<PAGE> 1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Quarterly Report Under Section 13 or 15 (d) of
The Securities Exchange Act of 1934
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 14 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
[ ] TRANSITION REPORT PURSUANT OR SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File No. 0-7770
MCCLAIN INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
Michigan 38-1867649
State of Incorporation IRS Employer I.D. No.
6200 Elmridge Road
Sterling Heights, Michigan 48310
(810) 264-3611
(Address of principal executive offices and telephone number)
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 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 the number of shares outstanding of each of the issuer's
classes of common stock as of July 26, 1999.
Common Stock, No Par Value 4,653,358
- -------------------------- ----------------
Class Number of Shares
1 of 14
<PAGE> 2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
MCCLAIN INDUSTRIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, SEPTEMBER 30,
1999 1998
(unaudited)
-------------- ---------------
ASSETS
<S> <C> <C>
CURRENT ASSETS
Cash and Cash Equivalents $ 2,859,200 $ 1,924,006
Accounts Receivable (Net) 21,497,600 24,235,761
Inventories 58,344,272 38,873,477
Net Investment in Sales Type
Leases - Current Portion 4,300,000 3,100,000
Prepaid Expenses 371,940 543,095
------------- --------------
Total Current Assets 87,373,012 68,676,339
------------- --------------
Property and Equipment 45,322,878 42,100,575
Accumulated Depreciation (20,859,569) (18,834,030)
------------- --------------
Net Property and Equipment 24,463,309 23,266,545
------------- --------------
Net Investment in Sales Type
Leases - Less Current Portion 8,335,772 6,013,959
------------- --------------
Other Assets 1,389,482 2,290,124
------------- --------------
Total Assets $ 121,561,575 $ 100,246,967
============= ==============
</TABLE>
2 of 14
<PAGE> 3
LIABILITIES AND STOCKHOLDERS' INVESTMENT
<TABLE>
<CAPTION>
CURRENT LIABILITIES
<S> <C> <C>
Current Portion of Long-Term Debt $ 3,300,000 $ 3,300,000
Accounts Payable 29,215,830 18,405,224
Accrued Liabilities 5,530,732 4,537,434
Federal and State Income Taxes 1,438,139 513,994
-------------- ---------------
Total Current Liabilities 39,484,701 26,756,652
-------------- ---------------
Deferred Income Taxes 2,215,000 2,215,000
-------------- ---------------
Long-Term Debt - Less
Current Portion 48,476,019 42,530,105
-------------- ---------------
Product Liability 1,627,337 1,909,904
-------------- ---------------
Stockholders' Equity 29,758,518 26,835,306
-------------- ---------------
Total Liabilities and
Stockholders' Equity $ 121,561,575 $ 100,246,967
============== ===============
</TABLE>
See notes to consolidated financial statements.
3 of 14
<PAGE> 4
MCCLAIN INDUSTRIES, INC.
CONDENSED COLSOLIDATED STATEMENTS OF OPERATIONS
UNAUDITED
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
June 30, June 30,
1999 1998 1999 1998
---------------------------- -----------------------------
<S> <C> <C> <C> <C>
Net Sales $ 42,932,485 $33,441,088 $101,946,172 $80,681,338
Cost of Sales 35,247,417 27,487,916 83,666,479 65,977,131
------------ ----------- ------------ -----------
Gross Profit 7,685,068 5,953,172 18,279,693 14,704,207
Selling, General
And Administrative
Expenses 4,683,884 3,548,809 12,023,313 10,086,462
------------ ----------- ------------- -----------
Operating Income 3,001,184 2,404,363 6,256,380 4,617,745
------------ ----------- ------------- -----------
Other Income (Expense)
Interest Expense (1,019,744) (826,462) (2,654,269) (2,402,986)
Interest Income 381,596 311,133 1,141,328 930,865
Other Expense 2,303 (277,581) (99,963) (524,734)
------------ ----------- ------------- -----------
(635,845) (792,910) (1,612,904) (1,996,855)
------------ ----------- ------------- -----------
Income Before
Income Taxes 2,365,339 1,611,453 4,643,476 2,620,890
Provision for
Income Taxes 804,000 551,000 1,579,000 891,000
------------ ----------- ------------- -----------
Net Income $ 1,561,339 $ 1,060,453 $ 3,064,476 $ 1,729,890
============ =========== ============= ===========
Net Income per
Common and Common
Equivalent Shares $ .33 $ .23 $ .65 $ .37
============ =========== ============= ===========
Weighted Average
Number of Common and
Common Equivalent
Shares Outstanding 4,669,552 4,684,439 4,669,552 4,684,439
============ =========== ============= ===========
</TABLE>
See notes to consolidated financial statements
4 of 14
<PAGE> 5
MCCLAIN INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED
<TABLE>
<CAPTION>
NINE MONTHS ENDED
JUNE 30,
1999 1998
---- ----
<S> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES:
Net income $ 3,064,476 $ 1,729,890
============ ============
Adjustments to reconcile net income to net
Cash used in operating activities:
Depreciation and amortization 2,451,924 2,586,766
Common Stock Issued in Lieu of Cash 10,114 15,367
Changes in Operating Assets and Liabilities
Which Provided (Used) Cash:
Current Assets Excluding
Cash & Cash Equivalents (17,761,479) (12,837,896)
Other assets (1,776,788) 388,080
Accounts payable 10,810,606 5,929,413
Accrued liabilities 993,298 672,022
Federal Income Tax 924,145 1,221,526
Other liabilities (282,567) (21,494)
------------ ------------
TOTAL ADJUSTMENTS (4,630,747) (2,046,216)
------------ ------------
NET CASH USED IN OPERATING ACTIVITIES (1,566,271) (316,326)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment (3,293,071) (1,590,134)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Additions to long term debt 5,945,914 1,900,263
Sale of common stock -- 61,369
Redemption of common stock (151,378) (441,000)
------------ ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 5,794,536 1,520,632
------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 935,194 (385,838)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 1,924,006 2,402,421
------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 2,859,200 $ 2,016,583
============ ============
</TABLE>
See notes to condensed consolidated financial statements.
5 of 14
<PAGE> 6
MCCLAIN INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NINE MONTHS ENDED JUNE 30, 1999
1. Basis of Presentation
The accompanying unaudited Consolidated Financial Statements of McClain
Industries, Inc. and subsidiaries (the "Company") have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Rule 10-01 of Regulation
S-X. Accordingly, such Statements do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments consisting
of normal recurring items considered necessary for a fair presentation have been
included. Operating results for the three-month and nine month periods ended
June 30, 1999, are not necessarily indicative of the results that may be
expected for the year ending September 30, 1999. For further information, refer
to the Consolidated Financial Statements and footnotes thereto included in the
Company's annual report on Form 10-K for the year ended September 30, 1998.
2. Inventories
Inventories at June 30, 1999 and September 30, 1998 are summarized as
follows:
<TABLE>
<CAPTION>
(Unaudited)
June 30, 1999 September 30, 1998
------------- ------------------
<S> <C> <C>
Materials and Supplies $ 40,228,168 $ 22,100,252
Work in Process 7,652,852 5,707,374
Finished Goods 10,463,252 11,065,851
------------- -------------
$ 58,344,272 $ 38,873,477
------------- -------------
</TABLE>
3. Earnings per Common Share and Common Equivalent Share:
Earnings per share are computed using the weighted average number of
common shares outstanding during the year. The Company adopted Statement of
Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share", effective
September 30, 1998. This statement requires a dual presentation and
reconciliation of "basic" and "diluted" per share amounts. Diluted
reflects the potential dilution of all common stock equivalents. At June 30,
1999, and 1998 options to purchase 183,339 and 199,464 shares, respectively,
were excluded from the computation of earnings per share because the options'
exercise prices were greater than the average market price of the common shares.
6 of 14
<PAGE> 7
MCCLAIN INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NINE MONTHS ENDED JUNE 30, 1999
4. Depreciation
For the nine months ended June 30, 1999 and 1998, depreciation charges
were $2,096,308 and $2,245,321, respectively.
5. Contingencies
Product Liability
As a manufacturer of industrial products, the Company is occasionally
subjected to various product liability claims. Such claims typically involve
personal injury or wrongful death associated with the use or misuse of the
Company's products. The Company is currently defending certain legal proceedings
involving allegations of product liability relating to products manufactured and
sold by the Company. Historically, such claims have not resulted in material
losses to the Company in any one year, and the Company maintains product
liability insurance in amounts believed by management to be adequate.
Galion Holding Company (GHC), pursuant to an indemnification it
provided to the seller in connection with GHC's July 1992 acquisition of the
Galion operations, is currently defending a number of legal proceedings
involving product liability claims arising out of products manufactured and sold
prior to the acquisition. These claims are covered by insurance and many of
these cases have been settled. 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.
A reserve 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 June 30, 1999.
7 of 14
<PAGE> 8
MCCLAIN INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NINE MONTHS ENDED JUNE 30, 1999
Environmental Matters
The Company's operations are subject to extensive federal, state and
local regulation under environmental laws and regulations concerning, among
other things, emissions into the air, discharges into the waters and the
generation, handling, storage, transportation, treatment and disposal of waste
and other materials. Inherent in manufacturing operations and in owning real
estate is the risk of environmental liabilities as a result of both current and
past operations, which cannot be predicted with certainty. The Company has
incurred and will continue to incur costs, on an ongoing basis, associated with
environmental regulatory compliance in its business.
Labor Union Matters
Certain of the Company's hourly employees are represented by various
labor unions pursuant to collective bargaining agreement which expire between
September 1999 and June 2000.
On February 23, 1995, the National Labor Relations Board (NLRB) conducted an
election in response to a petition filed by a local union (Union) to represent
the hourly employees at the Company's Macon, Georgia plant. The ballots of
certain employees were challenged as ineligible. The Union filed charges
asserting that the Company committed various unfair labor practices, which
affected the election results, and that the challenged ballots should be
counted. On October 17, 1996, the NLRB upheld the unfair labor practice charges
and on November 5, 1996, the NLRB determined that the results of the election
were in favor of the Union. Management, based upon the opinion of counsel, does
not believe a final decision upholding the Union certification or the unfair
labor practice charges would have a material adverse effect on the Company.
Other Legal Matters
The Company is also involved in routine litigation incidental to its
business. Management believes that the resolution of these matters will not
materially affect the consolidated financial statements.
8 of 14
<PAGE> 9
MCCLAIN INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NINE MONTHS ENDED JUNE 30, 1999
6. 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 portable 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 by the end of the Company's fiscal year on September 30, 1999.
To date, the Company has expended approximately $60,000 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 $30,000 on its remaining computers and software.
These amounts represent approximately 50% of the Company's technology
budget for the fiscal year ended September 30, 1999 and will be paid
from the cash flow generated by the Company's 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 of unforeseen
circumstances may arise that interrupt certain areas of the Company's
business or operations. In the case such an occurrence, management
believes that it can correct the problem within a few days with no
material interruption to its business or operations.
The Company has made no formal assessment concerning the status of its
customers or suppliers regarding the Year 2000 issue. If any of the
Company's significant suppliers or customers do 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 issue.
9 of 14
<PAGE> 10
MCCLAIN INDUSTRIES, INC.
ITEM TWO. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
Overview
The following discussion should be read in conjunction with the
condensed consolidated financial statements, including the notes thereto,
appearing elsewhere in this report.
Selected financial data for the Company for the periods indicated:
<TABLE>
<CAPTION>
(Unaudited) (Unaudited)
Three Months Ended Nine Months Ended
June 30, March 31,
1999 1998 1999 1998
-------------------------------- ---------------------------------
<S> <C> <C> <C> <C>
Net Sales $42,932,485 $33,441,088 $101,946,172 $80,681,338
Net Income 1,561,339 1,060,453 3,064,476 1,729,890
Net Earnings Per Common
And Common Equivalent
Share $ .33 .07 $ .65 $ .37
</TABLE>
<TABLE>
<CAPTION>
(Unaudited)
As of As of
June 30, September 30,
1999 1998
--------------- --------------
<S> <C> <C>
Working Capital $ 47,888,311 $ 41,919,687
Total Assets 121,561,575 100,246,967
Long-Term Debt 48,476,019 42,530,105
Stockholder's Investment 29,758,518 26,835,306
Weighted Average Number
Of Common and Common Equivalent
Shares Outstanding 4,669,552 4,684,439
Current Ratio 2.21:1 2:57:1
Long-Term Debt to Equity
Stockholders' Investment 1.63:1 1.59:1
</TABLE>
10 of 14
<PAGE> 11
MCCLAIN INDUSTRIES, INC.
The following table presents, as a percentage of net sales, certain selected
financial data for the Company for the periods indicated:
<TABLE>
<CAPTION>
(Unaudited) (Unaudited)
Three Months Ended Nine Months Ended
June 30, June 30,
1999 1998 1999 1998
---------------------- -----------------------
<S> <C> <C> <C> <C>
Net Sales 100.00% 100.00% 100.00% 100.00%
Cost of Sales 82.10 82.20 82.07 81.78
------ ------ ------ ------
Gross Profit 17.90 17.80 17.93 18.22
Selling, General &
Administrative Expenses 10.91 10.61 11.79 12.50
------ ------ ------ ------
Operating Income 6.99 7.19 6.14 5.72
Other Expenses (1.48) (2.37) (1.58) (2.47)
------ ------ ------ ------
Income before Income Taxes 5.51 4.82 4.56 3.25
Provision for Income Taxes (1.87) (1.65) (1.55) (1.11)
------ ------ ------ ------
Net Income 3.64% 3.17% 3.01% 2.14%
------ ------ ------ ------
</TABLE>
11 of 14
<PAGE> 12
MCCLAIN INDUSTRIES, INC.
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
Net sales increased 28.4% to $42.9 million for the quarter ended June
30, 1999 (Quarter 1999) from $33.4 million for the quarter ended June 30, 1998
(Quarter 1998). The increase was due primarily to strong sales by the Company's
McClain E-Z Pack and McClain Truck divisions. Sales for McClain E-Z Pack
increased 65.0% or $3.7 million for the Quarter 1999 over the Quarter 1998.
While McClain Truck sales increased 23.8% or $1.3 million during the Quarter
1999 compared to the Quarter 1998. Sales of the Company's other product lines
were flat for the Quarter 1999 compared to the Quarter 1998. The sales of the
McClain Truck division accounted for 17.4% of the Company's sales for the
Quarter 1999 compared to 17.2% of the Company's sales for the Quarter 1998.
Cost of goods sold decreased to 82.1% for the Quarter 1999 from 82.2%
for the Quarter 1998. The gross profit margin on manufactured products decreased
to 20.0% for the Quarter 1999 compared to 20.8% for the Quarter 1998. This
decrease resulted primarily from the recognition of a credit of approximately
$.4 from the State of Ohio's workers' compensation fund in the Quarter 1998. The
gross profit margin for the McClain Truck division increased to 8.1% for the
Quarter 1999 from 3.6% for the Quarter 1998.
Selling, General & Administrative Expenses increased slightly to 10.91%
of net sales for the Quarter 1999 from 10.61% of net sales for the Quarter 1998.
Net sales increased 26.4% to $101.9 million for the nine months ended
June 30, 1999 (nine months 1999) from $80.7 million for the nine months ended
June 30, 1998 (nine months 1998). The increase was due primarily to strong sales
by the Company's McClain E-Z Pack and McClain Truck divisions. Sales for McClain
E-Z Pack increased 55.6% or $9.5 million for the nine months 1999 over the nine
months 1998, while McClain Truck sales increased 94.1% or $9.2 million during
the nine months 1999 compared to the nine months 1998. Sales of the Company's
other product lines were flat for the nine months 1999 compared to the nine
months 1998. The sales of the McClain truck division accounted for 18.7% of the
Company's sales for the nine months 1999 compared to 12.2% of the Company's
sales for the nine months 1998.
12 of 14
<PAGE> 13
Cost of goods sold increased to 82.1% for the nine months 1999 from
81.8% for the nine months 1998 due primarily to the higher percentage of truck
sales discussed previously. The gross profit margin on manufactured products
increased to 20.5% for the nine months 1999 compared to 20.2% for the nine
months 1998. This increase is the result of reduced steel prices and increased
production, providing overhead reductions at certain of the Company's
manufacturing facilities. The gross profit margin for the McClain Truck division
increased to 7.0% for the nine months 1999 from 4.1% for the nine months 1998.
Selling, General & Administrative Expenses decreased to 11.79% of net
sales for the nine months 1999 from 12.5% of net sales for the nine months 1998
as a result of the increased sales volume and the continued restructuring of
certain administrative processes.
The Inventory has increased to $58.3 million at June 30, 1999 from
$38.9 million at September 30, 1998. Approximately $23.0 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 a market 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) that it believes is currently expanding.
The Company had working capital of $47.9 million at June 30, 1999
compared to $41.9 million at September 30, 1998. The ratio of current assets to
current liabilities was 2.21:1 at June 30, 1999 and 2.57:1 at September 30,
1998. The Company's cash and cash equivalents totaled $2.9 million at June 30,
1999. Cash flows used by operations were $4.6 million for the nine months ended
June 30, 1999, primarily due to the increased inventory dedicated to the
Company's truck program as discussed previously.
On July 9, 1999 the Company revised its debt agreement with its
principal lender that expanded its existing line of credit to $35.0 million, its
term debt to $18.5 million and the line of credit for its leasing subsidiary to
$15.0 million. This new agreement provides additional working capital for the
inventory expansion previously discussed and the Company's growing leasing
program. The Company was in violation of two of its debt covenants at June 30,
1999. The Bank has issued a waiver of its rights related to these covenant
violations.
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<PAGE> 14
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
McCLAIN INDUSTRIES, INC.
Date: August 13, 1999 By: Kenneth D. McClain
----------------------------- ------------------------------
Kenneth D. McClain, President
Date: August 13, 1999 By: Mark S. Mikelait
----------------------------- ------------------------------
Mark S. Mikelait, Treasurer
14 of 14
<PAGE> 15
INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION
- ----------- -----------
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-START> APR-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 2,859,200
<SECURITIES> 0
<RECEIVABLES> 21,497,600
<ALLOWANCES> 0
<INVENTORY> 58,344,272
<CURRENT-ASSETS> 87,373,012
<PP&E> 45,322,878
<DEPRECIATION> 20,859,569
<TOTAL-ASSETS> 121,561,575
<CURRENT-LIABILITIES> 39,484,701
<BONDS> 0
0
0
<COMMON> 4,856,545
<OTHER-SE> 24,901,973
<TOTAL-LIABILITY-AND-EQUITY> 121,561,575
<SALES> 101,946,172
<TOTAL-REVENUES> 101,946,172
<CGS> 83,666,479
<TOTAL-COSTS> 83,666,479
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,654,269
<INCOME-PRETAX> 4,643,476
<INCOME-TAX> 1,579,000
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,064,476
<EPS-BASIC> .65
<EPS-DILUTED> .65
</TABLE>
