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.
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
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,
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.
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.
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
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.
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:
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
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.
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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's security holders during the fourth quarter of the fiscal year covered by this report.
PART II
ITEM 5.
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.
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.
ITEM 6. SELECTED FINANCIAL DATA
Selected financial data for each of the Company's last five fiscal years ended September 30 are as follows:
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.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The following discussion should be read in conjunction with the consolidated financial statements, including the notes to them, appearing elsewhere in this report.
The following table presents, as a percentage of net sales, certain selected financial data for the Company for the years indicated:
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
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.
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
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.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Financial statements and supplementary data are filed herewith under Item 14.
ITEM 9.
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.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The directors and executive officers of the Company are as follows:
(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
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.
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.
SUMMARY COMPENSATION TABLE
AGGREGATED OPTION/SAR EXERCISES AND FISCAL YEAR-END OPTION/SAR VALUES TABLE
(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
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.
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.
(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.
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.
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.
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
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
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.
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
MCCLAIN INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
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The accompanying notes are an integral part of these consolidated financial statements.
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LIABILITIES AND STOCKHOLDERS' INVESTMENT
MCCLAIN INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial statements.
MCCLAIN INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' INVESTMENT
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial statements.
MCCLAIN INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial statements.
MCCLAIN INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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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.
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.
MCCLAIN INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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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:
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.
MCCLAIN INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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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:
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:
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.
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:
Gross minimum lease payments are collectible in the following scheduled annual amounts for the years succeeding September 30, 1999:
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:
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.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - --------------------------------------------------------------------------------
Property, plant and equipment consisted of the following amounts as of September 30:
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:
MCCLAIN INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - --------------------------------------------------------------------------------
7. LONG-TERM DEBT
Long-term debt consisted of the following obligations as of September 30:
MCCLAIN INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - --------------------------------------------------------------------------------
Scheduled aggregate principal maturities of long-term debt for years succeeding September 30, 1999 are presented below:
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:
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:
The effective income tax rate on consolidated pre-tax income differs from the federal statutory rate for the following reasons:
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:
The components which comprise gross deferred taxes are predominantly noncurrent; as such, the entire related net liability is classified as noncurrent.
MCCLAIN INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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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.
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:
OPTIONS AT SEPTEMBER 30, 1999
*Weighted average
MCCLAIN INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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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.
MCCLAIN INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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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.
MCCLAIN INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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Information regarding the Company's operating segments follows:
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.
MCCLAIN INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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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.
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.
MCCLAIN INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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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).
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