10-Q 1 k67581e10-q.txt QUARTERLY REPORT - PERIOD ENDED DECEMBER 31, 2001 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 December 31, 2001 [ ] 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 (586) 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 February 6, 2002. Common Stock, No Par Value 4,534,206 -------------------------------------------------------------------------------- Class Number of Shares 1 of 13 PART I. FINANCIAL INFORMATION Item 1. Financial Statements MCCLAIN INDUSTRIES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS

See notes to condensed consolidated financial statements 2 of 13 MCCLAIN INDUSTRIES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS UNAUDITED

See notes to condensed consolidated financial statements 3 of 13 MCCLAIN INDUSTRIES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS UNAUDITED

See notes to condensed consolidated financial statements 4 of 13 MCCLAIN INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) THREE MONTHS ENDED DECEMBER 31, 2001 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 period ended December 31, 2001 are not necessarily indicative of the results that may be expected for the year ending September 30, 2002. 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, 2001. 2. Inventories Inventories at December 31, 2001 and September 30, 2001 are summarized as follows:

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 December 31, 2001 and 2000 options to purchase 155,331 and 146,983 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. 5 of 13 MCCLAIN INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) THREE MONTHS ENDED DECEMBER 31, 2001 4. Depreciation For the three months ended December 31, 2001 and 2000, depreciation charges were $691,565 and $698,805, respectively. Accumulated depreciation totaled $26,076,890 and $25,353,719 at December 31, 2001 and September 30, 2001, 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. 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 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 December 31, 2001. Nevertheless, it is not possible to predict the ultimate outcome of any product liability claim, and any such claim not fully covered by insurance, as well as adverse publicity from a product claim, could have a material adverse effect on the Company. 6 of 13 MCCLAIN INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) THREE MONTHS ENDED DECEMBER 31, 2001 Environmental Matters The Company's operations are subject to extensive federal, state and local regulation under environmental laws and regulations concerning, among other things, emissions into the air, discharges into the waters and the generation, handling, storage, transportation, treatment and disposal of waste and other materials. Inherent in manufacturing operations and in owning real estate is the risk of environmental liabilities as a result of both current and past operations, which cannot be predicted with certainty. The Company has incurred and will continue to incur costs, on an ongoing basis, associated with environmental regulatory compliance in its business. Labor Union Matters Certain of the Company's hourly employees are represented by various labor unions pursuant to collective bargaining agreements which expire between September 2002 and June 2003. In 1995, a local union filed unfair labor practices against the Company's Macon, Georgia plant, which were subsequently upheld by the National Labor Relations Board (NLRB) and the U.S. Court of Appeals. The local union filed additional unfair labor practices in 1996. The NLRB seeks back pay, reinstatement and an order requiring transfer of work. The Company is currently negotiating with the NLRB in an effort to reach a settlement of all of these matters. There can be no assurance that these claims will be settled or that the amounts awarded to the union will not have a material adverse impact on the Company. 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. 6. Segment Information The Company operates in three principal operating segments 1) Manufactured Equipment, 2) Truck Chassis Sales, and 3) Leasing Operations. The accounting policies of the reportable segments are the same as those described in Note 1. Management evaluates the performance of its operating segments separately to individually monitor the different factors affecting performance. The Company measures the performance of its operating segments based on net revenue and operating income. Income taxes are managed on a Company-wide basis. Segment performance is also evaluated based on profit or loss before income taxes. 7 of 13 MCCLAIN INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) THREE MONTHS ENDED DECEMBER 31, 2001 Information regarding the Company's operating segments follows:

8 of 13 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:

9 of 13 MCCLAIN INDUSTRIES, INC. The following table presents, as a percentage of net sales, certain selected financial data for the Company for the periods indicated:

10 of 13 MCCLAIN INDUSTRIES, INC. DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION Net sales decreased 4.7% to $20.1 million for the quarter ended December 31, 2001 (Quarter 2001) from $21.1 million for the quarter ended December 31, 2000 (Quarter 2000). The decrease was due primarily to reduced truck sales and the continued limited capital expenditures by the national hauling companies resulting from the continuing difficult economic environment. McClain E-Z Pack's sales increased 5.4% or $0.7 million during the Quarter 2001 compared to the Quarter 2000 while McClain Truck sales decreased 50.4% or $2.0 million during the Quarter 2001 compared to the Quarter 2000. Sales of the Company's dump body products decreased by 4.6% or $0.13 million for the Quarter 2001 compared to the Quarter 2000 due to the continued slump and excess production capacity in the dump body markets. The sales of the McClain Truck division accounted for 9.8% of the Company's sales for the Quarter 2001 compared to 18.8% of the Company's sales for the Quarter 2000. Cost of goods sold decreased to 84.79% for the Quarter 2001 from 85.02% for the Quarter 2000. The gross profit margin on manufactured products decreased to 16.7% for the Quarter 2001 compared to 20.3% for the Quarter 2000 due to increased discounting related to the slow economy. McClain Truck had a gross loss of 1.11% for the Quarter 2001 compared to a gross loss of 2.96% for the Quarter 2000 primarily as a result of the liquidation of certain stale chassis from inventory. Selling, General & Administrative Expenses decreased to 15.54% of net sales for the Quarter 2001 from 19.38% of net sales for the Quarter 2000 as the Company continued to bring operating costs in line with the current sales volume. The Company had a working capital deficit of $13.2 million at December 31, 2001 compared to $12.4 million at September 30, 2001. The ratio of current assets to current liabilities was 0.81:1 at December 31, 2001 and 0.84:1 at September 30, 2001. The Company's cash and cash equivalents totaled $0.5 million at December 31, 2001. Cash flows provided by operations were $4.4 million for the three months ended December 31, 2001. The Company's debt agreements contain certain restrictive covenants that require the Company to, among other things, meet certain net worth and working capital requirements along with maintaining various financial ratios. As the result of non compliance with certain of the financial covenants, the Company entered into a forbearance agreement with its principal lending institution in June of 2001 and expiring August 31, 2001. This agreement was extended to October 31, 2001 and further extended through January 31, 2002. Under the most recent amended and extended forbearance agreement, the line of credit is capped at $22 million, effective December 4, 2001, interest will accrue at the default rate of prime plus 2 1/2%, the leasing credit limit is reduced to the lesser of $19 million or the borrowing base, as defined, and the Company has been placed under a dominion of funds arrangement. Accordingly, the debt related to these 11 of 13 agreements has been shown as a current liability. Management's plans to resolve this matter include, exploring other financing options while continuing to negotiate with its principal lender to extend the forbearance period or amend its current agreements to among other things reset those covenants that are currently out of compliance and extend the maturity dates on certain of its revolving credit agreements, continuing to evaluate the need for additional personnel reductions, analyzing all plant operations and product lines to determine the viability of each facility, and continuing inventory reductions to match forecasted operating levels. While management believes it will be successful in its negotiations with it principal lender or in obtaining an alternative financing source, that outcome is not certain. If either of these options are ultimately unavailable to the Company and the principal lender exercises it right to accelerate the repayment of the outstanding debt, the Company would be unable to pay the amount outstanding. The revolving credit agreements expire in May 2002. Management believes, that if its principal lender extends the forbearance period, the negotiations discussed above are successful or the Company secures an alternative financing source, that the Company's cash flow, together with the credit available to it under existing debt facilities, will provide it with adequate cash for its working capital needs for the next 12 months (For further information on the Company's debt agreements, 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, 2001). If these options are ultimately unavailable to the Company and the principal lender exercises it right to accelerate the repayment of the outstanding debt, the Company would be unable to pay the amount outstanding. 12 of 13 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: February 6, 2002 By: /s/ Kenneth D. McClain ------------------------------- ------------------------------ Kenneth D. McClain, President Date: February 6, 2002 By: /s/ Mark S. Mikelait ------------------------------- ------------------------------ Mark S. Mikelait, Treasurer 13 of 13

MCCLAIN INDUSTRIES INC 10-Q