10-Q 1 k62083e10-q.txt FORM 10-Q FOR PERIOD ENDING MARCH 31, 2001 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 March 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 (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 May 4, 2001. Common Stock, No Par Value 4,508,196 ------------------------------------------------------------------------------- Class Number of Shares 1 of 16 2 PART I. FINANCIAL INFORMATION Item 1. Financial Statements McCLAIN INDUSTRIES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS

ASSETS ~~DECEMBER~~March 31, ~~SEPTEMBER~~September 30, ~~2000~~2001 2000 (UNAUDITED) -------------- --------------- CURRENT ASSETS Cash and cash equivalents $ 1,~~512~~735,~~164~~798 $ 1,401,810 Accounts receivable, (Net) 1115,~~438~~624,~~706~~495 20,292,647 Inventories 4846,~~624~~854,~~577~~358 52,031,112 Net investment in sales-type leases, current portion 7,800,000 7,500,000 Prepaid expenses 1,~~604~~311,~~519~~500 238,404 Refundable federal and state income taxes 1,~~228~~918,~~717~~862 587,612 ------------ ------------ TOTAL CURRENT ASSETS 7275,~~208~~945,~~683~~013 82,051,585 ------------ ------------ PROPERTY, PLANT AND EQUIPMENT, NET 2221,~~623~~938,~~193~~118 23,298,832 ------------ ------------ NET INVESTMENT IN SALES-TYPE LEASES, NET OF CURRENT PORTION 1715,~~334~~159,~~261~~606 16,486,444 ------------ ------------ OTHER ASSETS 1,~~810~~715,~~688~~219 1,848,052 ------------ ------------ TOTAL OTHER ASSETS ~~113~~114,~~976~~057,~~825~~956 123,684,913 ============ ============ LIABILITIES AND STOCKHOLDERS' INVESTMENT CURRENT LIABILITIES ~~Accounts payable~~ $13 12,~~439~~067,~~771~~790 $ 14,523,573 Accounts payable 66,639,030 4,200,000 Current portion of long-term debt 644,~~012~~521,~~777~~506 43,~~200~~740,~~000~~452 Accrued expenses 4------------ ------------ 83,~~347~~928,~~776~~326 322,~~740~~464,~~452~~025 TOTAL CURRENT LIABILITIES ~~81,800,324~~0 2267,~~464~~476,~~025~~117 Long-term debt, net of current portion ~~0 67~~940,~~476,117~~215 ~~Product liability 969,155~~ 1,182,315 ~~Deferred~~Product ~~income~~liability ~~taxes~~ 2,355,000 2,355,000 ~~TOTAL~~Deferred ~~LIABILITIES~~income 85taxes ------------ ------------ 87,~~124~~223,~~479~~541 93,477,457 ~~STOCKHOLDERS'~~TOTAL ~~INVESTMENT~~LIABILITIES 28------------ ------------ 27,~~852~~534,~~346~~415 30,207,456 ~~TOTAL LIABILITIES AND~~ STOCKHOLDERS' INVESTMENT ------------ ------------ $~~113~~114,~~976~~057,~~825~~956 $123,684,913 TOTAL LIABILITIES AND STOCKHOLDERS' INVESTMENT ============ ============

See notes to condensed consolidated financial statements 2 of 16 3 MCCLAIN INDUSTRIES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS UNAUDITED

THREE MONTHS ENDED ~~DECEMBER~~SIX MONTHS ENDED MARCH 31, MARCH 31, ------------------------------ ------------------------------ 2001 2000 ~~1999~~2001 2000 -------------- -------------- -------------- -------------- Net sales $21 24,~~087~~748,~~686~~635 $29 38,~~592~~334,~~618~~080 $ 45,836,321 $ 67,926,698 Cost of sales 1720,~~928~~773,~~298~~019 2431,~~005~~809,~~434~~115 38,701,317 55,814,549 Inventory writedown 700,000 0 700,000 0 ------------ ------------ ------------ ------------ GROSS PROFIT 3,~~159~~275,~~387~~616 56,~~587~~524,~~184~~965 6,435,004 12,112,149 Selling, general and administrative expenses 4,~~086~~387,~~270~~360 34,~~929~~251,~~930~~512 8,473,630 8,181,442 Restructuring charge 1,100,000 0 1,100,000 0 ------------ ------------ ------------ ------------ INCOME (LOSS) FROM OPERATIONS (~~926~~1,~~883~~511,744) 12,~~657~~273,~~254~~453 (2,438,626) 3,930,707 ------------ ------------ ------------ ------------ OTHER INCOME (EXPENSE) Interest expense (1,~~572~~278,~~364~~383) (1,~~258~~435,~~254~~795) (2,850,747) (2,694,049) Interest income ~~790~~848,~~032~~589 ~~468~~526,~~333~~588 1,638,621 994,921 Other, net 8(69,~~350~~388) (~~142~~153,~~063~~632) (61,038) (295,695) ------------ ------------ ------------ ------------ OTHER EXPENSE - NET (~~773~~499,~~982~~182) (~~931~~1,~~984~~062,839) (1,273,164) (1,994,823) ------------ ------------ ------------ ------------ INCOME (LOSS) BEFORE INCOME TAXES (2,010,926) 1,~~700~~210,~~865~~614 (3,711,790) ~~725~~1,~~270~~935,884 Income taxes (benefit) (~~578~~684,000) ~~247~~411,000 (1,262,000) 658,000 ------------ ------------ ------------ ------------ NET INCOME (LOSS) ($ 1,~~122~~326,~~865~~926) $~~478~~ 799,~~270~~614 ($ 2,449,790) $ 1,277,884 ============ ============ ============ ============ Net income (loss) per share: Basic ($ 0.2529) $ 0.1017 ($ 0.54) $ 0.28 ============ ============ ============ ============ Assuming dilution ($ 0.2529) $ 0.1017 ($ 0.54) $ 0.28 ============ ============ ============ ============

See notes to condensed consolidated financial statements 3 of 16 4 McCLAIN INDUSTRIES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS UNAUDITED

~~THREE~~Six ~~MONTHS~~Months ~~ENDED~~Ended ~~DECEMBER~~March 31, -------------------------------- 2001 2000 ~~1999~~-------------- -------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) ($12,~~122~~449,~~865~~790) $~~561~~ 1,~~486~~277,884 Adjustments to reconcile net income (loss) to net cash provided by operating activities Depreciation and amortization ~~832~~1,~~516~~665,972 ~~800~~1,~~753~~691,535 Common stock issued to directors for services 817,~~993~~987 016,484 Net changes in operating assets and liabilities which provided (used) cash: Current assets excluding cash & cash equivalents 98,~~612~~471,~~151~~810 1,~~746~~292,~~712~~436 Other assets (1,~~244~~192,~~163)~~251 (~~306~~1,~~331~~491,697) Accounts payable (12,~~083~~455,~~802~~783) (21,~~557~~879,~~315~~792) Accrued expenses ~~607~~781,~~324~~054 ~~243~~1,~~404~~119,176 Federal and state income taxes ~~641~~(1,~~105~~331,250) (~~513~~1,~~994~~398,377) ----------- ----------- NET CASH ~~(USED)~~ PROVIDED BY OPERATING ACTIVITIES 85,~~251~~892,~~258~~251 ~~(25~~627,~~285)~~649 ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of plant and equipment (2337,~~166~~838) (~~324~~926,~~870~~217) Payments (made on) ~~received from~~ liabilities assumed upon the Galion acquisition (~~213~~242,~~160~~100) ~~721~~(317,~~409~~749) ----------- ----------- NET CASH (USED IN) INVESTING ACTIVITIES (~~236~~279,~~326~~938) ~~396~~(1,~~539~~243,966) ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Principal increase (reduction) of long term debt (75,~~663~~037,~~340~~087) (1,~~570~~594,~~778)~~223 Repurchase of common stock (241,238) 0(310,630) ----------- ----------- NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES (75,~~904~~278,~~578~~325) (1,~~570~~283,~~778)~~593 ~~NET~~----------- ~~(DECREASE)~~----------- NET INCREASE IN CASH AND CASH EQUIVALENTS ~~110~~333,~~354~~988 (1667,~~199,524)~~276 ----------- ----------- Cash and cash equivalents, beginning of ~~year~~period 1,401,810 1,~~924~~908,~~006~~397 ----------- ----------- CASH AND CASH EQUIVALENTS, END OF ~~YEAR~~PERIOD $ 1,~~512~~735,~~164~~798 $~~724~~ 2,~~482~~575,673 =========== ===========

See notes to condensed consolidated financial statements 4 of 16 5 MCCLAIN INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) SIX MONTHS ENDED MARCH 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 six-month period ended March 31, 2001 are not necessarily indicative of the results that may be expected for the year ending September 30, 2001. 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, 2000. 2. Inventories Inventories at March 31, 2001 and September 30, 2000 are summarized as follows:

(Unaudited) ~~December~~March 31, ~~2000~~2001 September 30, 2000 ------------------------------------~~---------~~ Materials and Supplies $23 17,~~189~~502,~~577~~441 $ 23,918,300 Work in Process 5,~~500~~700,000 5,521,754 Finished Goods 1112,~~850~~572,~~000~~035 11,146,428 Chassis 811,~~085~~079,~~000~~882 11,444,630 ------------- ------------- $48 46,~~624~~854,~~577~~358 $ 52,031,112 ============= =============

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 periods, including a dual presentation and reconciliation of "basic" and "diluted" per share amounts. Diluted reflects the potential dilution of all common stock equivalents for the periods ended March 31, 2001 and 2000 options to purchase 146,983 and 134,684 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 16 6 MCCLAIN INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) SIX MONTHS ENDED MARCH 31, 2001 4. Depreciation For the six months ended March 31, 2001 and 2000, depreciation charges were $1,398,552 and $1,424,115, respectively. Accumulated depreciation totaled $24,696,160 and $23,259,276 at March 31, 2001 and September 30, 2000, respectively. 5. Debt 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 of March 31, 2001, the Company was not in compliance with certain of the financial covenants contained in the loan agreements with its principal lending institution and the Company has been unable to obtain a waiver from its principal lender of its right to accelerate repayment of debt arising from these covenant violations. Accordingly, the debt related to these agreements has been shown as a current liability. 6. 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. 6 of 16 7 MCCLAIN INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) SIX MONTHS ENDED MARCH 31, 2001 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 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 March 31, 2000. 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. Labor Union Matters Certain of the Company's hourly employees are represented by various labor unions pursuant to collective bargaining agreements which expire between November 2002 and June 2003. 7 of 16 8 MCCLAIN INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) SIX MONTHS ENDED MARCH 31, 2001 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. The Company continues to vigorously defend against the unfair labor practice allegations. The Company 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. The Company believes that relations with the hourly employees at McClain of Georgia are generally satisfactory. There have been no work stoppages due to labor difficulties. 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. 7. Other Matters The Company recorded a $1,100,000 charge against operations in March 2001 primarily related to the reduction of certain truck chassis to their estimated realizable value and for various severance packages for terminated employees. 8. Segment Information The Company operates in three principal operating segments 1) Manufactured Equipment, 2) Truck Chassis Sales, and 3) Leasing Operations. 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. 8 of 16 9 McCLAIN INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) THREE MONTHS ENDED MARCH 31, 2001 Information regarding the Company's operating segments follows for the three months ended March 31, 2001 and 2000 follows:

Manufacturing Truck Leasing Operations Group Operations Totals ------------------- ------------------- ------------------ ------------------- ~~2000~~ -~~---~~ 2001 Net sales $1518,~~446~~851,~~670~~958 $5,~~641~~896,~~016~~677 $0 $2124,~~087~~748,~~686~~635 Lease revenues 0 0 1,~~798~~925,~~609~~387 1,~~798~~925,~~609~~387 Operating income (loss) (1,~~090~~744,~~865~~594) (~~192~~58,~~896~~958) ~~356~~291,~~877~~808 (~~926~~1,~~883~~511,744) Interest expense, net ~~933~~662,~~386~~219 ~~250~~195,~~870~~315 ~~388~~420,~~108~~849 1,~~572~~278,~~364~~383 Income (loss) before income taxes (12,~~042~~039,~~382~~460) (~~437~~263,~~360~~274) ~~356~~291,~~877~~808 (12,~~122~~010,~~865~~926) Identifiable assets 7779,~~408~~167,~~495~~360 11,~~434~~930,~~069~~990 2522,~~134~~959,~~261~~606 ~~113~~114,~~976~~057,~~825~~956 Capital expenditures 2314,~~166~~672 0 0 2314,~~166~~672 Depreciation and amortization ~~832~~833,~~516~~456 0 0 ~~832~~833,~~516~~456 ~~1999~~2000 ~~----~~ Net sales $2228,~~848~~065,~~062~~838 $610,~~744~~268,~~556~~242 $0 $2938,~~592~~334,~~618~~080 Lease revenues 0 0 1,~~188~~450,~~257~~250 1,~~188~~450,~~257~~250 Operating income ~~(loss) 1~~2,~~360~~231,~~155~~545 60(118,~~415~~822) ~~236~~160,~~684~~730 12,~~657~~273,~~254~~453 Interest expense, net ~~615~~708,~~737~~475 ~~414~~472,~~063~~328 ~~228~~254,~~454~~992 1,~~258~~435,~~254~~795 Income ~~(loss)~~ before income taxes ~~851~~1,~~234~~643,475 (~~362~~600,~~648~~150) ~~236~~167,~~684~~289 ~~725~~1,~~270~~210,614 Identifiable assets 8284,~~595~~452,~~945~~910 2523,~~310~~150,~~013~~563 22,~~265~~421,~~667~~835 130,~~171~~025,~~625~~308 Capital expenditures ~~471~~454,~~987~~230 0 0 ~~471~~454,~~987~~230 Depreciation and amortization ~~843~~847,~~953~~582 0 0 ~~843~~847,~~953~~582

9 of 16 10 McCLAIN INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) SIX MONTHS ENDED MARCH 31, 2001 Information regarding the Company's operating segments follows for the six months ended March 31, 2001 and 2000 follows:

~~(Unaudited)~~Manufacturing ~~Three~~Truck ~~Months~~Leasing ~~Ended~~Operations ~~December~~Group ~~31,~~Operations ~~2000~~Totals ~~1999~~------------------- ------------------- ------------------ -------------------- 2001 Net ~~Sales~~sales $34,298,629 21$11,~~087~~537,~~686~~692 $0 29$45,~~592~~836,~~618~~321 ~~Net~~Lease ~~Income~~revenues 1,789,609 0 1,925,387 3,714,996 Operating income (~~Loss~~loss) (12,~~122~~835,~~865~~457) ~~478~~(251,~~270~~854) ~~Net~~648,685 ~~Earnings~~(2,438,626) Interest expense, net 1,595,605 446,185 808,957 2,850,747 Income (~~Loss~~loss) ~~Per~~before ~~Common~~income ~~Share~~taxes (~~Basic~~3,659,841) ~~and~~(700,634) ~~Diluted~~648,685 (3,711,790) Identifiable assets 79,167,360 11,930,990 22,959,606 114,057,956 Capital expenditures 37,838 0 0 37,838 Depreciation and amortization 1,665,972 0 0 1,665,972 2000 Net sales $50,913,900 $17,012,798 $0 $67,926,698 Lease revenues 0 0 2,638,507 2,638,507 Operating income (~~.25~~loss) $3,591,700 ~~.10~~(58,407) 397,414 3,930,707 Interest expense, net 1,324,212 886,391 483,446 2,694,049 Income (loss) before income taxes 2,494,709 (962,798) 403,973 1,935,884 Identifiable assets 84,452,910 23,150,563 22,421,835 130,025,308 Capital expenditures 926,217 0 0 926,217 Depreciation and amortization 1,691,535 0 0 1,691,535

10 of 16 11 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:

(Unaudited) (Unaudited) Three Months Ended Six Months Ended March 30, March 31, 2001 2000 2001 2000 ---- ---- ---- ---- Net Sales $24,748,635 $38,334,080 $45,836,321 $67,926,698 Net Income (Loss) (1,326,926) 799,614 (2,449,790) 1,277,884 Net Earnings (Loss) Per Common Share (Basic and Diluted) $ (.29) .17 $ (.54) $ .28 (Unaudited) As of As of ~~December~~March 31, September 30, ~~2000~~2001 2000 --------------~~----~~ --------------- Working Capital $ 50(7,~~221~~983,~~136~~313) $ 59,587,560 Total Assets ~~113~~114,~~976~~057,~~825~~956 123,684,913 Long-Term Debt ~~59,812,777~~0 67,476,117 ~~Stockholder~~Stockholders's Investment 2827,~~852~~534,~~346~~415 30,207,456 Common ~~Shares~~shares ~~Outstanding~~outstanding (Basic and Diluted) 4,~~504~~508,~~953~~196 4,565,661 Current Ratio 0.8891:1 3:65:1 ~~Long-Term~~Funded Debt to Equity Stockholders' Investment 2.0742:1 2.23:1

11 of 16 12 MCCLAIN INDUSTRIES, INC. The following table presents, as a percentage of net sales, certain selected financial data for the Company for the periods indicated:

(Unaudited) (Unaudited) Three Months Ended ~~December~~Six Months Ended March 31, March 31, 2001 2000 ~~1999~~2001 2000 ------------------- ------------------- Net Sales 100.00% 100.00% 100.00% 100.00% Cost of Sales 8583.0294 8182.1298 84.43 82.17 Inventory Writedown 2.83 0.00 1.53 0.00 ------ ------ ------ ------- Gross Profit 13.23 17.02 14.9804 1817.8883 Selling, General & Administrative Expenses 1917.3872 1311.2809 18.49 12.04 Restructuring charge 1.61 0.00 .087 0.00 ------ ------ ------ ------- Operating Income (Loss) (46.4010) 5.6093 (5.32) 5.79 Other Expenses (32.6702) (32.1577) (2.78) (2.94) ------ ------ ------ ------- Income (Loss) before Income Taxes (8.0712) 3.16 (8.10) 2.4585 Income (Taxes) (Benefit) (2.7476 (1.07) 2.7475 (0.97) ------ ------ ------ ------- Net Income (Loss) (5.3336)% 2.09% (5.35)% 1.6288% ~~=========================~~------ ------ ------ ------

12 of 16 13 MCCLAIN INDUSTRIES, INC. DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION Net sales decreased 36.7% to $24.7 million for the quarter ended March 31, 2001 (Quarter 2001) from $38.3 million for the quarter ended March 31, 2000 (Quarter 2000). The decrease was due primarily to slumping sales resulting from the slowdown in the manufacturing sector of the economy. McClain E-Z Pack's sales decreased 33.9% or $7.7 million during the Quarter 2001 compared to the Quarter 2000 while McClain Truck sales decreased 51.1% or $4.5 million during the Quarter 2001 compared to the Quarter 2000. These decreases were the result of the economic slowdown and limited capital expenditures by the national hauling companies. Sales of the Company's dump body products decreased by 37.1% or $2.3 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 20.6% of the Company's sales for the Quarter 2001 compared to 22.9% of the Company's sales for the Quarter 2000. Cost of goods sold increased to 86.8% for the Quarter 2001 from 83.0% for the Quarter 2000 due to the lower sales volume and a write down of the Company's chassis inventory (See Net Income Loss discussion below). The gross profit margin on manufactured products decreased to 19.8% for the Quarter 2001 compared to 22.0% for the Quarter 2000. The McClain Truck division had a gross loss of 11.87% for the Quarter 2001 compared to a gross profit of 4.5% for the Quarter 2000. Selling, General & Administrative Expenses increased to 17.72% of net sales for the Quarter 2001 from 11.09% of net sales for the Quarter 2000 due primarily the lower sales volume. The Company had a Net Loss of 5.36% of sales for the Quarter 2001 compared to a Net Income 2.09% of sales for the Quarter 2000. The loss was due primarily to reduced sales volumes throughout the Company's product lines and a $1.1 million charge taken to operations in March 2001. This charge was primarily related to the reduction of certain truck chassis to their estimated realizable value and for various severance packages for terminated employees. 13 of 16 14 Net sales decreased 33.3% to $45.8 million for the six months ended March 31, 2001 (six months 2001) from $67.9 million for the six months quarter March 31, 2000 (six months 2000). The decrease was due primarily to slumping sales resulting from the slowdown in the manufacturing sector of the economy. McClain E-Z Pack's sales decreased 32.3% or $13.3 million during the six months 2001 compared to the six months 2000 while McClain Truck sales decreased 41.1% or $5.8 million during the six months 2001 compared to the six months 2000. These decreases were the result of the continuing economic slowdown and limited capital expenditures by the national hauling companies. Sales of the Company's dump body products decreased by 32.6% or $3.3 million for the six months 2001 compared to the six months 2000 due to the continued slump and excess production capacity in the dump body markets. The sales of the McClain Truck division accounted for 27.0% of the Company's sales for the six months 2001 compared to 31.9% of the Company's sales for the six months 2000. Cost of goods sold increased to 86.0% for the six months 2001 from 82.1% for the six months 2000 due to the lower sales volume and a write down of the Company's chassis inventory (See Net Income Loss discussed below). The gross profit margin on manufactured products decreased to 20.0% for the six months 2001 compared to 22.4% for the six months 2000. The McClain Truck division had a gross loss of 7.57% for the six months 2001 compared to a gross profit of 4.5% for the Quarter 2000. Selling, General & Administrative Expenses increased to 18.5% of net sales for the six months 2001 from 12.04% of net sales for the six months 2000 as a result of the lower sales volume. The Company had a Net Loss of 5.35% of sales for the six months 2001 compared to a Net Income of 1.88% of sales for the six months 2000. The loss was due primarily to reduced sales volumes throughout the Company's product lines and a $1.1 million charge taken to operations in March 2001. This charge was primarily related to the reduction of certain truck chassis to their estimated realizable value and for various severance packages for terminated employees. The Company had negative working capital of $8.0 million at March 31, 2001 compared to positive working capital of $59.6 million at September 30, 2000 (see subsequent discussion regarding the Company's debt agreements). The ratio of current assets to current liabilities was 0.91:1 at March 31, 2001 and 3.65:1 at September 30, 2000. The Company's cash and cash equivalents totaled $1.7 million at March 31, 2001. Cash flows provided by operations were $5.9 million for the six months ended March 31, 2001. 14 of 16 15 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 of March 31, 2001, the Company was not in compliance with certain of the financial covenants contained in the loan agreements with its principal lending institution and the Company has been unable to obtain a waiver from its principal lender of its right to accelerate repayment of debt arising from these covenant violations. Accordingly, the debt related to these agreements has been shown as a current liability. The Company is currently exploring other options while it negotiates with its principal lender to 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. 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 guaranteed. 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. Management believes, that if its principal lender does not chose to accelerate its right to payment, 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, 2000). 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. 15 of 16 16 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: May 4, 2001 By: /s/ Kenneth D. McClain -------------- ------------------------------------- Kenneth D. McClain, President Date: May 4, 2001 By: /s/ Mark S. Mikelait -------------- ------------------------------------- Mark S. Mikelait, Treasurer 16 of 16

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