a Security Agreement, dated July 19, 1995, and by a Security Agreement, dated September 15, 1994, and by a Security Agreement, dated June 22, 1995, and by a Commercial Mortgage, dated September 26, 1988, covering property located in River Rouge, Michigan, as amended of even date herewith, and by a Real Estate Mortgage with Power of Sale, dated October 13, 1988, covering property located in Cleveland County, Oklahoma, as amended of even date herewith, and by a Commercial Mortgage, Assignment of Lease and Rents, Security Agreement and Financing Statement, dated February 6, 1995, covering property located in Sterling Heights, Michigan, as amended of even date herewith, and by a Commercial Mortgage, Assignment of Lease and Rents, Security Agreement and Financing Statement, dated February 6, 1995, covering property located in Comstock Township, Michigan, as amended of even date herewith, and by an Open-End Commercial Mortgage and Assignment of Lease and Rents, dated June 29, 1993, as amended, covering property located in Winesburg, Ohio, as amended of even date herewith, and by an Open-End Commercial Mortgage and Assignment of Lease and Rents, dated June 29, 1993, as amended, covering property located in Galion, Ohio, as amended of even date herewith. Reference is hereby made to such documents for additional terms relating to the transaction giving rise to this Note, the security given for this Note and additional terms and conditions under which this Note matures, may be accelerated or prepaid. Advances hereunder may be requested by telephone, in writing or in any other manner acceptable to Standard Federal. Borrower understands and agrees that any telephone conversation with Standard Federal may be recorded for accuracy. 3 4 BORROWER: MCCLAIN INDUSTRIES, INC., a Michigan corporation By: - ------------------------ ------------------------------------------ Mark S. Mikelait Its: Treasurer ------------------------------ 38-1867649 --------------------------------------------- Taxpayer Identification Number MCCLAIN E-Z PACK INC., a Michigan corporation By: - ------------------------ ------------------------------------------- Mark S. Mikelait Its: Treasurer -------------------------------- 38-3060202 ---------------------------------------------- Taxpayer Identification Number MCCLAIN GALION, INC., a Michigan corporation By: - ------------------------ ------------------------------------------- Mark S. Mikelait Its: Treasurer ------------------------------- 38-3060260 ---------------------------------------------- Taxpayer Identification Number SHELBY STEEL PROCESSING COMPANY, a Michigan corporation By: - ------------------------ ------------------------------------------- Mark S. Mikelait Its: Treasurer ------------------------------- 38-2205216 ---------------------------------------------- Taxpayer Identification Number 4 5 MCCLAIN TUBE COMPANY d/b/a QUALITY TUBE, a Michigan corporation By: - ------------------------ ------------------------------------------------ Mark S. Mikelait Its: Treasurer ------------------------------------ 38-3191647 --------------------------------------------------- Taxpayer Identification Number MCCLAIN INTERNATIONAL FSC, a U.S. Virgin Islands corporation By: - ------------------------ ------------------------------------------------ Kenneth D. McClain Its: President ------------------------------------ --------------------------------------------------- Taxpayer Identification Number MCCLAIN SOUTHLAND CO, INC., a Florida corporation By: - ------------------------ ------------------------------------------------ Mark S. Mikelait Its: Treasurer ------------------------------------ 59-3241829 --------------------------------------------------- Taxpayer Identification Number Standard Federal Bank, a federal savings bank 2600 West Big Beaver Road Troy, Michigan 48084 5 EX-10.42 6 PROMISSORY NOTE (TERM LOAN) 1 EXHIBIT 10.42 Note No.: ------------------------- STANDARD FEDERAL BANK PROMISSORY NOTE (Term Loan) $20,000,000.00 Troy, Michigan - ---------------------------- --------------------- Due Date: September 1, 2006 Dated: July 9, 1999 - ---------------------------- --------------------- FOR VALUE RECEIVED, the undersigned, jointly and severally (collectively, "Borrower"), promise to pay to the order of Standard Federal Bank, a federal savings bank ("Standard Federal"), at its office set forth below, or at such other place as Standard Federal may designate in writing, the principal sum of Twenty Million and 00/100 Dollars ($20,000,000.00), or such lesser amount as may from time to time be outstanding by reason of having been advanced hereunder in accordance with the provisions of an Amended and Restated Loan Agreement, dated July 9, 1999 , between the Borrower and Standard Federal (the "Loan Agreement"), plus interest as hereinafter provided on all amounts from time to time outstanding hereunder, all in lawful money of the United States of America. Capitalized terms not otherwise defined herein shall have the meanings given such terms in the Loan Agreement. This Note is given as evidence of any and all indebtedness of the Borrower to Standard Federal arising as a result of advances which may be made under this Note from time to time to and until September 1, 1999 (the "Advance Date"). Standard Federal shall, from time to time prior to the Advance Date, make advances to Borrower hereunder upon request therefor by Borrower, provided that upon giving effect to such advance no Event of Default (as hereinafter defined) and no event which with notice and/or the passage of time would become an Event of Default shall exist at the time the advance is to be made and that all representations and warranties of Borrower theretofore made are true and correct and that Standard Federal shall not have previously or concurrently declared all amounts owing hereunder to be immediately due and payable and that the amount requested shall not cause the total amount outstanding hereunder to exceed the face amount hereof. The principal amount of indebtedness owing pursuant to this Note shall change from time to time, decreasing in an amount equal to any and all payments of principal made by the Borrower prior to the Due Date and increasing by an amount equal to any and all advances made by Standard Federal to the Borrower pursuant to the terms hereof, and the books and records of Standard Federal shall be conclusive evidence of the amount of principal and interest owing hereunder at any time. Principal amounts repaid may not be re-advanced. The principal outstanding under this Note from time to time shall bear interest ("Effective Interest Rate"), on a basis of a year of 360 days for the actual number of days amounts are outstanding hereunder, at Borrower's option, to be exercised in accordance with the procedures outlined in the Loan Agreement, at the Prime-Based Rate or the Term LIBOR Rate. Accrued interest shall be payable beginning on August 1, 1999, and continuing on the same day of each consecutive month thereafter through and including the Advance Date. From and after the Advance Date, Standard Federal shall make no further advances hereunder and the outstanding principal balance hereunder as of the Advance Date, with interest, shall be repaid in consecutive monthly payments of principal, each in the amount determined by dividing the outstanding principal balance hereunder as of the Advance Date by Eighty 1 2 Four (84), plus interest accrued to the due date of each such payment, beginning on October 1, 1999, and continuing on the same day of each consecutive month thereafter and a final payment on the Due Date in an amount equal to the then unpaid principal and accrued interest. All payments made hereunder shall be applied first against costs and expenses required to be paid hereunder, then against accrued interest to the extent thereof and the balance shall be applied against the outstanding principal amount hereof. All payments required to be paid hereunder shall first be applied to costs and expenses required to be paid hereunder, then to accrued interest hereunder and the balance shall be applied against the principal. This Note may be prepaid, in full or in part, at any time, without the payment of any prepayment fee or penalty. All partial prepayments shall be applied against the last accruing installment or amount due under this Note; and no prepayments shall affect the obligation of the undersigned to continue the regular installments hereinbefore mentioned, until the entire unpaid principal and accrued interest has been paid in full. Borrower understands that the installment payments of principal provided for herein are not sufficient to fully amortize the outstanding principal balance of this Note by the Due Date and that the final payment due on the Due Date will be a balloon payment of all then outstanding principal and accrued interest. Nothing herein contained, nor any transaction relating thereto, or hereto, shall be construed or so operate as to require the Borrower to pay, or charge, interest at a greater rate than the maximum allowed by the applicable law relating to this Note. Should any interest, or other charges, charged, paid or payable by the Borrower in connection with this Note, or any other document delivered in connection herewith, result in the charging, compensation, payment or earning of interest in excess of the maximum allowed by applicable law, then any and all such excess shall be and the same is hereby waived by Standard Federal, and any and all such excess paid shall be automatically credited against and in reduction of the principal due under this Note. If Standard Federal shall reasonably determine that the Effective Interest Rate (together with all other charges or payments related hereto that may be deemed interest) stipulated under this Note is, or may be, usurious or otherwise limited by law, the unpaid balance of this Note, with accrued interest at the highest rate permitted to be charged by stipulation in writing between Standard Federal and Borrower, at the option of Standard Federal, shall immediately become due and payable. The Borrower represents and warrants that it is duly organized, validly existing and in good standing and is duly authorized to make and perform this Note, which constitutes its valid and binding legal obligation enforceable in accordance with its terms. All financial data furnished to Standard Federal in connection with this Note fairly present the financial condition of the Borrower and its subsidiaries, if any, as of the dates thereof and there has been no material adverse change in the condition (financial or otherwise) of the Borrower since such dates. An Event of Default shall be deemed to have occurred hereunder if any indebtedness of the Borrower to Standard Federal hereunder is not paid when due, regardless of whether such indebtedness has arisen pursuant to the terms of this Note, the Loan Agreement or any mortgage, security agreement, guaranty, instrument or other agreement executed in conjunction herewith, or if an Event of Default shall otherwise occur under the Loan Agreement. Upon the occurrence of any Event of Default, after the giving of any notice and the expiration of any grace, cure or notice period provided for in the Loan Agreement, if any, and if no such notice or grace, cure or notice period is so provided for in the Loan Agreement, then immediately, Standard Federal may declare the entire unpaid and outstanding principal balance hereunder and all accrued interest to be due and payable in full forthwith, without presentment, demand or notice of any kind and may exercise any one or more of the rights 2 3 and remedies provided herein or in the Loan Agreement or in any mortgage, guaranty, security agreement or other document relating hereto or by applicable law. The remedies provided for hereunder are cumulative to the remedies for collection of the amounts owing hereunder as provided by law or by the Loan Agreement, or by any mortgage, guaranty, security agreement or other document relating hereto. Nothing herein is intended, nor should it be construed, to preclude Standard Federal from pursuing any other remedy for the recovery of any other sum to which Standard Federal may be or become entitled for breach of the terms of this Note or the Loan Agreement, or any mortgage, guaranty, security agreement or other instrument relating hereto. Borrower agrees, in case of an Event of Default under the terms of this Note or under any loan agreement, security or other agreement executed in connection herewith, to pay all costs of Standard Federal for collection of the Note and all other liabilities of Borrower to Standard Federal and enforcement of rights hereunder, including reasonable attorney fees and legal expenses including participation in Bankruptcy proceedings. During any period(s) this Note is in default, or after the Due Date, or after acceleration of maturity, the outstanding principal amount hereof shall bear interest at a rate equal to two percent (2.0%) per annum greater than the interest rate otherwise charged hereunder. If any required payment is not made within ten (10) days after the date it is due, then, at the option of Standard Federal, a late charge of not more than four cents ($.04) for each dollar of the payment so overdue may be charged. In addition to any other security interests granted to Standard Federal, Borrower hereby grants Standard Federal a security interest in all of Borrower's bank deposits, instruments, negotiable documents, and chattel paper which at any time are in the possession or control of Standard Federal. After the occurrence of an Event of Default hereunder, Standard Federal may hold and apply at any time its own indebtedness or liability to Borrower in payment of any indebtedness hereunder. Acceptance by Standard Federal of any payment in an amount less than the amount then due shall be deemed an acceptance on account only, and the failure to pay the entire amount then due shall be and continue to be an Event of Default. Upon any Event of Default, neither the failure of Standard Federal promptly to exercise its right to declare the outstanding principal and accrued unpaid interest hereunder to be immediately due and payable, nor the failure of Standard Federal to demand strict performance of any other obligation of the Borrower or any other person who may be liable hereunder shall constitute a waiver of any such rights, nor a waiver of such rights in connection with any future default on the part of the Borrower or any other person who may be liable hereunder. Borrower and all endorsers and guarantors hereof, hereby jointly and severally waive presentment for payment, demand, notice of non-payment, notice of protest or protest of this Note, diligence in collection or bringing suit, and hereby consent to any and all extensions of time, renewals, waivers, or modifications that may be granted by Standard Federal with respect to payment or any other provisions of this Note, and to the release of any collateral or any part thereof, with or without substitution. The liability of the Borrower shall be absolute and unconditional, without regard to the liability of any other party hereto. This Note is executed pursuant to the Loan Agreement and is secured by a Security Agreement, dated September 15, 1994, and by a Security Agreement, dated July 19, 1995, and by a Security Agreement, dated September 15, 1994, and by a Security Agreement, dated June 22, 1995, and by a Commercial Mortgage, dated September 26, 1988, covering property located in River Rouge, Michigan, as amended of even date herewith, and by a Real Estate Mortgage with Power of Sale, dated October 13, 1988, covering property located in Cleveland County, Oklahoma, as amended of even date herewith, and by a Commercial Mortgage, Assignment of Lease and Rents, Security Agreement and Financing Statement, dated February 6, 1995, covering property located in Sterling Heights, Michigan, as amended of even date herewith, and by a 3 4 Commercial Mortgage, Assignment of Lease and Rents, Security Agreement and Financing Statement, dated February 6, 1995, covering property located in Comstock Township, Michigan, as amended of even date herewith, and by an Open-End Commercial Mortgage and Assignment of Lease and Rents, dated June 29, 1993, as amended, covering property located in Winesburg, Ohio, as amended of even date herewith, and by an Open-End Commercial Mortgage and Assignment of Lease and Rents, dated June 29, 1993, as amended, covering property located in Galion, Ohio, as amended of even date herewith. Reference is hereby made to such documents for additional terms relating to the transaction giving rise to this Note, the security given for this Note and additional terms and conditions under which this Note matures, may be accelerated or prepaid. BORROWERS: MCCLAIN INDUSTRIES, INC., a Michigan corporation By: - ----------------------------- -------------------------------------------- Mark S. Mikelait Its: Treasurer ---------------------------------- 38-1867649 ------------------------------------------------ Taxpayer Identification Number MCCLAIN E-Z PACK INC., a Michigan corporation By: - ----------------------------- -------------------------------------------- Mark S. Mikelait Its: Treasurer -------------------------------- 38-3060202 ------------------------------------------------ Taxpayer Identification Number MCCLAIN GALION, INC., a Michigan corporation By: - ----------------------------- -------------------------------------------- Mark S. Mikelait Its: Treasurer -------------------------------- 38-3060260 ----------------------------------------------- Taxpayer Identification Number 4 5 SHELBY STEEL PROCESSING COMPANY, a Michigan corporation By: - ----------------------------- -------------------------------------------- Mark S. Mikelait Its: Treasurer -------------------------------- 38-2205216 ----------------------------------------------- Taxpayer Identification Number MCCLAIN TUBE COMPANY d/b/a QUALITY TUBE, a Michigan corporation By: - ----------------------------- -------------------------------------------- Mark S. Mikelait Its: Treasurer -------------------------------- 38-3191647 ----------------------------------------------- Taxpayer Identification Number MCCLAIN INTERNATIONAL FSC, a U.S. Virgin Islands corporation By: - ----------------------------- -------------------------------------------- Kenneth D. McClain Its: President -------------------------------- ----------------------------------------------- Taxpayer Identification Number MCCLAIN SOUTHLAND CO, INC., a Florida corporation By: - ----------------------------- -------------------------------------------- Mark S. Mikelait Its: Treasurer -------------------------------- 59-3241829 ----------------------------------------------- Taxpayer Identification Number Standard Federal Bank, a federal savings bank 2600 West Big Beaver Road Troy, Michigan 48084 5 EX-10.43 7 PROMISSORY NOTE (LINE OF CREDIT TO TERM LOAN) 1 EXHIBIT 10.43 Note No.: ----------------- STANDARD FEDERAL BANK PROMISSORY NOTE --------------- (Line of Credit Converting to Term Loan) $1,500,000.00 Troy , Michigan - ---------------------------- ---------------------------------- Due Date: July 1, 2005 Dated: July 9, 1999 ------------------- ---------------------------- FOR VALUE RECEIVED, on the Due Date unless accelerated earlier as provided herein, the undersigned, jointly and severally (collectively, "Borrower"), promise to pay to the order of Standard Federal Bank, a federal savings bank ("Standard Federal"), at its office set forth below, or at such other place as Standard Federal may designate in writing, the principal sum of One Million Five Hundred Thousand and 00/100 Dollars ($1,500,000.00) or such lesser amount as may from time to time be outstanding by reason of having been advanced hereunder in accordance with the provisions of an Amended and Restated Loan Agreement, dated July 9, 1999, between the Borrower and Standard Federal (the "Loan Agreement"), plus interest as hereinafter provided on all amounts from time to time outstanding hereunder, all in lawful money of the United States of America. Capitalized terms not otherwise defined herein shall have the meanings given such terms in the Loan Agreement. This Note is given as evidence of any and all indebtedness of the Borrower to Standard Federal arising as a result of advances or other credit which may be made under this Note from time to time to and until July 1, 2000 (the "Term Date"). Any and all indebtedness may be repaid by the Borrower in whole or in part from time to time prior to the Term Date. Standard Federal shall, from time to time prior to the Term Date, make advances to Borrower hereunder upon request therefor by Borrower, provided that upon giving effect to such advance no Event of Default (as hereinafter defined) and no event which with notice and/or the passage of time would become an Event of Default shall exist at the time the advance is to be made and that all representations and warranties of Borrower theretofore made are true and correct and that Standard Federal shall not have previously or concurrently declared all amounts owing hereunder to be immediately due and payable and that the amount requested shall not cause the total amount outstanding hereunder to exceed the face amount hereof. The principal amount of indebtedness owing pursuant to this Note shall change from time to time, decreasing in an amount equal to any and all payments of principal made by the Borrower prior to the Due Date and increasing by an amount equal to any and all advances made by Standard Federal to the Borrower pursuant to the terms hereof, and the books and records of Standard Federal shall be conclusive evidence of the amount of principal and interest owing hereunder at any time. From the date hereof until the Term Date, the principal outstanding under this Note from time to time shall bear interest ("Line of Credit Interest Rate"), on a basis of a year of 360 days for the actual number of days amounts are outstanding hereunder, at Borrower's option, to be exercised in accordance with the procedures outlined in the Loan Agreement, at the Prime-Based Rate or the Line of Credit LIBOR Rate. From and after the Term Date, the principal amount then advanced and outstanding hereunder shall bear interest on a basis of a year of 360 days for the actual number of days amounts are outstanding hereunder, at a rate per annum equal to either, at Borrower's option, to be exercised in accordance with the 1 2 procedures outlined in the Loan Agreement, at the Prime-Based Rate or the Term LIBOR Rate. Accrued interest shall be payable beginning on August 1, 1999, and continuing on the same day of each consecutive month thereafter through and including the Term Date. From and after the Term Date, Standard Federal shall make no further advances hereunder and the outstanding principal balance hereunder as of the Term Date, with interest, shall be repaid in consecutive monthly payments of principal, each in the amount determined by dividing the outstanding principal balance hereunder as of the Term Date by Sixty (60), plus interest accrued to the due date of each such payment, beginning on August 1, 2000, and continuing on the same day of each consecutive month thereafter and a final payment on the Due Date in an amount equal to the then unpaid principal and accrued interest. All payments made hereunder shall be applied first against costs and expenses required to be paid hereunder, then against accrued interest to the extent thereof and the balance shall be applied against the outstanding principal amount hereof. Nothing herein contained, nor any transaction relating thereto, or hereto, shall be construed or so operate as to require the Borrower to pay, or charge, interest at a greater rate than the maximum allowed by the applicable law relating to this Note. Should any interest, or other charges, charged, paid or payable by the Borrower in connection with this Note, or any other document delivered in connection herewith, result in the charging, compensation, payment or earning of interest in excess of the maximum allowed by applicable law, then any and all such excess shall be and the same is hereby waived by Standard Federal, and any and all such excess paid shall be automatically credited against and in reduction of the principal due under this Note. If Standard Federal shall reasonably determine that the Effective Interest Rate (together with all other charges or payments related hereto that may be deemed interest) stipulated under this Note is, or may be, usurious or otherwise limited by law, the unpaid balance of this Note, with accrued interest at the highest rate permitted to be charged by stipulation in writing between Standard Federal and Borrower, at the option of Standard Federal, shall immediately become due and payable. The Borrower represents and warrants that it is duly organized, validly existing and in good standing and is duly authorized to make and perform this Note, which constitutes its valid and binding legal obligation enforceable in accordance with its terms. All financial data furnished to Standard Federal in connection with this Note fairly present the financial condition of the Borrower and its subsidiaries, if any, as of the dates thereof and there has been no material adverse change in the condition (financial or otherwise) of the Borrower since such dates. An Event of Default shall be deemed to have occurred hereunder if any indebtedness of the Borrower to Standard Federal hereunder is not paid when due, regardless of whether such indebtedness has arisen pursuant to the terms of this Note, the Loan Agreement or any mortgage, security agreement, guaranty, instrument or other agreement executed in conjunction herewith, or if an Event of Default shall otherwise occur under the Loan Agreement. Upon the occurrence of any Event of Default, after the giving of any notice and the expiration of any grace, cure or notice period provided for in the Loan Agreement, if any, and if no such notice or grace, cure or notice period is so provided for in the Loan Agreement, then immediately, Standard Federal may declare the entire unpaid and outstanding principal balance hereunder and all accrued interest to be due and payable in full forthwith, without presentment, demand or notice of any kind and may exercise any one or more of the rights and remedies provided herein or in the Loan Agreement or in any mortgage, guaranty, security agreement or other document relating hereto or by applicable law. The remedies provided for hereunder are cumulative to the remedies for collection of the amounts owing hereunder as provided by law or by the Loan Agreement, or by any mortgage, guaranty, security agreement or other document relating hereto. 2 3 Nothing herein is intended, nor should it be construed, to preclude Standard Federal from pursuing any other remedy for the recovery of any other sum to which Standard Federal may be or become entitled for breach of the terms of this Note or the Loan Agreement, or any mortgage, guaranty, security agreement or other instrument relating hereto. Borrower agrees, in case of an Event of Default under the terms of this Note or under any loan agreement, security or other agreement executed in connection herewith, to pay all costs of Standard Federal for collection of the Note and all other liabilities of Borrower to Standard Federal and enforcement of rights hereunder, including reasonable attorney fees and legal expenses including participation in Bankruptcy proceedings. During any period(s) this Note is in default, or after the Due Date, or after acceleration of maturity, the outstanding principal amount hereof shall bear interest at a rate equal to two percent (2.0%) per annum greater than the interest rate otherwise charged hereunder. If any required payment is not made within ten (10) days after the date it is due, then, at the option of Standard Federal, a late charge of not more than four cents ($.04) for each dollar of the payment so overdue may be charged. In addition to any other security interests granted to Standard Federal, Borrower hereby grants Standard Federal a security interest in all of Borrower's bank deposits, instruments, negotiable documents, and chattel paper which at any time are in the possession or control of Standard Federal. After the occurrence of an Event of Default hereunder, Standard Federal may hold and apply at any time its own indebtedness or liability to Borrower in payment of any indebtedness hereunder. Acceptance by Standard Federal of any payment in an amount less than the amount then due shall be deemed an acceptance on account only, and the failure to pay the entire amount then due shall be and continue to be an Event of Default. Upon any Event of Default, neither the failure of Standard Federal promptly to exercise its right to declare the outstanding principal and accrued unpaid interest hereunder to be immediately due and payable, nor the failure of Standard Federal to demand strict performance of any other obligation of the Borrower or any other person who may be liable hereunder shall constitute a waiver of any such rights, nor a waiver of such rights in connection with any future default on the part of the Borrower or any other person who may be liable hereunder. Borrower and all endorsers and guarantors hereof, hereby jointly and severally waive presentment for payment, demand, notice of non-payment, notice of protest or protest of this Note, diligence in collection or bringing suit, and hereby consent to any and all extensions of time, renewals, waivers, or modifications that may be granted by Standard Federal with respect to payment or any other provisions of this Note, and to the release of any collateral or any part thereof, with or without substitution. The liability of the Borrower shall be absolute and unconditional, without regard to the liability of any other party hereto. This Note is executed pursuant to the Loan Agreement and is secured by a Security Agreement, dated September 15, 1994, and by a Security Agreement, dated July 19, 1995, and by a Security Agreement, dated September 15, 1994, and by a Security Agreement, dated June 22, 1995, and by a Commercial Mortgage, dated September 26, 1988, covering property located in River Rouge, Michigan, as amended of even date herewith, and by a Real Estate Mortgage with Power of Sale, dated October 13, 1988, covering property located in Cleveland County, Oklahoma, as amended of even date herewith, and by a Commercial Mortgage, Assignment of Lease and Rents, Security Agreement and Financing Statement, dated February 6, 1995, covering property located in Sterling Heights, Michigan, as amended of even date herewith, and by a Commercial Mortgage, Assignment of Lease and Rents, Security Agreement and Financing Statement, dated February 6, 1995, covering property located in Comstock Township, Michigan, as amended of even date herewith, and by an Open-End Commercial Mortgage and Assignment of Lease and Rents, dated June 29, 1993, as amended, covering property located in Winesburg, Ohio, as amended of even date herewith, 3 4 and by an Open-End Commercial Mortgage and Assignment of Lease and Rents, dated June 29, 1993, as amended, covering property located in Galion, Ohio, as amended of even date herewith. Reference is hereby made to such documents for additional terms relating to the transaction giving rise to this Note, the security given for this Note and additional terms and conditions under which this Note matures, may be accelerated or prepaid. Advances hereunder may be requested by telephone, in writing or in any other manner acceptable to Standard Federal. Borrower understands and agrees that any telephone conversation with Standard Federal may be recorded for accuracy. BORROWER: MCCLAIN INDUSTRIES, INC., a Michigan corporation By: - --------------------------------- -------------------------------------- Mark S. Mikelait Its: Treasurer ---------------------------- 38-1867649 ----------------------------------------- Taxpayer Identification Number MCCLAIN E-Z PACK INC., a Michigan corporation By: - --------------------------------- -------------------------------------- Mark S. Mikelait Its: Treasurer ---------------------------- 38-3060202 ----------------------------------------- Taxpayer Identification Number MCCLAIN GALION, INC., a Michigan corporation By: - --------------------------------- -------------------------------------- Mark S. Mikelait Its: Treasurer ---------------------------- 38-3060260 ----------------------------------------- Taxpayer Identification Number 4 5 SHELBY STEEL PROCESSING COMPANY, a Michigan corporation By: - --------------------------------- -------------------------------------- Mark S. Mikelait Its: Treasurer ---------------------------- 38-2205216 ----------------------------------------- Taxpayer Identification Number MCCLAIN TUBE COMPANY d/b/a QUALITY TUBE, a Michigan corporation By: - --------------------------------- -------------------------------------- Mark S. Mikelait Its: Treasurer ---------------------------- 38-3191647 ----------------------------------------- Taxpayer Identification Number MCCLAIN INTERNATIONAL FSC, a U.S. Virgin Islands corporation By: - --------------------------------- -------------------------------------- Kenneth D. McClain Its: President ---------------------------- ----------------------------------------- Taxpayer Identification Number MCCLAIN SOUTHLAND CO, INC., a Florida corporation By: - --------------------------------- -------------------------------------- Mark S. Mikelait Its: Treasurer ---------------------------- 59-3241829 ----------------------------------------- Taxpayer Identification Number Standard Federal Bank, a federal savings bank 2600 West Big Beaver Road Troy, Michigan 48084 5 EX-10.44 8 THIRD AMENDMENT AGREEMENT 1 Loan No. 500-0024084 EXHIBIT 10.44 THIRD AMENDMENT AGREEMENT Loan Agreement Promissory Note (Line of Credit) THIS AGREEMENT made this day of , 1999, by and among Standard Federal Bank, a federal savings bank ("Standard Federal"), McClain Group Leasing, Inc., a Michigan corporation ("Borrower"), and McClain Industries, Inc., a Michigan corporation ("Guarantor"). RECITALS: A. Borrower and Standard Federal entered into a Loan Agreement, dated July 17, 1996, as amended April 28, 1997 and April 16, 1998 (the "Loan Agreement"), pursuant to which Standard Federal opened a line of credit in favor of the Borrower, as evidenced by a Promissory Note (Line of Credit), dated July 17, 1996, as amended April 28, 1997 and April 16, 1998 in the principal amount of $10,000,000.00 (the "Note"), secured by an Assignment of Equipment Leases and Security Agreement dated July 17, 1996, as amended April 28, 1997, and all Schedule A's thereto (the "Security Agreement"), and guaranteed by the Guarantor pursuant to a Guaranty dated July 17, 1996 (the "Guaranty"). B. Borrower has requested an amendment and increase in the credit limit of the line of credit evidenced by the Note and an extension of the maturity date thereof and Standard Federal and the Guarantor are agreeable thereto, on the terms and conditions herein provided. NOW, THEREFORE, in consideration of Standard Federal's forbearance to enforce payment of the Note except as herein provided, of the mutual covenants herein contained and of other good and valuable consideration the receipt and sufficiency whereof are hereby acknowledged, the parties hereto hereby warrant, represent and agree as follows: 1. The Borrower is a Michigan corporation in good standing. All corporate resolutions heretofore delivered to Standard Federal relative to borrowing money and granting security interests remain in full force and effect. Borrower has duly authorized and validly executed and delivered this Amendment Agreement and such Agreement and the Loan Agreement and Note (as hereby amended) are valid and enforceable according to their terms and do not conflict with or violate Borrower's corporate charter or by-laws or any agreement or covenants to which Borrower is a party. 2. The Security Agreement is valid and enforceable in accordance with its terms. Standard Federal's security interests in the collateral described in the Security Agreement are valid and perfected and Borrower is aware of no claims or interests in such collateral prior or paramount to Standard Federal's. 3. The Guaranty is valid and enforceable in accordance with its terms and the Guarantor presently has no valid and existing defense to liability thereunder. 4. The Loan Agreement is hereby amended as follows: a. The definition of "Credit Limit" contained in Section 1.1 of the Loan Agreement is hereby amended to read as follows: 1 2 "Credit Limit" shall mean the lesser of: (a) Fifteen Million and 00/100 Dollars ($15,000,000.00), or (b) an amount equal to 80% of Eligible Lease Receivables. b. The definition of "McClain Group" contained in Section 1.1 of the Loan Agreement is hereby amended to read as follows: "McClain Group" shall mean McClain Industries, Inc., a Michigan corporation; McClain E-Z Pack Inc., a Michigan corporation; McClain Galion, Inc., a Michigan corporation; Shelby Steel Processing Company, a Michigan corporation; McClain Tube Company d/b/a Quality Tube, a Michigan corporation; McClain International FSC, a U.S. Virgin Islands corporation; and McClain Southland Co., a Florida corporation. c. The termination date of the Line of Credit provided in Section 1.9 of the Loan Agreement is hereby amended and extended from March 1, 2000 to May 1, 2001. 5. The Note is hereby amended in the following respects only: a. The Due Date provided for in the Note is hereby amended and extended from March 1, 2000 to May 1, 2001. b. The principal amount stated in the Note is hereby increased to the sum of Fifteen Million and 00/100 Dollars ($15,000,000.00). Borrower hereby promises to pay to the order of Standard Federal the principal amount of the Note, as hereby amended, together with interest thereon, in accordance with the terms and provisions of the Note, as hereby amended. 6. Except as amended herein, the Loan Agreement, Note, Security Agreement and Guaranty shall remain in full force and effect. This Amendment Agreement may be attached to the Note as a rider, but such attachment shall not be necessary to the validity thereof. 7. Guarantor acknowledges and consents to the amendment to the Loan Agreement and Note herein provided and agrees that the Guaranty shall continue and remain in full force and effect with respect to the Loan Agreement and Note as herein amended. IN WITNESS WHEREOF the parties hereto have executed this agreement the day and date first above written. Witness: BORROWER: MCCLAIN GROUP LEASING, INC., a Michigan corporation By: - ---------------------------- ------------------------------------ Mark S. Mikelait Its: Treasurer - ---------------------------- -------------------------- 2 3 6200 Elmridge --------------------------------------- Sterling Heights, Michigan 48310 --------------------------------------- 38-2969462 --------------------------------------- Tax Identification Number GUARANTOR: MCCLAIN INDUSTRIES, INC., a Michigan corporation By: - ---------------------------- ------------------------------------ Mark S. Mikelait Its: Treasurer - ---------------------------- -------------------------- STANDARD FEDERAL: STANDARD FEDERAL BANK, a federal savings bank By: - ---------------------------- ------------------------------------ Its: - ---------------------------- -------------------------- 3 EX-27 9 FINANCIAL DATA SCHEDULE
5 YEAR SEP-30-1999 JUL-01-1999 SEP-30-1999 1,908,397 0 20,140,166 0 63,281,785 91,467,477 44,282,617 21,046,447 129,923,989 32,777,512 0 0 0 4,871,530 26,019,435 129,923,989 140,604,885 140,604,885 115,863,228 115,863,223 0 0 3,982,325 6,336,938 2,155,000 0 0 0 0 4,181,938 .90 .90
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