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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
( X ) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED]
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the year ended December 31, 1997
Commission File Number 0-2000
METALCLAD CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 95-2368719
(State or other jurisdiction of (I.R.S. Employer ID No.)
incorporation or organization)
2 Corporate Plaza, Suite 125
Newport Beach, California 92660
(Address of Principal Executive Office) (Zip Code)
Registrant's telephone number, including area code (714) 719-1234
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
None None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock -- $.10 Par Value
(Title of Class)
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 ( )
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Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. ( X )
The aggregate market value of the Common Stock held by non-affiliates
of the registrant on March 17, 1998 was approximately $36,076000, based
upon the average of the bid and asked prices of the Common Stock, as
reported on the Nasdaq Small Cap Market.
The number of shares of the Common Stock of the registrant
outstanding as of March 17, 1998 was 30,063,870.
Documents incorporated by reference:
Portions of the Company's Proxy Statement to be filed with the
Securities and Exchange Commission in connection with the Company's 1998
Annual Meeting of Stockholders are incorporated by reference into Part III
hereof.<PAGE>
PART I
All statements, other than statements of historical fact, included in
this Form 10-K, including without limitation the statements under
Management s Discussion and Analysis of Financial Condition and Results
of Operations and Business , are, or may be deemed to be, forward-
looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended (the Securities Act ), and Section 21E of the
Securities Exchange Act of 1934 (the Exchange Act ). Such forward-
l o o king statements involve assumptions, known and unknown risks,
uncertainties, and other factors which may cause the actual results,
performance or achievements of Metalclad Corporation (the Company ) to be
materially different from any future results, performance or achievements
expressed or implied by such forward-looking statements contained in this
Form 10-K. Such potential risks and uncertainties include, without
limitation, the ability to commence operations at the Company s hazardous
waste treatment sites under development, competitive pricing and other
pressures from other businesses in the Company s markets, economic
conditions generally and in the Company s primary markets, availability of
capital, cost of labor, and other risk factors detailed herein and in
other of the Company s filings with the Securities and Exchange
Commission. The forward-looking statements are made as of the date of
this Form 10-K and the Company assumes no obligation to update the
forward-looking statements or to update the reasons actual results could
d i f f er from those projected in such forward-looking statements.
Therefore, readers are cautioned not to place undue reliance on these
forward-looking statements.
ITEM 1. BUSINESS
(a) General Development of Business
Mexican Industrial Waste Treatment and Disposal Business. Since
November 1991, the Company has been actively involved in the development
of integrated industrial waste treatment and disposal facilities in
various states in the Republic of Mexico. The business is comprised of
three major components: industrial waste services, treatment and
disposal, and development.
Industrial waste services are conducted by Administracion de Residuos
Industriales, S.A. de C.V. ( ARI ). ARI s business is comprised of waste
collection, placement and servicing of parts-washing machines, recycling,
fuels blending and transportation. ARI currently operates through a
n e twork of branch offices, strategically located in Mexico City,
Guadalajara, Puebla, Tampico, Monterrey, Guanajuato, San Luis Potosi,
Veracruz and Coatzacoalcos. In addition, it operates a fuel blending and
recycling facility in Tenango and has its headquarters in Mexico City.
Treatment and disposal operations remain in the development stage,
with the Company s completed landfill and treatment facility, known as El
Confin , located in the State of San Luis Potosi unable to open and now
the subject of the Company s claim under the North American Free Trade
Agreement ( NAFTA ). See Item 3 - Legal Proceedings and Note 3 of the
Financial Statements (Item 14).
1<PAGE>
Development activities are conducted by Ecosistemas Nacionales, S.A.
de C.V. ( ECONSA ). ECONSA s primary business is the development and
permitting of industrial waste treatment and landfill facilities in
strategic locations in Mexico. It currently has several facilities under
development, with construction at one having commenced in the first
quarter of 1998.
Insulation and Asbestos Abatement Contracting. Metalclad Insulation
Corporation is one of the largest and most respected insulation and
asbestos abatement contractors on the West Coast. The Company provides
labor and material supply services to a wide range of industrial and
commercial clients. Insulation services include the installation of high
and low temperature insulation on pipe, ducts, furnaces, boilers, and
other types of industrial equipment and commercial applications. Asbestos
abatement services include removal and disposal of asbestos-containing
products in similar applications. The Company fabricates specialty items
for the insulation industry and sells insulation material and accessories
incident to its services business to its customers as well as other
contractors. A diverse list of clientele includes refineries, utilities,
c h e m i c a l / petrochemical plants, manufacturing facilities,
c o m m ercial/manufacturing installations and buildings, and various
government facilities.
Corporate Structure. The Company, incorporated originally in 1947 as
an Arizona corporation, was reincorporated in Delaware on November 24,
1993. The Company's wholly-owned United States subsidiaries include Eco-
Metalclad, Inc. ("ECO-MTLC"), a Utah corporation, Metalclad Insulation
Corporation ("MIC"), a California corporation, and Metalclad Environmental
Contractors ("MEC"), a California corporation.
The Company's Mexican subsidiaries include Ecosistemas Nacionales,
S.A. de C.V. (ECONSA), Ecosistemas del Potosi, S.A. de C.V., formerly
known as Eco Administracion, S.A. de C.V. ("ECOPSA"), Quimica Omega, S.A.
de C.V. ("QUIMICA OMEGA"), Consultoria Ambiental Total, S.A. de C.V.
("CATSA"), Confinamiento Tecnico de Residues Industriales, S.A. de C.V.
("COTERIN"), Administracion de Residuos Industriales, S.A. de C.V. (ARI)
and Ecosistemas El Llano, S.A. de C.V. ( Llano ). Each of the Mexican
subsidiaries is a corporation of variable capital (sociedad anonima de
capital variable).
Unless otherwise indicated, the term "Company" refers to Metalclad
C o rporation, its United States and Mexican subsidiaries, and its
predecessors.
The Company's principal executive offices are located at 2 Corporate
Plaza, Suite 125, Newport Beach, California 92660, United States, and its
telephone number is (714) 719-1234. MIC and MEC serve their insulation
contracting customers from their headquarters in Anaheim, California.
ECO-MTLC's offices are in Newport Beach, California, and the Company's
Mexican subsidiaries' offices are located in Mexico City, the City of San
Luis Potosi and the City of Aguascalientes.
(b) Subsequent Events
2<PAGE>
1. The Company began working on an industrial waste landfill and
hazardous waste treatment facility in the State of Aguascalientes more
than two years ago. The Company attempted to make the project a model for
cooperation between the federal, state and local units of government in
Mexico as a result of the Company s experience in San Luis Potosi and
because of the Company s knowledge of governmental sensitivity to the
potential problems of such a project. The Company s developmental team
w o r ked with governmental officials at all levels, together with
environmental organizations, non-governmental organizations and virtually
any other party that showed any kind of an interest in the project.
Company employees experienced in this area attempted to be sensitive to
every legal requirement as well as every cultural nuance. As a way of
strengthening the public profile of the project, the Company applied for
financing with Banco Nacional De Obras Y Servicios Publicos, S.N.C.
(BANOBRAS). Because Aguascalientes is a state bordering San Luis Potosi
and knowledge of the Company s negative experience in the state of San
Luis Potosi proceeded our development activities in Aguascalientes, state
and local officials were supportive of an open, transparent and mutually
supportive relationship from the beginning. The Company always believed
there would be no linkage between the fact of our claim in the NAFTA
Tribunal (which primarily targeted the former governor of San Luis Potosi)
and the development of additional projects in the Country of Mexico and,
t h e r efore, had no hesitation about moving forward with several
developmental projects there.
On February 25, 1998, the Company expected approval for long-term
financing for its Aguascalientes project from BANOBRAS. The Company
believed this based upon the fact that the Board of BANOBRAS gave
authority for this kind of financing approximately a year ago, that the
bank gave specific conceptual approval for the project more than six
months before, that the entire financial submission was complete, and
representations of bank officials given prior to the February 25, 1998
meeting of the Credit Committee of the bank.
As of the date of this filing, BANOBRAS has still not yet approved the
long-term financing for the Aguascalientes project and has indicated to
the Company that the project is still under review. Regrettably, the
Company has reason to believe that there is, indeed, linkage between the
Federal agency defending Mexico before the NAFTA Tribunal and BANOBRAS and
the Company believes that the project will either remain under review or
be ultimately rejected by the bank. Consequently, the Company has had to
reevaluate the project with a view towards finding other alternatives for
long-term financing. In addition, it was important that the Company
determine whether the hostility shown by those defending the NAFTA claim
had any possibility of having a negative impact on the future success of
the Aguascalientes project. At this writing, the Company has confirmed
that it has both the legal and political support necessary to make the
project a success. The Company also believes it will be able to obtain
the long-term financing necessary to ensure successful completion and
operation of the project. The contractor on the project has offered to
participate with the Company in construction financing in order to meet
the completion deadline of August 1998, but the Company intends to pace
the construction consistent with its own resources as it pursues long-term
project financing consistent with its overall objectives. The Company is
3<PAGE>
currently pursuing a proposal for long-term financing and if successful,
which it believes it will be, will enable an on-time completion of this
project.
2. On October 13, 1997, the Company filed its detailed memorial with
the NAFTA Tribunal, hearing the Company s claim related to its El Confin
facility. On February 17, 1998, the United Mexican States ( Mexico )
responded to the Company s claim to the Tribunal. The Company now expects
that there will be required a reply brief from the Company, a rejoinder
brief from Mexico and then a hearing prior to the final determination of
the case. It is believed that this process could take six months or more
to complete.
3. In March 1998, the Company continued its warrant exchange
program, initiated in August 1997. The exchange program involves the
exercise of currently held warrants at an exercise price of $1.25 per
share of common stock. The Company is replacing each warrant exercised
with a new warrant, expiring in five years, with an exercise price of
$1.25. The effect of this financing program reduces the exercise price of
most of the company s outstanding warrants to $1.25, effective March 20,
1998.
4. As disclosed in Item 7, Liquidity and Capital Resources, the
Company entered into a transaction in December 1997, the effect of which
was to make a secured convertible loan for approximately $1,500,000. In
order for the debt to be convertible, the agreement provided that
Metalclad stock had to trade above $1.50 for a period of 10 consecutive
days. The reason this provision was negotiated was to protect the Company
from the impact of the anti-dilution provisions of outstanding warrants
that require a ratchet effect if any subsequent equity sales are made
below the current exercise price of the warrant (the effect is to lower
the outstanding warrant exercise price to the price of the equity sale or
the existing market price of the stock, whichever is lower). At the date
of this writing, that condition has now been fulfilled and the debt is
fully convertible into equity at an exchange rate of $1.50 per share. In
addition, the note holder now has the right to 1,500,000 warrants
exercisable at $1.50.
(c) Financial Information About Industry Segments
The Company, through MIC and MEC, is engaged in insulation services,
asbestos abatement services, and insulation material sales, such
activities constituting one industry segment. The development and
operation of the industrial waste treatment business, commenced in
November 1991 through ECO-MTLC and now conducted by the Company s Mexican
subsidiaries, has been reported as a separate industry segment for 1995,
1996 and 1997. Financial information concerning the Company's business
segments is included and incorporated by reference in Part II and Part IV
of this Form 10-K.
(d) Narrative Description of Business
Introduction
4<PAGE>
Business in Mexico. Since November 1991, the Company has been
actively involved in doing business in Mexico. The Company s initial
focus was the development of facilities for the treatment, storage and
disposal of industrial hazardous waste.
In May 1994, the Company acquired QUIMICA OMEGA, a ten-year old
Mexican company engaged in the business of industrial waste collection,
recycling, blending, the production of fuel by-products for sale to the
cement kilns and disposal at licensed facilities.
In April 1996, the Company formed a joint venture in Mexico with BFI-
Mexico. The joint venture, which was named BFI-OMEGA, became effective
for accounting purposes on March 10, 1996, expanded operations in Mexico
to eight branches, all of which include collection, transportation,
treatment, and disposal of industrial wastes.
In January 1997, QUIMICA OMEGA and BFI-Mexico reached agreement for
QUIMICA OMEGA to acquire BFI-Mexico s 50% interest in the joint venture
and the Company renamed this entity Administracion de Residuos
Industriales, S.A. de C.V. ( ARI ).
With the acquisition of BFI-OMEGA, Metalclad now owns all of its
operations in Mexico, which are split into two primary divisions: (i) the
business conducted by ECONSA which involves development, ownership and
operation of landfill and treatment facilities; and (ii) the operating
activities of ARI which include primarily the collection, transportation
and treatment of certain hazardous and industrial waste, as well as the
placement and servicing of parts-washing machines.
Business in the United States. Metalclad Insulation Corporation is
one of the largest and most respected insulation and asbestos abatement
contractors on the West Coast. The Company provides labor and material
supply services to a wide range of industrial and commercial clients.
Insulation services include the installation of high and low temperature
insulation on pipe, ducts, furnaces, boilers, and other types of
industrial equipment and commercial applications. Asbestos abatement
services include removal and disposal of asbestos-containing products in
similar applications. The Company fabricates specialty items for the
insulation industry and sells insulation material and accessories incident
to its services business to its customers as well to as other contractors.
A diverse list of clientele includes refineries, utilities, chemical/
petrochemical plants, manufacturing facilities, commercial/manufacturing
installations and buildings, and various government facilities.
Mexican Business
ECONSA. ECONSA s role for the Company in Mexico is to develop
facilities for the treatment, storage, and disposal of industrial waste.
ECONSA, through subsidiaries, will own these facilities after development
is completed. All management and operation will be performed by a new
subsidiary under terms of operating agreements which will be in place for
each facility.
ECONSA, through a subsidiary, owns a completed hazardous waste
5<PAGE>
landfill and treatment facility in the State of San Luis Potosi. The
landfill is located in the remote area of La Pedrera, Guadalcazar and is
known by its trade name, El Confin . It comprises 2,200 acres of land,
has a permitted capacity of 360,000 tons of waste per year and is designed
presently to handle approximately 160,000 tons per year when fully
operational.
El Confin is presently not in operation because of political
opposition to its opening. The Company has not been able to overcome this
opposition despite repeated promises of support from the highest levels of
the Mexican government. Consequently, on October 2, 1996, the Company
filed a Notice of Intent to File Claim Under the North American Free Trade
Agreement ( NAFTA ).
Following the procedure outlined by NAFTA, the Company filed its
Notice of Claim on January 2, 1997. The Claim was filed with the
International Centre for Settlement of Investment Disputes ( ICSID ) in
Washington, D.C. On January 13, 1997, the Secretary General of ICSID
registered the Company s claim and notified both the United States and
Mexican governments of the registration.
The rules governing these kinds of claims allow each party to choose
one arbitrator with those two to choose a third. This tribunal has been
impaneled and an initial hearing was held in July 1997 to set rules for
discovery, time periods for submissions, and other administrative
processes.
On October 13, 1997, the Company filed its detailed memorial, or
claim. On February 17, 1998, Mexico filed its counter-memorial, or
response. The Company now expects that there will be required a reply
brief from the Company, a rejoinder brief from Mexico and then a hearing
prior to the final determination of the case. It is believed that this
process could take six months or more to complete.
The Company s claim is one under the category of claims identified in
NAFTA referred to as Likened to Expropriation wherein the Company,
having been denied the right to operate its constructed and permitted
facility, claims its property has therefore been, as a practical matter,
expropriated, entitling the Company to the fair market value of the
facility as damages.
Although the Company remains confident in its position, no assurances
can be given that it will be successful in this arbitration process.
ECONSA is also active in development of additional projects in
Mexico. It is presently pursuing development opportunities near the heart
of industrial Mexico. These opportunities include industrial waste
landfill facilities and hazardous waste treatment facilities which will
include neutralization, solidification and evaporation processes to handle
a variety of waste streams. These development activities include siting,
permitting, social and political support, and community awareness. The
development process typically can take up to two years to obtain the
necessary support and permitting to build a facility. The actual
construction time necessary to complete these facilities is approximately
6<PAGE>
six months. However, there can be no assurances that the Company will be
successful in these efforts.
ARI. In 1996, the Company undertook significant expansion of the ARI
operations in Mexico. Branches now exist in Mexico City, Guadalajara,
Puebla, Tampico, Monterrey, Guanajuato, San Luis Potosi, Veracruz and
Coatzacoalcos. The Company intends to expand the number of branches as
necessary to serve as collection and transportation facilities, as well as
the marketing arm for any treatment and disposal facilities opened by the
Company.
The goal of the Company is to expand the existing business of ARI to
include fully-integrated services which will be able to satisfy all of the
requirements of industrial waste producers.
By following this business plan, ARI anticipates capturing a
significant share of the newly-developing market for environmental
services in the industrial heart of Mexico. The Company has developed a
new technology for the disposing of industrial solid hazardous waste. The
material has been successfully used as an alternate fuel at two cement
plants. Steps are continually being taken to expand relationships at both
the Cruz Azul Cement Company and the Apasco Cement Company so that
additional liquid and solid fuel can be sent to their facilities.
Mexican Governmental Regulations and Permits. The Company's proposed
business in Mexico is highly regulated and is subject to Mexican
environmental law. Development of each proposed industrial waste
treatment facility cannot be commenced until the Company receives a
separate unconditional permit to construct (a "Construction Permit") from
the applicable local, state, and federal agencies of the Mexican
government. A completed facility cannot be opened until the Company has
received a permit to operate (an "Operating Permit") the facility from
such agencies.
The Secretariat of Environment, National Resources and Fishing,
( SEMARNAP ) is the Mexican federal government agency charged with
environmental policy formulation and enforcement of such policy under the
General Law of Ecological Equilibrium and Environmental Protection which
was enacted in 1988 (the "General Ecology Law"). Under the General
Ecology Law, regulations have been adopted which require, among other
things, the permit for construction and operation of facilities which
treat, store, or dispose of hazardous wastes. SEMARNAP has divided its
environmental functions between two autonomous agencies: Instituto
Nacional de Ecologia (the National Institute of Ecology or "INE"), which
is responsible for regulation and permitting, and Procuraduria Federal de
Proteccion al Ambiente (the Office of the Federal Attorney for the
Protection of the Environment or "PROFEPA"), which is responsible for
inspection, compliance, and enforcement. A Construction Permit from INE
cannot be obtained until the site for the facility has acquired zoning and
land use permits from local and state agencies and INE approves
feasibility studies, risk analysis, and environmental impact studies. The
commencement of operations of each facility is contingent upon receipt of
an Operating Permit from INE. Operation of each facility and compliance
with the regulations of INE will be monitored by PROFEPA on a continuous
7<PAGE>
basis.
Insurance. The Company's Mexican operations are covered by a general
liability insurance policy, which provides base coverage of $1,000,000 per
occurrence and in the aggregate. The Company believes that its current
insurance arrangements are adequate for the Company s current needs and
that coverage will be available at reasonable prices for anticipated
future needs.
Market. The Company has conducted a comprehensive evaluation of the
industrial waste market in Mexico. Various organizations participated in
specific aspects of the evaluation and the study included numerous direct
interviews with waste generators. The study identifies the distribution
of waste types by industry segment, estimates the quantity of hazardous
wastes generated in Mexico, identifies specific pricing structure for
current waste handling activities, and identifies existing and possible
future competitors. As a result of this study, the Company estimates that
the total industrial waste generated annually is approximately 150 million
tons, of which approximately 8 million tons are hazardous and likely to be
processed at commercial facilities. The remaining waste will most likely
be processed in-house by industry. The Company's conclusions are
consistent with reports from SEMARNAP and the United States Department of
Commerce relative to hazardous waste generated.
Each of the Company's proposed landfill facilities, with a design
capacity of 90,000 - 360,000 tons per year, will be able to process
approximately 2% of the estimated 8 million tons of hazardous waste
generated in Mexico annually.
Competition. The Company believes it will build and operate the
first fully-integrated waste treatment facility in Mexico, having the
capability to treat, store or recycle all forms of waste, operating to
international standards. Existing facilities do not typically offer
either a high level of technology or a high degree of integration with
regard to the processing of waste. As a fully-integrated industrial waste
management facility, the Company has no known, commercially active
competitors. The Company believes that it will encounter limited
competition from small companies operating in various niches of the waste
treatment industry; however, companies with substantially greater
financial, technical, marketing, and other resources than the Company may
enter the market and compete with the Company's anticipated business.
The only substantial hazardous waste disposal operation currently
operating in Mexico is a landfill located near Monterrey which is 60%-
owned by Waste Management. This landfill receives wastes from plants
throughout Mexico and has had significant growth during the last few years
as a result of the increased enforcement activities of PROFEPA. Although
this landfill will be a competitor, the Company believes that in many
cases the technologies offered at the Company's proposed facilities will
be both preferred because of the design and treatment strategies
incorporated into the Company s landfill and competitively priced as a
result of transportation cost savings. See Transportation.
Although the Company believes the hazardous waste treatment market
8<PAGE>
in Mexico is substantial and growing, to the extent potential competitors
establish facilities in Mexico and offer comparable services at lower
prices or more cost-effective waste disposal alternatives, the Company's
ability to compete effectively could be adversely affected. No such
competition is yet evident in Mexico and the impact of the Company s NAFTA
claim may slow entry of other U.S. firms evaluating Mexico.
Transportation. The Company believes that its single most
competitive short and long-term advantage in the Mexican marketplace is
due to the location of El Confin and other ARI facilities. The El Confin
site is centrally located in Mexico and situated near the intersection of
the major north/south transportation route (Highway 57) and the major
east/west transportation route (Highway 70), both of which are well-
maintained and conveniently traveled. The central location of the site
will minimize the freight element of waste-handling costs to industries
located in many of the major Mexican industrial zones. The distances from
major cities in Mexico to El Confin are approximately as follows:
San Luis Potosi 100 km (65 miles) Durango 81 km (300 miles)
Aguascalientes 203 km (125 miles) Monterrey 537 km (335 miles)
Guadalajara 348 km (215 miles) Veracruz 758 km (470 miles)
Mexico City 413 km (260 miles) Oaxaca 950 km (590 miles)
Tampico 418 km (260 miles) Chihuahua 1,050 km (650 miles)
Employees. As of December 31, 1997, the Company had a full-time
staff of approximately 165 employees working in its Mexican operations,
including 14 management personnel and 15 clerical workers.
Insulation Contracting Services
Background. The Company's insulation contracting services include
the installation of high and low temperature insulation on pipe, ducts,
furnaces, boilers, and various other types of equipment. Insulation
services are provided for new construction and maintenance of existing
facilities. The Company is a licensed general contractor and typically
provides project management, labor, tools, equipment and materials
necessary to complete the installation.
The Company usually performs substantially all of the work required
to complete its contracts, generally subcontracting to others the
scaffolding and painting. In a typical insulation contract, the Company
obtains plans and specifications prepared by the owner of a facility or
its agent. In projects where the customer is the owner of the facility,
the Company acts as the general contractor. The Company also works as a
subcontractor for other general contractors. Insulation contracts for new
construction may require one or more years to complete. Maintenance
contracts typically extend over a period of one or more years.
The Company's insulation contracting business has historically
included, among other things, maintenance, removal, repair, and re-
installation of insulation on existing facilities and equipment. These
activities included asbestos removal services in most cases in which the
insulation at such facilities has included asbestos-containing material
("ACM").
9<PAGE>
The Company removes all forms of ACM after first treating the
asbestos with water and a wetting agent to minimize fiber release. Dry
removal is conducted in special cases where wetting is not feasible,
provided Environmental Protection Agency ("EPA") approval is obtained.
The Company's workers also remove pipe insulation by cutting the wrapping
into sections in an enclosed containment area or utilizing special
" g lovebags" which provide containment around the section of pipe
insulation being removed. In some instances, the Company performs
asbestos removal and provides related re-insulation contracting services,
including insulation material sales; in other cases, the Company performs
only asbestos removal services. The Company believes that the removal of
ACM provides the best and most cost-effective solution for most asbestos
abatement projects.
Insulation Contracts. The Company obtains contracts, which
ordinarily fall within one of the types set forth below, on the basis of
either competitive bids or direct negotiations:
Cost-plus. These contracts, sometimes referred to as "time and
materials" contracts, generally provide for reimbursement of costs
incurred by the Company and the payment of a fee equal to a percentage of
the cost of construction. They generally provide for monthly payments
covering both reimbursement for costs incurred to date and a portion of
the fee based upon the amount of work performed and are customarily not
subject to retention of fees or costs.
Fixed-price. These contracts generally require the Company to
perform all work for an agreed upon price, often by a specified date.
Such contracts usually provide for increases in the contract price if the
Company's construction costs increase due to changes in or delays of the
project initiated or caused by the customer or owner or by escalating
project labor rates. However, absent causes resulting in increases in
contract prices, the Company takes certain risks associated with its fixed
prices. Under these types of contracts the Company receives periodic
payments based on the work performed to date, less certain retentions.
The amounts retained are held by the customer pending either satisfactory
completion of the Company's work or in some cases, satisfactory completion
of the entire project.
In accordance with industry practice, most of the Company's contracts
are subject to termination or modification by the customer, with provision
for the recovery of costs incurred and the payment to the Company of a
proportionate part of its fees, in the case of a cost-plus contract, and
overhead and profit, in the case of a fixed price contract. At various
times, contracts which the Company has with its customers have been
terminated or modified. However, such termination or modification occurs
in the regular course of the Company's business due to changes in the work
to be performed as determined by the customer. No single termination or
modification has had or is expected to have a material adverse impact on
the Company's business.
Operations and Employee Safety. All contract work is performed by
trained Company personnel and supervised by project managers trained and
experienced in construction and asbestos abatement. Each employee
10<PAGE>
involved in asbestos abatement must complete a general training and safety
program conducted by the Company. Training topics include approved work
procedures, instruction on protective equipment and personal safety,
dangers of asbestos, methods for controlling friable asbestos and asbestos
transportation and handling procedures. In addition, all full-time
employees engaged in asbestos abatement activities are required to attend
a minimum four-day course approved by EPA and the Occupational Safety and
Health Administration ("OSHA") and all supervisors of abatement projects
are required to attend a nine-hour first aid/CPR/safety course and an
eight-hour EPA/AHERA refresher course annually. Six of the Company's
full-time employees and 43 hourly employees have been trained and
certified as "competent individuals" under EPA regulations relating to the
training of asbestos abatement workers. All employees are issued detailed
training materials and the Company typically conducts a job safety
analysis in the job bidding stage.
The Company requires the use of protective equipment and sponsors
periodic medical examination of all field employees. During removal
procedures, ACM is generally wetted to minimize fiber release and
filtration devices are used to reduce contamination levels. Air
monitoring to determine asbestos fiber contamination levels is conducted
on all abatement projects involving the removal of friable asbestos. The
Company has a comprehensive policy and procedure manual which covers all
a c t i v i ties of an asbestos abatement project and the specific
responsibilities and implementation of Company procedures and policies to
be followed on each project. The manual is reviewed periodically by
management and updated to insure compliance with federal, state, and local
r e gulations, to include information from in-house project reviews
findings, and to include updated information regarding industry practices.
To separate its responsibilities and to limit liability, the Company
utilizes third party, unaffiliated laboratories for asbestos sampling
analysis and licensed independent waste haulers for the transportation and
disposal of asbestos waste from its projects.
Materials and Supplies. The Company purchases its insulating and
asbestos abatement materials and supplies from a number of national
manufacturers and the Company is not dependent on any one source for these
materials and accessories used in its insulation services and asbestos
abatement business.
Marketing and Sales
Insulation Contracting Services. The Company currently obtains most
of its insulation contracting business from existing customers and
referrals by customers, engineers, architects, and construction firms.
Additional business is obtained by referrals obtained through labor,
industry, and trade association affiliations.
Projects are also awarded through competitive bidding although major
companies frequently rely on selected bidders chosen by them based on a
variety of criteria such as adequate capitalization, bonding capability,
insurance carried, and experience. The Company is frequently invited in
this manner to bid on projects and obtains a significant amount of its
contracts through the competitive bidding process. The Company believes
11<PAGE>
that its bids are competitively priced and anticipates that in the future
its bids will continue to be competitively priced with bids submitted by
others.
The Company's marketing and sales effort emphasizes its experience,
reputation for timely performance, and knowledge of the insulation and
asbestos abatement industry. The Company is a member of the Western
Insulation Contractors Association, the National Insulation Contractors
Association, and various local business associations.
Curtom-Metalclad Joint Venture. In 1989, the Company entered into a
j o i nt venture with a minority service firm which qualifies for
preferential contract bidding because of minority status, with the Company
owning a 49% interest in this joint venture. The joint venture, known as
"Curtom-Metalclad," submits bids for insulation and asbestos abatement
services. When contracts are obtained by the joint venture, the Company
performs the work specified in the contract as a subcontractor to the
joint venture. The Company also receives an interest in 49% of the
profits or losses of the joint venture.
Insulation Material Sales. The current emphasis in this area is to
primarily warehouse and supply material for projects where other Company
services are provided. The warehoused material is based on economics of
bulk purchases of the most commonly used products or projected needs on
future known projects, to handle emergencies, and to supply material sales
direct to other users as available and when solicited.
Customers. The Company's insulation customers are categorized as
Industrial or Commercial. The industrial customers are predominately
public utilities (power, natural gas and water/water treatment), major oil
companies for oil refineries and petrochemical plants, chemical and food
p r ocessors, other heavy manufacturers, and engineering/construction
c o m p a n ies. The Commercial customers are primarily government
i n stallations, schools, hospitals, institutions, an array of
m a nufacturing/commercial facilities, and the General or mechanical
construction contractors. The Company anticipates that a significant
portion of its revenues in 1998 will continue to be from work performed
for Southern California Edison, ARCO, and Texaco.
Competition. Competition in the insulation contracting services
business is intense and is expected to remain intense in the foreseeable
future. Competition includes a few national and regional companies which
provide integrated services and many regional and local companies which
provide insulation and asbestos abatement specialty contracting services.
Most of the national and regional competitors providing integrated
services are well established and have substantially greater marketing,
financial, and technological resources than the Company. The regional and
local specialty contracting companies which compete with the Company
either provide one service or they provide integrated services by
subcontracting part of their services to other companies. The Company
believes that the primary competitive factors in these areas are price,
technical performance, and reliability. The Company obtains a significant
number of its insulation service contracts through the competitive bidding
process. The Company believes that its bids are competitively priced and
12<PAGE>
anticipates that in the future its bids will continue to be competitively
priced with bids submitted by others.
Insurance and Bonding. The Company's asbestos and general liability
insurance policy provides base coverage of $1,000,000 per occurrence and
e x cess liability coverage of $10,000,000. The Company's current
insulation and asbestos abatement services customers do not generally
require performance bonds. The Company believes, however, that its
current bonding arrangements are adequate for the Company's anticipated
future needs.
Government Regulation
Insulation Services and Material Sales Regulation. The Company, as a
general contractor and insulation specialty contractor, is subject to
regulation requiring it to obtain licenses from several state and
municipal agencies. Other than licensing, the Company's industrial
insulation services and material sales business is not subject to material
or significant regulation.
Asbestos Abatement Regulation. Asbestos abatement operations are
s u b ject to regulation by federal, state, and local governmental
authorities, including OSHA and the EPA. In general, OSHA regulations set
maximum asbestos fiber exposure levels applicable to employees and the EPA
regulations provide asbestos fiber emission control standards. The EPA
requires use of accredited persons for both inspection and abatement. In
addition, a number of states have promulgated regulations setting forth
such requirements as registration or licensing of asbestos abatement
contractors, training courses for workers, notification of intent to
u n dertake abatement projects and various types of approvals from
designated entities. Transportation and disposal activities are also
regulated. The Company believes that similar legislation may be adopted
in other states and in local building codes.
OSHA has promulgated regulations specifying airborne asbestos fiber
exposure standards for asbestos workers, engineering and administrative
controls, workplace practices, and medical surveillance and worker
protection requirements. OSHA's construction standards require companies
removing asbestos on construction sites to utilize specified control
methods to limit employee exposure to airborne asbestos fibers, to conduct
air monitoring, to provide decontamination units and to appropriately
supervise operations. EPA regulations restrict the use of spray applied
ACM and asbestos insulation, establish procedures for handling ACM during
demolition and renovations, and prohibit visible emissions during removal,
transportation and disposal of ACM.
The Company believes that it is substantially in compliance with all
regulations relating to its asbestos abatement operations, and currently
h a s all material government permits, licenses, qualifications and
approvals required for its operations.
Backlog. The Company's backlog for insulation services at December
3 1 , 1997, and December 31, 1996 was $5,500,000 and $4,050,000,
respectively. Backlog is calculated in terms of estimated revenues on
13<PAGE>
fixed-price and cost-plus projects in progress or for which contracts have
been executed. The Company believes that backlog as of any date is not
necessarily indicative of future revenues. The Company estimates that its
entire backlog as of December 31, 1997 will be completed during the next
twelve months. The majority of the Company's present business is on cost-
plus contracts for which backlog is estimated. The Company fulfills
product and supply orders promptly, and there is no backlog in the
material sales business.
Employees. As of December 31, 1997, the Company had a full-time
staff of 10 salaried employees, including two executive officers, project
managers/estimators, purchasing, accounting, and office staff.
As of December 31, 1997, the Company employed approximately 105
hourly employees for insulation contracting services, nearly all of whom
are members of the International Association of Heat and Frost Insulators
and Asbestos Workers ("AFL-CIO"). The Company is a party to agreements
with various local chapters of various trade unions. The number of hourly
employees employed by the Company fluctuates depending upon the number and
size of projects which the Company has under construction at any
particular time. It has been the Company's experience that hourly
employees are generally available for its projects, and the Company has
continuously employed a number of them on various projects over an
extended period of time. The Company considers its relations with its
hourly employees and the unions representing them to be good and has
experienced no major work stoppages due to strikes by such employees.
Additionally, the trade union agreements the Company is a party to also
include no strike, no work stoppage premiums.
Directors and Executive Officers of the Company
The names, ages, and positions of the Company's directors and
executive officers (including certain significant executive officers of
the Company's principal subsidiaries) are listed below:
14<PAGE>
Director or Officer
Name Age Since Current Position with the Company
-------------------------------------------------------------------------
Jose Akle Fierro 53 1997 Director
Anthony C. Dabbene 46 1996 Chief Financial Officer, Director
David Duclett 47 1989 Vice President-Marketing & Sales,
MIC/MEC
Javier Guerra Cisneros 51 1994 Director, Vice President-Mexican
Operations
Bruce H. Haglund 46 1983 Secretary-General Counsel
Grant S. Kesler 54 1991 President, Chief Executive Officer,
Director
Juan B. Morales 46 1997 Director
Donald K. Yamano 53 1997 President, Chief Executive Officer,
MIC/MEC
Jose Akle Fierro has been a Director of the Company since May 1997.
Mr. Akle has spent most of his professional career in the financial
sector, during which he worked for Citicorp for seven years. His last
position there was Investment Banking Head for Mexico. Dr. Akle has been
involved in venture capital in Mexico since 1986, as a fund manager and
investor. At present, he is the largest shareholder and President of a
telecommunications venture in Peru, a software development company in
Mexico and an investment advisory services corporation. He is on the
Board of several processed food companies and a venture capital fund. Dr.
Akle s academic background includes two engineering degrees, one in
communications in Mexico and another in systems from France. He holds a
Doctor of Engineering from the Universite De Grenoble, Grenoble, France.
Anthony C. Dabbene has been the Chief Financial Officer for the
Company since January 1996 and a Director since May 1997. Prior to his
employment with the Company, Mr. Dabbene was employed by LG & E Energy
Corp. for 10 years, including service as Vice President and Controller to
the Energy Services Group. From 1973 to 1985, he was employed by EBASCO
Services Incorporated, where he was Manager - Finance and Administration
for the Western region from 1981 to 1985. He received a B.B.A. degree in
Accounting from St. Francis College and an M.B.A. degree from Long Island
University, New York.
David Duclett has been employed by the Company since 1977 and has
been Vice President of Marketing and Sales of Metalclad Insulation and
Metalclad Environmental since 1989. Mr. Duclett s main responsibilities
are to implement and achieve the marketing strategies and objectives of
the Company while establishing and building long-term client
relationships. He has negotiated and managed contracts for both
industrial and commercial work, with concentration on refinery and utility
maintenance work and hi-rise commercial buildings. Mr. Duclett received a
B.A. degree in communications from California State University, Fullerton.
Javier Guerra Cisneros has been a Director of the Company since May
1994 and the Director General of QUIMICA OMEGA since its formation in
1981. He also founded and was the President of the Institute on
15<PAGE>
Industrial Hazardous Waste, a non-profit organization that promotes public
awareness of the Mexican environmental regulations through its publication
DIP. Since 1990, Mr. Guerra, through QUIMICA OMEGA, has been one of the
pioneers in the implementation in Mexico of the program to use hazardous
wastes as supplemental fuel in cement kilns. He has more than 10 years of
experience on environmental regulations and handling of hazardous wastes
in Mexico and the United States as well as in the compliance of Mexican
environmental legislation. He has participated in multiple conferences on
ecological matters, including seminars sponsored by the EPA and SEDESOL.
Mr. Guerra is a business administration graduate from the Universidad
Iberoamericana in Mexico City, with studies in international marketing at
the St. Gallen University in Switzerland. He has also made specialized
engineering studies in the areas of combustion equipment and chemicals.
Bruce H. Haglund has served as Secretary-General Counsel of the
Company since 1983 and served as a Director of the Company from 1983 to
July 1991. Since April 1994, Mr. Haglund has been a principal in the law
firm of Gibson, Haglund & Johnson. From February 1991 to April 1994, Mr.
Haglund was a principal in the law firm of Phillips, Haglund, Haddan &
Jeffers. From 1984 to February 1991, he was a partner in the law firm of
Gibson & Haglund. Mr. Haglund is also a member of the Board of Directors
of GB Foods Corporation, the Secretary and a member of the Board of
Directors of Aviation Distributors, Inc., and the Secretary of Renaissance
Golf Products, Inc., companies whose stock is publicly traded. He is a
graduate of the University of Utah College of Law.
Grant S. Kesler has served as a Director of the Company since
February 1991 and has been Chief Executive Officer since May 1991. From
1982 to May 1991, he was employed by Paradigm Securities, Inc., a company
he formed in 1982. In 1975, he was General Counsel to Development
Associates, a real estate development firm. Earlier, he was engaged in
the private practice of law, served as an assistant attorney general for
the State of Utah, and served as an intern to the chief justice of the
Utah Supreme Court. Mr. Kesler is a graduate of the University of Utah
College of Law and a member of the Utah State Bar Association.
Juan B. Morales, Jr. has been a Director of the Company since May
1997. Mr. Morales spent 4 years working in various divisions of Alfa
Group from 1976 through 1980. He represented Ferrostaal and Thyssen from
Germany, negotiating for both government and private industry until 1980.
Mr. Morales then entered the private sector, owning and directing his own
steel scrap processing and wine distribution businesses in Mexico. Mr.
Morales academic background includes a BS in economics, from the Wharton
School of Business and an MBA from IMEDE in Laussane, Switzerland.
Donald K. Yamano has been the President and Chief Executive Officer
for Metalclad Insulation since June, 1997. His prior experience
encompasses Engineering, Design and Construction operational management
p o s i t i ons in the power, petrochemical, natural gas and
environmental/process industries. The last 15 years has been in Senior
Management for LG&E Power, serving as President and CEO of LG&E Power
Engineers and Constructors, Inc. since 1992. He received a BS degree in
Mechanical Engineering from California State Polytechnic University and is
a Registered Licensed Professional Engineer in California and Texas.
16<PAGE>
ITEM 2. PROPERTIES
The Company leases space for its offices and warehouse facilities
under leases of varying terms at rentals aggregating approximately $15,500
per month. The Company's executive offices are located in Newport Beach,
California which consists of approximately 3,000 square feet leased at a
current rate of $5,572 per month. The Newport Beach lease expires in
September 2002. Facilities in Anaheim, California house the Southern
California industrial insulation services and the insulation material
sales operations. The Anaheim facility consists of 26,000 square feet of
office and warehouse space which is leased at the current rate of $8,800
per month. The Anaheim lease expires in April, 1999.
The Company owns approximately 145 acres of unimproved land located
in Tulare County, California which is not related to the business of the
Company and is being held for sale.
ECOPSA owns an approximately 92-hectare parcel (approximately 227
acres) of land in Santa Maria del Rio near San Luis Potosi, Mexico.
COTERIN owns approximately 2,200 acres of land near La Pedrera in the
Mexican state of San Luis Potosi on which El Confin is located.
QUIMICA OMEGA owns approximately 1.25 acres of land in Tenango del
Valle, Mexico and a 6,940 square foot lot in Tenango del Valle on which an
office building and a manufacturing plant are located.
ECONSA and ARI maintain their corporate offices in Bosques de las
L o m as, in the Federal District of Mexico. They jointly lease
approximately 2,200 square feet at the rate of $2,800 per month. Their
lease is for one year, expiring in October 1998.
ARI also maintains its branch offices in various cities throughout
Mexico. All leases aggregate to a total of $10,000 per month and are for
a period of one year.
ITEM 3. LEGAL PROCEEDINGS
Given the Company s long history in the insulation business and in
the sale of insulation materials, it is subject to various claims related
to prior asbestos related business as well as its current business. The
number of these claims is over 100, the Company believes it has adequate
insurance in place and had adequate insurance in prior years and is
vigorously defending all claims. The Company does not believe that these
claims, individually or in the aggregate, will have a material adverse
effect on its financial condition.
On October 2, 1996, having completed a long period of negotiation with the
Mexican government on the opening of its hazardous waste landfill in San
Luis Potosi, Mexico, the Company filed a Notice of Claim under the
provision of the North American Free Trade Agreement. The notice was
filed with the International Center for the Settlement of Investment
17<PAGE>
Disputes (ICSID) in Washington, D.C. pursuant to the provisions of the
NAFTA. On January 2, 1997, the Company filed its actual claim with the
Tribunal, after which a three-member Tribunal was impaneled which includes
one arbitrator from Mexico, one from the United States and a third, chosen
jointly by the parties, from Great Britain. The first hearing was held in
Washington, D.C. on July 15, 1997 and a number of matters were agreed upon
by the parties and a significant amount of direction was given by the
Tribunal to the proceedings that would move forward.
Pursuant to those understandings, the Company, on October 13, 1997,
filed its Memorial which included the Claim and all of the evidence
supporting the Claim, including expert witness studies and the like. The
b a sis of the Company s claim against Mexico is one likened to
expropriation. The Company s position is since it is not being allowed to
operate a legally authorized project, it has in essence been taken by the
Mexican government and they should, therefore, be responsible for paying
fair compensation under the provision of the NAFTA. A fair market
valuation was done on behalf of the Company by an expert company which
indicated the fair market value of this business was $90,000,000.
On February 17, 1998, the United Mexican States ( Mexico ) responded
to the Company s claim to the Tribunal. The Company now expects that there
will be required a reply brief from the Company, a rejoinder brief from
Mexico and then a hearing prior to the final determination of the case.
It is believed that this process could take six months or more to
complete.
It is now expected that the Tribunal will make rulings narrowing the
issues between the parties, determining the limits of further discovery on
both sides and requesting further pleadings on certain issues, all of
which to lead to a final hearing and ultimate determination by the
Tribunal. Because this is the first claim before the Tribunal under the
Treaty, there is a certain amount of uncertainty about the outcome and the
length of time it will take to achieve it. The Company reasonably
believes that the arbitration will be concluded during the calendar year
1998.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
18<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The Company's Common Stock is traded on the Nasdaq Small Cap Market
under the symbol "MTLC." The following table sets forth, for the fiscal
periods indicated, the high and low sales prices for the Common Stock as
reported by Nasdaq:
Sales Price
High Low
Fiscal Year Ended May 31, 1996
1st Fiscal Quarter Ended August 31, 1995 3 5/16 2 15/16
2nd Fiscal Quarter Ended November 30, 1995 3 13/16 3 1/8
3rd Fiscal Quarter Ended February 29, 1996 5 5/8 5 1/4
4th Fiscal Quarter Ended May 31, 1996 3 1/4 3 1/32
Seven Months Ended December 31, 1996
1st Fiscal Quarter Ended August 31, 1996 3 3/8 2 5/8
2nd Fiscal Quarter Ended November 30, 1996 3 1/4 1 1/2
One month period ended December 31, 1996 1 15/16 1 3/8
Fiscal Year Ended December 31, 1997
1st Fiscal Quarter Ended March 31, 1997 1 5/8 1 3/32
2nd Fiscal Quarter Ended June 30, 1997 2 1 3/32
3rd Fiscal Quarter Ended September 30, 1997 1 17/32 1 3/16
4th Fiscal Quarter Ended December 31, 1997 1 9/32 15/16
The Company has not paid any cash dividends on its Common Stock since
its incorporation and anticipates that, for the foreseeable future,
earnings, if any, will continue to be retained for use in its business.
As of March 17, 1998, the approximate number of record holders of the
Company's Common Stock was 1740.
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data is derived from the
consolidated financial statements of the Company and should be read in
conjunction with the consolidated financial statements, related notes and
other financial information included herein.
19<PAGE>
<TABLE><S> <C> <C> <C> <C> <C> <C>
Year 7 Months Year Year Year 5 Months
Ended Ended Ended Ended Ended Ended
Dec 31, Dec 31, May 31, May 31, May 31, May 31,
1997 1996 1996 1995 1994 1993
---- ---- ---- ---- ---- ----
(in thousands, except per share amounts)
Statement of Operations Data
----------------------------
Revenues $11,885 $ 6,150 $14,902 $17,952 $16,453 $7,294
Operating income (loss) - Insulation 107 (21) (854) 257 327 (552)
Operating loss-Waste Management (1) (2,217) (1,282) (560) (9,111) (3,443) (2,816)
Operating loss (4,578) (3,243) (5,091) (13,628) (4,049) (3,368)
Net loss (4,610) (3,280) (6,780) (15,399) (4,892) (3,643)
Earnings per share:
Net loss per common share - basic and
diluted (.16) (.11) (.30) (1.13) (.56) (.46)
Balance Sheet Data
------------------
Total assets 13,216 14,931 17,702 10,710 18,311 5,469
Long-term debt 1,500 - - 2,050 2,662 19
Convertible subordinated debentures (2) 20 229 239 8,636 8,755 4,733
--------------------------
(1) Includes $6,378,000 write off in May 1995 of the goodwill associated with the May
1994 purchase of QUIMICA OMEGA. See Item 7, Management s Discussion and Analysis of
Financial Conditions and Results of Operations
(2) During the year ended May 31, 1996 a substantial portion of the convertible
subordinated debentures were converted into shares of common stock. Additionally,
$2,100,000 of the Company s long term debt was converted into equity. See Item 7,
Management s Discussion and Analysis of Financial Conditions and Results of
Operations .
</TABLE>
No dividends were paid or declared during the year ended December 31,
1997, the seven months ended December 31, 1996, or the fiscal years ended
May 31, 1996, 1995 or 1994.
ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This discussion and analysis contains forward-looking statements
within the meaning of Section 27A of the Securities Act and Section 21E of
the Exchange Act, which are subject to the safe harbor created by those
sections. The Company s actual future results could differ materially
from those projected in the forward-looking statements. The Company
assumes no obligation to update the forward-looking statements or such
factors.
20<PAGE>
Presentation of Financial Statements
In December 1994, the Mexican government adopted a free market policy
toward the valuation of the Mexican peso. During the month of December
1994, the value of the peso declined approximately 44%, falling from 3.4
Mexican pesos to the U.S. dollar in November 1994 to 4.9 Mexican pesos to
the U.S. dollar at December 31, 1994. The value of the Mexican peso
continued to decline throughout 1995. At the close of business on May 31,
1995, May 31, 1996, December 31, 1996 and December 31, 1997, the value of
the peso was 6.15, 7.4, 7.8 and 8.07, respectively. The adverse impact on
the economy of Mexico as a result of the decline in the relative value of
its currency has been dramatic. The Company had a foreign currency
translation adjustment of $(2,140,110) at December 31, 1997, reflected in
the equity section of the balance sheet.
In May 1994, the Company acquired QUIMICA OMEGA for a purchase price
of $6,300,000. The purchase price was based on management's estimate of
the fair value of the Company's common stock issued to the QUIMICA OMEGA
stockholders. The purchase resulted in costs in excess of net assets
a c q uired of approximately $7,300,000. The recession and economic
uncertainty in Mexico resulting from the devaluation and other political
changes caused the Company to reevaluate its business plan and strategy
for QUIMICA OMEGA. As a result, the Company determined in May 1995 to
write off the balance of the capitalized goodwill of $6,378,000 in
accordance with generally accepted accounting principles.
In April 1996, QUIMICA OMEGA entered into the agreement with BFI-
MEXICO to form BFI-OMEGA, a 50%-50% owned joint venture corporation, for
the purpose of providing a full range of industrial waste collection,
transportation, treatment and disposal services (excluding ownership of
hazardous waste landfills) within the Republic of Mexico. The Company s
investment in this joint venture was accounted for under the equity
method. (See Note D.)
In January 1997, QUIMICA OMEGA and BFI-MEXICO completed QUIMICA
OMEGA s acquisition of BFI s interest in BFI-OMEGA, the Mexican joint
venture company established in April 1996. Effective January 1, 1997, the
Company controlled 100% of the outstanding stock of BFI-OMEGA and assumed
management control of its operations. The BFI-OMEGA joint venture was
subsequently renamed Administracion de Residuos Industriales ( ARI ). For
the first six months of 1997, the Company pursued a strategy of
identifying a new partner to acquire 50% of ARI. Because of this
strategy, the Company maintained the equity method of accounting for ARI.
In August 1997, the Board of Directors decided to maintain ARI as a 100%
owned subsidiary and not continue the pursuit of a partner. This decision
was based upon the increasing value of ARI relative to the Company s on-
going development activities. Consequently, the Company is consolidating
ARI, effective July 1, 1997.
Results of Operations
General. The Company s revenues were generated primarily by (i)
revenues in the United States from insulation services and sales of
insulation products and related materials; and (ii) revenues in Mexico
21<PAGE>
from the collection of waste oils and solvents for recycling, rental of
parts washing machines, brokering the disposal of waste and remediation
services.
Since November 1991, the Company has pursued the development of
integrated waste treatment and disposal facilities in several Mexican
states. The Company has completed construction of a hazardous waste
landfill in San Luis Potosi which is not yet open; all other contemplated
projects are in the development stage. The Company s results of
operations include the costs of development of all such waste treatment
facilities in Mexico.
Twelve Months Ended December 31, 1997 Compared to Twelve
Months Ended December 31, 1996.
Insulation Business. Total revenues for the year ended December 31,
1997 were $8,971,000 compared to $10,144,000 for the same period in 1996,
a decline of 12%. This decrease can be attributed to lower volumes of
work performed under the Company s various maintenance agreements and
under subcontracts with Curtom-Metalclad for work at various Edison
plants. In addition, demand for asbestos abatement services has also
declined.
Operating costs and expenses were $7,686,000 compared to $9,463,000
for the same period in 1996, a decline of 19%. This decrease is directly
associated with the decline in revenues. Additionally, 1996 contained
costs associated with overruns on two fixed price projects.
Selling, general and administrative expenses were $1,177,000 compared
to $1,600,000 for the same period in 1996, a decrease of 26%. This
decline in expenses is the direct result of steps taken by the Company to
reduce its cost structure, including the elimination of certain staff
positions.
Waste Management. Total revenues for the year ended December 31,
1997 were $2,914,000 compared to $2,320,000 for the same period in 1996,
an increase of 26%. However, because of differing accounting methods in
the periods, comparisons cannot be accurately reflected. If the Company
had consolidated 100% of the revenues of ARI for the years ended December
31, 1997 and 1996, revenues would have been $4,964,000 and $3,192,000,
respectively, an increase of 55%.
Operating costs and expenses were $4,317,000 as compared to
$3,552,000 an increase of 22%, attributed to costs associated with the
increase in revenues and an increase in the Company s costs associated
with development.
Goodwill of $71,000 associated with BFI-OMEGA s acquisition of one of
its branches, was written off as the Company has fully absorbed this
branch into ARI. There is no comparison figure for the year ended
December 31, 1996.
Equity in earnings (losses) of BFI-OMEGA/ARI was $(743,000) compared
to $(686,000) for the same period in 1996. The year ended December 31,
22<PAGE>
1997 loss reflects 100% of the losses of BFI-OMEGA/ARI through June 30,
1997, while 1996 reflects only 50% of the losses reflecting the Company s
ownership level in each comparison period.
Corporate Expense. Corporate expense for the year ended December 31,
1997 was $2,469,000 compared to $3,828,000 for the same period in 1996, a
decrease of 36%.
Interest Expense. Interest expense was $(30,000) as compared to
$(163,000) for the same period in 1996.
Consolidated Results. The net loss for the year ended December 31,
1997 was $(4,610,000) as compared to $(6,783,000) for the same period in
1996, a decrease of 32%. This improved performance can be attributed to
an overall reduction in the Company s cost structure as well as improved
performance in the insulation business.
Seven Months Ended December 31, 1996 Compared to Seven
Months Ended December 31, 1995
Insulation Business. Total revenues for the seven months ended
December 31, 1996 was $5,519,000 compared to $6,910,000 for the same
period in 1995, a decrease of 20%. This decrease is attributable to a
decline in the overall volume of work performed under the Company s
various maintenance agreements as well as a decline in the demand for
asbestos abatement services. Income from the Curtom-Metalclad joint
venture was $45,000 compared to $0.00 for the same period in 1995 due to
the increase in Edison work contracted through the joint venture.
Operating costs and expenses were $4,816,000 compared to $5,685,000
for the same period in 1995, a decrease of 15% associated with the decline
in revenues. Selling, general and administrative expenses were $769,000
compared to $1,226,000 representing a decrease of 37% attributed to the
Company s efforts to control overhead costs.
Waste Management. Total revenues for the seven months ended December
31, 1996 were $632,000 versus $1,450,000 for the same period in fiscal
1996. The revenue decline is due to the transition of continuing revenues
to BFI-OMEGA which is accounted for under the equity method. If revenues
of the joint venture were included and reflected on a peso basis, revenues
for the seven months would have been 12,823,000 pesos versus 9,255,000
pesos, an increase of 39% over the same period in fiscal 1996.
Operating costs and expenses were $1,115,000 as compared to
$1,575,000 for the same period in fiscal 1996. This reduction is also
attributed to the transition of operations to BFI-OMEGA. Landfill costs
were $256,000 for the seven months compared to $117,000 for the same
period in fiscal 1996. This increase reflects the costs associated with
the Company s on-going development activities in Mexico.
Equity in earnings (Losses) of BFI-OMEGA was ($542,000) for the seven
months, with no comparison period. This loss is attributed to the initial
costs associated with the development of infrastructure and the start up
of new districts and sub-districts.
23<PAGE>
Corporate Expense. Corporate expense for the seven months ended
December 31, 1996 was $1,940,000 as compared to $1,790,000, an increase of
8%. This increase is attributed to (a) the initial costs of pursuing the
Company s claim under NAFTA and (b) a reserve established by the Company
for certain ongoing litigation.
Interest Expense. Interest expense, net, was $(37,000) for the seven
months ended December 31, 1996 compared to $(834,000) for the same period
in fiscal 1996. This reduction is due to the conversions of both the
Company s debt and convertible subordinated debentures to shares of common
stock.
Other Expense. Other expense was $0 as compared to $729,000 for the
same period in fiscal 1996. In 1996, other expense represented the
discount given to debenture holders to induce conversion into common stock
of the Company.
Consolidated Results. The net loss for the seven months ended
D e c ember 31, 1996 was ($3,280,000) as compared to ($3,277,000),
representing no change. This comparable performance was achieved despite
the start-up costs of BFI-OMEGA, NAFTA litigation costs and litigation
reserves included in the current seven months net loss, while the seven
months ended December 31, 1995 contained a one-time gain of $317,000 for
donated equipment.
Fiscal Year Ended May 31, 1996 Compared to Fiscal Year
Ended May 31, 1995
Insulation Business. Total revenues and joint venture income from
the insulation business for the year ended May 31, 1996 were $11,536,000
as compared to $15,804,000 for the same period in 1995, a decrease of 27%.
The portion attributable almost entirely to a decline in contract revenues
for the period. Income from the Curtom-Metalclad joint venture increased
14% to $91,000 from $80,000 for the same period in 1995. The decrease in
contract revenues can be primarily attributed to an overall decline in the
volume of work performed under the Company s various maintenance contracts
with industrial and utility plant clients.
Operating costs and expenses for the year declined to $12,390,000
from $15,547,000 for fiscal year 1995, a decrease of 20%. Operating
margins, before selling, general and administrative expenses, decreased to
$1,202,000 from $2,454,000 for 1995, a decline of 51%. This decline can
be attributed to (a) a decrease in revenues which affects operating costs,
(b) cost overruns on three fixed-price contracts, and (c) lower margins in
the marketplace due to the competitive nature of the business. Selling,
general and administrative expenses were $2,055,000 as compared to
$2,198,000 for fiscal 1995, a decrease of 7%.
Mexican Business. Waste management revenues, primarily from the
operations of QUIMICA OMEGA, for the fiscal year ended May 31, 1996, were
$3,457,000 as compared to $2,228,000 for the same period in 1995, an
increase of 55%. The increase in revenues reflects the continued
expansion of operations as well as increased revenues from existing
branches. Loss from joint venture operations, representing QUIMICA
24<PAGE>
OMEGA s 50% ownership in BFI-OMEGA, was $(143,000) with no comparison
period for this new venture. The joint venture loss represents the period
from March 10, 1996 through May 31, 1996 and incorporates the expenses
relating to the commencement of, the transition to, and expansion of BFI-
OMEGA s operations.
Waste collection costs for the fiscal year ended May 31, 1996 were
$3,719,000 as compared to $4,286,000 for the same period in 1995, a
decrease of 13%. The cost reductions are attributed to a streamlining of
operations and efficiencies inherent in higher volumes and additional
experience in the market.
The landfill costs were $154,000 in fiscal 1996 as compared to
$676,000 for fiscal 1995, a decrease of 77%. Landfill costs are those
costs associated with the development and maintenance of facilities in
Mexico.
Corporate Expense. Corporate expense for fiscal 1996 were $3,677,000
compared to $4,773,000, a decrease of 23%.
Interest Expense. Interest expense for fiscal 1996 was $960,000 as
compared to $1,771,000 in fiscal 1995. The decline is attributed to (a)
the conversion of a substantial amount of the 8% and 9% debentures in
August 1995, and (b) the conversion of all remaining debt in February
1996.
Other Expense. Other expense for fiscal 1996 was $728,644
representing the value of the inducement provided to debenture holders to
convert into common stock. There are no comparative numbers for prior
periods.
Consolidated Results. The Company experienced a net loss of
$6,780,000 for the year ended May 31, 1996 compared to a net loss of
$15,399,000 in fiscal 1995, a decrease of 56%. The fiscal 1995 loss
included $6,377,000 associated with the write-off of goodwill related to
the acquisition of QUIMICA OMEGA. Comparing the results, excluding the
write-off of goodwill, the Company s net loss for fiscal 1996 decreased
from fiscal 1995 by 25%, attributed to a reduction in interest costs as
well as a reduction in general and administrative costs associated with
the landfill and other development activities for its Mexican business.
Liquidity and Capital Resources
In November 1991, the Company completed the acquisition of Eco-
Metalclad, Inc. ("ECO-MTLC"), commenced the development of the hazardous
waste treatment business in Mexico and began advancing cash to its Mexican
subsidiaries for use in the Mexican business. Funding the development of
the Company's Mexican business has required and will continue to require
substantial capital. To obtain capital for the continued development of
the business of the Company in Mexico, the Company has made private
placements of its common stock and convertible subordinated debentures and
has obtained loans from financial institutions.
In February 1996, the Company completed a private placement of
25<PAGE>
1,650,000 shares of its common stock at a price of $4.00 per share, along
with 2,600,000 warrants to purchase common stock at $5.00 per share. The
Company realized net proceeds from its placement of common stock of
$5,875,000.
The totals for the fiscal year ended May 31, 1996, inclusive of the
private placement in February 1996, include the issuance of approximately
2,400,000 shares at prices ranging from $1.05 to $4.00 with net proceeds
of approximately $8,800,000. Shares totaling 4,000,000 were issued upon
the exercise of options and warrants at prices ranging from $1.375 to
$2.25, generating net proceeds of approximately $6,800,000 including
$2,000,000 from the Kesler, Neveau, and Guerra option exercise. Shares
totaling 3,500,000 were issued in exchange for approximately $8,600,000 in
outstanding 8% and 9% debentures.
In February 1996, CVD Financial, a lender to the Company exercised
its option to convert 100% of the outstanding loan balance of $1,924,797
into 1,210,564 shares of the Company s common stock at the conversion rate
of $1.59 per share.
In August 1997, the Company initiated a warrant exchange program,
wherein investors who exercised their existing warrants were granted
additional replacement warrants. Between August and October 910,626
warrants were exercised at $1.50, netting the Company $1,365,939.
In December 1997, the Company issued $2,200,000 Five Year Zero Coupon
S e cured Notes, netting the Company $1,500,000. These notes are
convertible into 1,000,000 shares of common stock and 1,500,000 warrants
of the Company upon certain events related to the common stock price
performance of the Company. Additionally, the notes are callable at the
option of the holder, any time after April 15, 1999. These notes are
secured by 100% of the stock of Metalclad Insulation Corporation.
The issuances of common stock have been utilized for working capital,
equipment, and fixed asset purchases in connection with QUIMICA OMEGA, the
expansion capital for ARI joint venture, and for the continued development
activities of the Company; however, the Company will require additional
capital to develop, construct and subsequently open the additional
facilities it is pursuing.
Working capital at December 31, 1997 was $1,702,000 compared to
$2,719,000 at December 31, 1996. The Company had cash and cash
equivalents at December 31, 1997 of $1,644,000 and $3,074,000 at December
31, 1996. Additionally, the Company had restricted cash deposits of
$770,000 at December 31, 1996. Cash used in operations for the twelve
months ended December 31, 1997 was ($3,939,000) compared to ($2,801,000)
for the seven months ended December 31, 1996. Cash used in operations in
the twelve months ended December 31, 1997 was funded primarily by cash and
cash equivalents on hand at the beginning of the fiscal year as well as
debt financing and warrant exercises during the year.
The Company believes that the insulation business will generate
adequate cash flows from operations to meet its future obligations and
e x penses relating to such operations. The Company will require
26<PAGE>
substantial additional financing to develop, construct and operate
additional waste treatment facilities in Mexico. Furthermore, the Company
is continuing to expend additional efforts to pursue its NAFTA claim,
along with general and administrative expenses without revenues to offset
such expenses. The Company is aware of its on going cash needs and
continues to work with its investment banker and project finance sources
to meet its on going needs through December 31, 1998. The Company
believes it will obtain the necessary funds to continue its planned
operations throughout 1998.
Impact of Inflation
The Company reflects price escalations in its quotations to its
insulation customers and in its estimation of costs for materials and
labor. For construction contracts based on a cost-plus or time-and-
materials basis, the effect of inflation on the Company is negligible.
For projects on a fixed-price basis, the effect of inflation may result in
reduced profit margin or a loss as a result of higher costs to the Company
as the contracts are completed; however, the majority of the Company's
contracts are completed within 12 months of their commencement and the
Company believes that the impact of inflation on such contracts is
insignificant.
Although inflation has been a significant factor in the Mexican
economy in general since the devaluation, the Company does not anticipate
that it will have a material impact on its current or proposed operations.
Recent Accounting Pronouncements
Effective in 1998, the Company will be required to adopt SFAS No. 130
Reporting Comprehensive Income and SFAS No. 131 Disclosure About
Segments of an Enterprise and Related Information . The impact of
adopting these pronouncements is not expected to be material to the
Company s financial position or results of operations.
Year 2000 Issues
During fiscal 1997, the Company initiated a plan to implement new
business information systems, which will address all year 2000 issues.
This implementation will not require any significant capital expenditures
during fiscal 1998 and 1999. In the event that this implementation is not
completed prior to the year 2000, the Company has a contingency plan,
pursuant to which, existing systems will be modified to eliminate
remaining year 2000 issues. Expenditures related to this contingency plan
will be expensed as incurred and are not expected to have a material
impact on the Company s results of operations and all costs associated
with the modifications will be expensed. The Company believes these
expenditures will not be material.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements and schedules listed in the
accompanying Index to Consolidated Financial Statements are attached
27<PAGE>
hereto and filed as a part of this Report under Item 14.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by Item 401 of Regulation S-K is set forth
in the Company's 1997 Annual Meeting Proxy Statement which will be filed
with the Securities and Exchange Commission not later than 120 days after
December 31, 1997. The Company's 1998 Annual Meeting Proxy Statement,
exclusive of the information set forth under the captions "Report of the
Compensation Committee" and "Company Performance," are incorporated herein
by this reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 402 of Regulation S-K is set forth
in the Company's 1998 Annual Meeting Proxy Statement which will be filed
with the Securities and Exchange Commission not later than 120 days after
December 31, 1997. The Company's 1997 Annual Meeting Proxy Statement,
exclusive of the information set forth under the captions "Report of the
Compensation Committee" and "Company Performance," are incorporated herein
by this reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by Item 403 of Regulation S-K is set forth
in the Company's 1998 Annual Meeting Proxy Statement which will be filed
with the Securities and Exchange Commission not later than 120 days after
December 31, 1997. The Company's 1998 Annual Meeting Proxy Statement,
exclusive of the information set forth under the captions "Report of the
Compensation Committee" and "Company Performance," are incorporated herein
by this reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In October 1994, in consideration of extraordinary contributions to
the Company, including but not limited to the pledge of 755,000 shares of
common stock of the Company owned by them to facilitate necessary
financings for the Company, the Board of Directors approved a loan of
$370,000 to each of Mr. Kesler and Mr. Neveau. Such borrowings are due 30
days after demand and bear Annual interest at the prime rate of interest
plus 7%. The borrowings are secured by a pledge of 300,000 shares of
common stock from each borrower. In February 1996 Messrs. Kesler and
Neveau each repaid $150,000 to the Company. In March 1996, the notes were
28<PAGE>
amended to modify the loan principal between Messrs. Kesler and Neveau as
well as to adjust the interest rates, effective March 1, 1996 to a
variable rate based upon the Company s quarterly investment rate. The
Board of Directors has extended repayment of these notes until December
31, 1998.
In June 1996, Mr. Neveau, Chairman of the Board of Directors, Senior
Vice President, and a Director of the Company, resigned his position
effective the next shareholders meeting. As a result, the Company and
Mr. Neveau renegotiated the terms of his employment agreement relative to
compensation, benefits and stock options. Since May 1997, the Company has
been offsetting payments due Mr. Neveau against his outstanding loan
balance to the Company.
During the year ended May 31, 1996, the Company agreed to pay
consulting fees of $47,000 to Mr. Liddle, a former director of the
Company. These fees were for services in connection with management
oversight and consulting to the insulation business. Additionally, the
Company entered into a 19-month consulting agreement with Mr. Liddle for
on-going consulting services at a rate of $5,000 per month, which expired
December 31, 1997.
During the fiscal year ended May 31, 1996, the Company entered into
an agreement with The Chesapeake Group, whose Managing Director is Douglas
S. Land, a former director of the Company. The agreement engaged
Chesapeake as a financial consultant to the Company in matters pertaining
to its Mexican waste operations. Additionally, the Company agreed to
certain transaction fees associated with new business ventures, mergers or
acquisitions in Mexico. During the period ended May 31, 1996, the Company
agreed to pay to Chesapeake $100,000 for consulting services rendered
during calendar year 1995 and $8,000 per month for on-going consulting
services. In addition, the Company agreed to pay a transaction fee for
the successful closing of the BFI-OMEGA joint venture of $325,000 and
granted 250,000 options for the purchase of common stock of the Company
exercisable at $3.00 per share. In May 1997, the Company negotiated a
termination of the Chesapeake agreement in exchange for payment of all
outstanding earned fees and expenses.
During the twelve months ended December 31, 1997, the Company paid
legal fees of $54,000 to the law firm of Gibson, Haglund & Johnson, of
which Bruce H. Haglund, general counsel and Secretary of the Company, is a
principal.
During December, 1996, the Company loaned $150,000 to Mr. Javier
Guerra Cisneros, a Director and Vice President of Mexico operations. This
loan is evidenced by a promissory note bearing interest at 10% and secured
by a pledge of future salary and 300,000 shares of common stock in the
Company. In February, 1997, Mr. Guerra repaid $120,000 of this loan.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K.
29<PAGE>
(a) The following documents are filed as part of this report on Form 10-
K:
1. Financial Statements
Report of Independent Public Accountants
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Shareholders' Equity (Deficit)
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
2. Schedules to Financial Statements
Schedule II - Valuation and Qualifying Accounts
All schedules, other than those listed above, are omitted, as the
information is not required, is not material or is otherwise furnished.
3. Exhibits
The following exhibits are being filed with this Annual Report on
Form 10-K and/or are incorporated by reference therein in accordance with
the designated footnote references:
4. Restated and Amended Certificate of Incorporation and Bylaws of
the Company, and all amendments thereto
3.1 Form of Certificate for Common Stock (3)
10.1 Warrant to Purchase Common Stock dated November 30, 1991
issued to F.N. Wolf & Co., Inc. (1)
10.2 Warrant to Purchase Common Stock dated February 6, 1992
issued to T. Marshall Swartwood (2)
10.3 Warrant to Purchase Common Stock dated February 6, 1992
issued to Glenn Cushman (2)
10.4 Employment Agreement, as amended, between the Company and
Grant S. Kesler dated March 7, 1995 (6)
10.5 Employment Agreement, as amended, between the Company and
T. Daniel Neveau dated March 7, 1995 (6)
10.6 Modification Agreement, as amended, between the Company and
T. Daniel Neveau dated July 15, 1996
10.7 Employment Agreement between the Company and Anthony C.
Dabbene dated July 10, 1996 (7)
10.8 Non-Qualified Stock Option Agreement between the Company
and Bruce H. Haglund dated October 17, 1991 (1)
10.9 Non-Qualified Stock Option Agreement between the Company
and T. Daniel Neveau dated October 17, 1991 (1)
30<PAGE>
10.10 Non-Qualified Stock Option Agreement between the Company
and Gordon M. Liddle dated October 17, 1991 (1)
10.11 Nonstatutory Stock Option Agreement between the Company
and Grant S. Kesler dated March 7, 1995 (6)
10.12 Nonstatutory Stock Option Agreement between the Company
and T. Daniel Neveau dated March 7, 1995 (6)
10.13 Nonstatutory Stock Option Agreement between the Company
and Javier Guerra Cisneros dated March 7, 1995 (6)
10.14 Nonstatutory Stock Option Agreement between the Company
and Bruce H. Haglund dated March 7, 1995 (6)
10.15 Nonstatutory Stock Option Agreement between the Company
and Douglas S. Land dated June 25, 1996
10.16 Lease dated June 17, 1992 pertaining to the Company s
facilities at 3737 Birch Street, Suite 300, Newport Beach, California
92660 (2)
10.17 Lease dated June 4, 1987 pertaining to the Company s
facilities at 2198 South Dupont Drive, Anaheim, California 92803 (3)
10.18 Third Amendment to Lease dated May 12, 1994 pertaining to
the Company s facilities at 2198 South Dupont Drive, Anaheim, California
92803 (7)
10.19 Form of 1993 Omnibus Stock Option and Incentive Plan (4)
10.20 Agreement between Confinamiento Tecnico de Residuos
Industriales, S.A. de C.V. and Eco-Metalclad, Inc. Dated April 23, 1993
and amendment dated September 9, 1993 (5)
10.21 Consulting Agreement between Chesapeake Group, Inc. and
the Company dated January 16, 1996
10.22 Consulting Agreement between Gordon M. Liddle and the
Company dated June 25, 1996
10.23 Amendment dated July 22 1997 to Employment Agreement
between Anthony C. Dabbene and the Company dated January 23, 1996.
10.23 Amendment dated July 22, 1997 to Employment Agreement
between the Company and Anthony C. Dabbene dated July 10, 1996
10.24 Nonstatutory Stock Option Agreement between the Company
and Grant S. Kesler dated January 2, 1997
10.25 Nonstatutory Stock Option Agreement between the Company
and Jose Akle Fierro dated May 15, 1997
10.26 Nonstatutory Stock Option Agreement between the Company
31<PAGE>
and Juan B. Morales dated May 15, 1997
10.27 Nonstatutory Stock Option Agreement between the Company
and Anthony C. Dabbene dated May 15, 1997
22. List of Subsidiaries of the Registrant
23. Consents of Experts and Counsel
----------------------------
(1) Filed with the Company s Annual Report on Form 10-K for the year
ended December 31, 1991 and incorporated herein by this reference.
(2) Filed with the Company s Annual Report on Form 10-K for the year
ended December 31, 1992 and incorporated herein by this reference.
(3) Filed with the Company s Registration Statement on Form S-1 dated
December 15, 1987 and incorporated by reference.
(4) Filed with the Company s Transition Report on Form 10-K for the
five months ended May 31, 1993 and incorporated herein by this reference.
(5) Filed with the Company s Annual Report on Form 10-K for the year
ended May 31, 1994
(6) Filed with the Company s Annual Report on Form 10-K for the year
ended May 31, 1995
(7) Filed with the Company s Annual Report on Form 10-K for the year
ended May 31, 1996
(b) Reports on Form 8-K
None.
SUPPLEMENTAL INFORMATION
An annual report and a proxy statement shall be furnished to the security
holders of the Company subsequent to the filing of this Form 10-K. The
Company shall furnish copies of the annual report to security holders and
the proxy statement to the Securities and Exchange Commission when it is
sent to the security holder.
32<PAGE>
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.
METALCLAD CORPORATION
By: /s/Anthony C. Dabbene
---------------------------------
Anthony C. Dabbene
Chief Financial Officer
Date: April 15, 1998
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.
Signatures Title Date
/s/Grant S. Kesler Chief Executive Officer and Director 4/15/98
------------------------ (Principal Executive Officer)
Grant S. Kesler
/s/Javier Guerra Cisneros Director 4/15/98
------------------------
Javier Guerra Cisneros
/s/Jose Akle Fierro Director 4/15/98
------------------------
Jose Akle Fierro
/s/Juan B. Morales Director 4/15/98
------------------------
Juan B. Morales
33<PAGE>
ITEM 14(A)(1) and (2)
METALCLAD CORPORATION AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
The following Consolidated Financial Statements of Metalclad Corporation
and subsidiaries are included in Item 8:
Reports of Independent Public Accountants on Consolidated Financial
Statements:
Report of Arthur Andersen LLP......................................F1
Report of Grant Thornton LLP........................................F3
Financial Statements:
Consolidated Balance Sheets - December 31, 1997 and 1996............F4
Consolidated Statements of Operations - the Year Ended
December 31, 1997, Seven Months Ended December 31, 1996 and
the Years Ended May 31, 1996 and 1995...............................F6
Consolidated Statements of Shareholders' Equity (Deficit) - the
Year Ended December 31, 1997, Seven Months Ended December 31,
1996 and the Years Ended May 31, 1996 and 1995.....................F7
Consolidated Statements of Cash Flows - the Year Ended
December 31, 1997, Seven Months Ended December 31, 1996
and the Years Ended May 31, 1996 and 1995...........................F9
Notes to Consolidated Financial Statements...........................F11
Supplementary Financial Statement Schedules:
Schedule II - Valuation and Qualifying Accounts....................F31
34<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
The Board of Directors and Shareholders of
Metalclad Corporation:
We have audited the accompanying consolidated balance sheets of Metalclad
Corporation (a Delaware Corporation) and subsidiaries as of December 31,
1997 and 1996 and the related consolidated statements of operations,
shareholders equity and cash flows for year ended December 31, 1997, the
seven months ended December 31, 1996 and the year ended May 31, 1996.
These financial statements are the responsibility of the Company s
management. Our responsibility is to express an opinion on these
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 financial statements are
free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the 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.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note A to the
financial statements, the Company has suffered recurring losses from
operations and has a large accumulated deficit that raises substantial
doubt about its ability to continue as a going concern. Management s
plans in regard to these matters are also described in Note A. The
financial statements do not include any adjustments relating to the
recoverability and classification of asset carrying amounts or the amount
and classification of liabilities that might result should the Company be
unable to continue as a going concern.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Metalclad Corporation
and subsidiaries as of December 31, 1997 and 1996, and the results of
their operations and their cash flows for the year ended December 31,
1997, the seven months ended December 31, 1996 and the year ended May 31,
1996 in conformity with generally accepted accounting principles.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in the index
of financial statements is presented for purposes of complying with the
Securities and Exchange Commission s rules and is not part of the basic
financial statements. The data for the year ended December 31, 1997, the
seven months ended December 31, 1996 and the year ended May 31, 1996 have
been subjected to the auditing procedures applied in the audits of the
basic financial statements and, in our opinion, fairly states in all
F1<PAGE>
material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Orange County, California
April 15, 1998
F2<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors and Shareholders
Metalclad Corporation
We have audited the accompanying consolidated statements of operations,
shareholders equity (deficit) and cash flows of Metalclad Corporation and
Subsidiaries for the year ended May 31, 1995. These consolidated
financial statements are the responsibility of the Company s management.
Our responsibility is to express an opinion on these financial statements
based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the 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 audit
provides a reasonable basis for our opinion
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated results of operations and
consolidated cash flows of Metalclad Corporation and Subsidiaries for the
year ended May 31, 1995, in conformity with generally accepted accounting
principles.
We have also audited Schedule II of Metalclad Corporation and Subsidiaries
for the year ended May 31, 1995. In our opinion, this schedule presents
fairly, in all material respects, the information required to be set forth
therein.
GRANT THORNTON LLP
Irvine, California
August 31, 1995
F3<PAGE>
Metalclad Corporation and Subsidiaries
CONSOLIDATED BALANCE SHEETS
<TABLE><S> <C> <C>
December 31,
1997 1996
---- -----
Current assets:
Cash and cash equivalents $ 1,643,521 $3,074,395
Accounts receivable, less allowance for doubtful accounts of $82,026 at December 1997,
and $67,972 at December 1996 2,890,681 2,478,528
Costs and estimated earnings in excess of billings on uncompleted contracts 232,073 174,768
Inventories 181,172 314,157
Prepaid expenses and other current assets 159,581 253,059
Receivables from related parties 131,825 240,379
---------- ----------
Total current assets 5,238,853 6,535,286
Property, plant and equipment, net 6,106,938 5,319,409
Investment and capitalized costs in unconsolidated affiliate 613,601 1,516,878
Deposits and other assets, including restricted certificates of deposit of
$769,500 at December 1996 432,087 837,516
Goodwill, less accumulated amortization of $232,354 at December 1997 and $115,390 at
December 1996 799,094 697,363
Real estate held for sale 25,000 25,000
---------- ----------
$13,215,573 $14,931,452
========== ==========
F4<PAGE>
December 31,
1997 1996
---- -----
LIABILITIES AND SHAREHOLDERS EQUITY
Current liabilities:
Accounts payable $1,932,997 $ 1,665,475
Accrued payroll, property and other taxes 622,379 493,751
Accrued expenses 940,511 1,381,972
Billings in excess of costs and estimated earnings on uncompleted contracts 20,727 45,468
Current portion of convertible subordinated debentures 19,533 229,533
--------- ---------
Total current liabilities 3,536,147 3,816,199
--------- ---------
Convertible long-term debt 1,500,000 -
--------- ---------
Shareholders equity:
Preferred stock, par value $10; 1,500,000 shares authorized; none issued - -
Common stock, par value $.10; 80,000,000 shares authorized; 30,063,870 and 29,123,239
issued and outstanding at December 1997 and 1996, respectively 3,006,387 2,912,324
Additional paid-in capital 56,962,689 55,582,063
Accumulated deficit (49,129,377) (44,643,578)
Officers receivable collateralized by stock (520,163) (576,640)
Cumulative foreign currency translation adjustment (2,140,110) (2,158,916)
--------- ---------
8,179,426 11,115,253
--------- ---------
$13,215,573 $14,931,452
========== ==========
</TABLE>
F5<PAGE>
Metalclad Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE><S> <C> <C> <C> <C>
Year Ended Seven Months Ended Year Ended
December 31, December 31, May 31,
1997 1996 1996 1995
------------ ------------------ ------------ ------------
Revenues-Insulation
Contract revenues $8,533,425 $ 5,380,297 $11,208,360 $15,404,952
Material sales 201,976 138,309 230,336 272,627
Other 235,702 - 6,390 46,336
--------- ---------- ---------- ----------
8,971,103 5,518,606 11,445,086 15,723,915
Operating costs and expenses - Insulation
Contract costs and expenses 7,525,047 4,703,458 10,160,868 13,148,231
Cost of material sales 161,297 112,299 173,911 200,588
Selling, general and administrative expenses 1,177,047 768,631 2,055,043 2,197,814
--------- --------- ---------- ----------
8,863,391 5,584,388 12,389,822 15,546,633
Equity in earnings of unconsolidated affiliate - 44,915 90,817 80,013
--------- --------- ---------- ----------
Operating income (loss) - Insulation 107,712 (20,867) (853,919) 257,295
--------- --------- ---------- ----------
Revenues - Waste Management
Collection, recycling and destruction 2,913,720 631,884 3,456,680 1,910,863
Landfill - - - -
Other - - - 317,306
--------- --------- ---------- ----------
2,913,720 631,884 3,456,680 2,228,169
--------- --------- ---------- ----------
Operating costs and expenses - Waste Management
Collection, recycling and destruction 3,911,719 1,115,121 3,719,137 4,286,178
Landfill 404,994 256,049 154,210 675,997
Write-off of goodwill 70,926 - - 6,377,716
--------- --------- ---------- ----------
4,387,639 1,371,170 3,873,347 11,339,891
Equity in earnings of unconsolidated affiliate (742,845) (542,461) (143,415) -
--------- --------- ---------- ----------
Operating loss - Waste Management (2,216,764) (1,281,747) (560,082) (9,111,722)
--------- --------- ---------- ----------
Corporate expense (2,468,973) 1,940,147) (3,676,907) (4,773,292)
--------- --------- ---------- ----------
Operating loss (4,578,025) (3,242,761) (5,090,908) (13,627,719)
Interest expense 29,695 37,054 960,220 1,771,394
Other expense 2,413 - 728,644 -
--------- --------- ---------- ----------
Net loss $(4,539,207) $(3,279,815) $(6,779,772) $(15,399,113)
========== ========== ========== ===========
Weighted average number of common shares 29,438,062 28,910,449 22,770,516 13,682,800
========== ========== ========== ==========
Loss per share of common stock - basic and diluted $(.16) $(.11) $(.30) $(1.13)
===== ===== ===== ======
F6<PAGE>
</TABLE>
Metalclad Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY (DEFICIT)
The Year Ended December 31, 1997, the Seven Months Ended December 31,
1996, and the Years Ended May 31, 1996 and 1995
<TABLE><S> <C> <C> <C> <C> <C> <C> <C>
Foreign Total
Additional Currency Shareholders
Common Stock Paid-in Accumulated Officers Translation Equity
Shares Amounts Capital Deficit Receivable Adjustment (Deficit)
----------- --------- ---------- ------------ ---------- ----------- -----------
Balance at May 31, 1994 11,691,372 $1,169,138 $20,643,750 $(19,184,878) $ - $ (18,391) $2,609,619
Issuance of common stock 4,119,216 411,921 8,118,061 - - - 8,529,982
Common stock issued under
stock option plans and
warrants 30,000 3,000 62,313 - - - 65,313
Conversion of debentures to
common stock 45,040 4,504 175,656 - - - 180,160
Donated capital - - 44,405 - - - 44,405
Advances to officers,
collateralized by stock - - - - (740,000) - (740,000)
Translation adjustment - - - - - (1,463,689) (1,463,689)
Net loss - - - (15,399,113) - - (15,399,113)
---------- --------- --------- ----------- ---------- ---------- -----------
Balance at May 31, 1995 15,885,628 1,588,563 29,044,185 (34,583,991) (740,000) (1,482,080) (6,173,323)
Issuance of common stock 4,044,986 404,498 9,297,372 - - - 9,701,870
Common stock issued under
stock option plans and
warrants 3,951,836 395,184 6,448,386 - - - 6,843,570
Conversion of debentures to
common stock 3,525,581 352,558 8,270,869 - - - 8,623,427
Officers loans; interest
& repayments - - - - 180,808 - 180,808
Debt conversions 1,325,198 132,520 1,974,545 - - - 2,107,065
Donated capital - - (44,405) - - - (44,405)
Translation adjustment - - - - - (393,450) (393,450)
Net loss - - - (6,779,772) - - (6,779,772)
---------- --------- --------- ----------- ---------- ---------- ----------
F7<PAGE>
Balance at May 31, 1996 28,733,229 2,873,323 54,990,952 (41,363,763) (559,192) (1,875,530) 14,065,790
Issuance of common stock 15,010 1,501 52,874 - - - 54,375
Common stock issued under
stock option plans and
warrants 371,000 37,100 528,637 - - - 565,737
Conversion of debentures to
common stock 4,000 400 9,600 - - - 10,000
Officers loans; interest
& repayments - - - - (17,448) - (17,448)
Translation adjustment - - - - - (283,386) (283,386)
Net loss - - - (3,279,815) - - (3,279,815)
---------- --------- --------- ----------- ---------- ---------- ----------
Balance at December 31, 1996 29,123,239 2,912,324 55,582,063 (44,643,578) (576,640) (2,158,916) 11,115,253
Issuance of common stock 5 - - - - - -
Common stock issued under
stock option plans and
warrants 910,626 91,063 1,274,876 - - - 1,365,939
Officers loans; interest
& repayments - - - - 56,477 - 56,477
Stock issued under bonus plans 30,000 3,000 105,750 - - - 108,750
Other - - - 124,334 - - 124,334
Translation adjustment - - - - 18,806 18,806
Net loss - - - (4,610,133) - - (4,610,133)
---------- --------- --------- ----------- ---------- ---------- ----------
Balance at December 31, 1997 30,063,870 $3,006,387 $56,962,689 $(49,129,377) $ (520,163) $(2,140,110) $ 8,179,426
========== ========= ========== =========== ========== ========== ==========
</TABLE>
F8<PAGE>
Metalclad Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE><S> <C> <C> <C> <C>
Year Ended Seven Months Ended Year Ended
December 31, December 31, May 31,
------------- ------------------ ------------------------------
1997 1996 1996 1995
---- ---- ---- ----
Cash flows from operating activities:
Net loss $(4,610,133) $(3,279,815) $(6,779,772) $(15,399,113)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 518,706 282,568 359,642 1,255,116
Write-off of goodwill 70,926 - - 6,377,716
Other - - (276,095) -
Provision for losses on accounts receivable (13,335) 3,410 24,373 -
Issuance of stock for services and interest on
convertible subordinated debentures 108,750 - 399,608 -
Issuance of debentures for services - - 39,323 -
Debenture conversion expense - - 728,644 -
Write down of real estate held for sale - - 130,415 -
Loss on sale of assets - - - 45,553
(Earnings) losses from unconsolidated affiliates 742,845 497,546 - -
Earnings in excess of distributions from
Curtom-Metalclad 12,588 88,530 27,412 (27,093)
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable 568,983 (249,632) (82,641) 97,841
(Increase) decrease in unbilled receivables (57,305) (118,396) 287,033 83,921
(Increase) decrease in inventories 151,362 11,482 46,839 (9,442)
(Increase) decrease in prepaid expenses and
other assets 33,157 (170,123) 629,952 623,212
(Increase) decrease in receivables from related
parties 108,554 (117,458) 97,914 (7,704)
(Decrease) increase in accounts payables and
accrued expenses (1,548,980) 274,797 (1,411,379) 1,127,241
(Decrease) increase in billings over costs (24,741) (24,289) (44,060) 101,097
---------- ---------- ---------- ----------
Net cash provided by (used in) operating activities (3,938,623) (2,801,380) (5,822,792) (5,731,655)
---------- ---------- ---------- ----------
Cash flows from investing activities:
Purchases of property, plant and equipment (104,113) (211,111) (735,780) (3,411,080)
Investments and capitalized costs in
unconsolidated affiliates (741,694) (1,024,995) (1,353,972) -
Restricted cash 769,500 (769,500) - -
Cash from ARI consolidation 175,546 - - -
Goodwill - ARI (218,696) - - -
Other (62,538) - - -
---------- ---------- ---------- ----------
Net cash used in investing activities (181,995) (2,005,606) (2,089,752) (3,411,080)
---------- ---------- ---------- ----------
F9<PAGE>
Cash flows from financing activities:
Proceeds from revolving line of credit and
long-term borrowings 1,500,000 - 11,154 797,297
Payments on revolving line of credit and
long-term borrowings - - (906,456) (517,144)
Payments on Officers receivable collateralized
by stock (net) 56,477 - 180,808 (740,000)
Sale of common stock - - 8,864,862 8,529,982
Issuance of common stock under stock option
plans and warrants 1,365,939 620,112 6,843,570 65,313
Issuance of convertible subordinated debentures,
net of offering costs - - - 61,000
Payments of convertible subordinated debentures (210,000) - - (38,368)
---------- ---------- ---------- ----------
Net cash provided by financing activities 2,712,416 620,112 14,993,938 8,158,080
---------- ---------- ---------- ----------
Effect of exchange rates on cash (22,672) (83,088) (118,443) 219,570
---------- ---------- ---------- ----------
Increase (decrease) in cash and cash equivalents (1,430,874) (4,269,962) 6,962,951 (765,085)
---------- ---------- ---------- ----------
Cash and cash equivalents at beginning of period 3,074,395 7,344,357 381,406 1,146,491
---------- ---------- ---------- ----------
Cash and cash equivalents at end of period $ 1,643,521 $ 3,074,395 $ 7,344,357 $ 381,406
========== ========== ========== =========
Supplemental disclosures of cash flow information:
Cash paid for interest $ 114,820 $ 211,537 $ 951,968 $1,260,373
========== ========== ========== =========
</TABLE>
Supplemental schedule of noncash investing and financing activities:
During fiscal year ended May 31, 1996, 125,000 shares of common stock were
issued at $3.50 per share as additional consideration for the acquisition
of COTERIN (see Note C).
During fiscal year ended May 31, 1996, approximately $8.6 million in
convertible subordinated debentures converted into common stock of the
Company at the induced conversion rate of $2.50 per share. Debenture
conversion rate at the time of the offer by the Company was $2.82 per
share.
During fiscal year ended May 31, 1996, approximately $2.1 million in debt
converted into common stock of the Company at the conversation rate of
$1.59 per share.
The accompanying notes are an integral part of these consolidated
statements.
F10<PAGE>
NOTE A - SIGNIFICANT ACCOUNTING POLICIES
Description of Business
Metalclad Corporation (the Company ) is engaged in insulation services,
including asbestos abatement services and insulation material sales, to
customers primarily in California (the Insulation Business ). The
Company is also engaged in the development of hazardous waste treatment
facilities and the collection and recycling of hazardous waste for
disposition to landfills or cement kilns in Mexico (the Mexican
Business ). (See Note C.)
On October 13, 1997, the Company filed a claim for arbitration against
Mexico under provisions of the North American Free Trade Agreement
(NAFTA). The claim alleges the Company has been denied the right to
operate its constructed and permitted landfill facility thereby causing
the facility to be, as a practical matter, expropriated. The Company
believes it is entitled to the fair market value of the facility as
damages. The Company cannot currently predict when the NAFTA arbitration
process will be completed. The results of the NAFTA arbitration process
could be material to the Company s business and operations.
The accompanying financial statements have been prepared assuming the
Company will continue as a going concern. As shown in the financial
statements, the Company has incurred recurring losses from operations and
has a large accumulated deficit. Additionally, the Company may require
substantial additional financing to develop, construct, and operate waste
treatment facilities in Mexico. Furthermore, the Company is continuing to
expend funds to pursue its NAFTA claim as well as to fund ongoing general
and administrative expenses without sufficient revenue. These matters
raise substantial doubt about the Company s ability to continue as a going
concern. The Company has implemented various measures, the results of
which are an expected improvement in operations and reduction in general
and administrative expenses in 1998. Additionally, the Company is
actively pursuing additional equity financing through a warrant exchange
program. The financial statements do not include any adjustments relating
to the recoverability of asset carrying amounts or the amount and
classification of liabilities that might result should the Company be
unable to continue as a going concern.
Principles of Consolidation/Investments
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. Investments in other companies and
joint venture corporations which are 20-50% owned are reported on the
equity method. Significant intercompany accounts and transactions have
been eliminated in consolidation. Costs incurred relating to the
acquisition or formation of an equity method investment are considered
part of the investment and are amortized over five years.
Contracts in Process
F11<PAGE>
Fixed price insulation installation and asbestos abatement contracts are
accounted for by the percentage-of-completion method wherein costs and
estimated earnings are included in revenues as the work is performed. If
a loss on a fixed price contract is indicated, the entire amount of the
estimated loss is accrued when known. Time and material contracts are
accounted for under a cost plus fee basis. Retentions by customers under
contract terms are due at contract completion.
Waste Collection Revenue
Revenues pertaining to the collection of industrial waste products are
recognized when waste is collected. Estimated costs of reprocessing and
disposal are accrued when revenues are recognized. Certain of the
collected wastes are blended and subsequently sold as fuel to cement
kilns. Revenues from fuel sales are recognized upon delivery to the
customers and revenues and costs for remediation contracts are recognized
under the contract accounting guidelines.
Inventories
Inventories, which consist principally of insulation products and related
materials, are stated at the lower of cost (determined on the first-in,
first-out method) or market.
Hazardous Waste Treatment Facilities
During fiscal 1994, the Company acquired COTERIN (see Note C), which owns
a landfill site that had been operated as a waste transfer station prior
to the acquisition. Management of the Company is continuing its efforts
to obtain public support from state and local government officials to
assure safe and uninterrupted operations of an expanded modern landfill.
Capitalized costs consist of acquisition, development and construction
costs, including engineering, consulting, environmental studies,
permitting and legal costs associated with the landfill. Additionally,
development costs associated with the site selection, permitting and
environmental studies for the Company s second landfill facility have been
capitalized in 1997. (See Note B.)
Depreciation and Amortization
Property, plant and equipment is stated at cost. Depreciation is computed
using the straight-line method over the estimated useful lives of related
assets which range from between five to seven years for machinery,
equipment and leasehold improvements to 25 years for hazardous waste
treatment facilities.
Goodwill
Goodwill represents the cost of purchasing COTERIN over the fair value of
its net assets and the costs of purchasing BFI-MEXICO s interest in BFI-
OMEGA. (See Note C.) The Company is amortizing its goodwill over 10
years.
F12<PAGE>
Cash Equivalents
The Company considers all highly liquid investments with original
maturities of three months or less to be cash equivalents. The carrying
amount approximates fair value because of the short maturity of those
instruments.
Restricted Cash
Restricted cash as of December 31, 1996 in the amount of $769,500
represented funds held as collateral for an appeal bond posted by the
Company associated with litigation. This litigation was settled in May
1997 and all restricted cash was released to the Company at that time.
Loss Per Share
Loss per share has been computed based upon the weighted average number of
common shares outstanding during the period. Stock options and warrants
are anti-dilutive and have been excluded from the computation. In
February 1997, the FASB issued SFAS No. 128, Earnings per Share . This
statement requires that primary earnings per share (EPS) be replaced by
basic EPS. The primary difference between the two methods is that common
stock equivalents are not included in the basic earnings per share
calculation thereby reducing the denominator in the calculation.
The Company has adopted SFAS 128, Earnings Per Share, and applied this
pronouncement to all periods presented. This statement requires the
presentation of both basic and diluted net income (loss) per share for
financial statement purposes. Basic net income (loss) Per share is
computed by dividing income (loss) available to common stockholders by the
weighted average number of common shares outstanding. Diluted net income
(loss) per share includes the effect of the potential shares outstanding,
including dilutive stock options and warrants using the treasury stock
method. Because the impact of options and warrants are antidilutive,
there is no difference between the loss per share amounts computed for
basic and diluted purposes. Also, the adoption of SFAS 128 resulted in no
change in amounts previously reported.
Stock Based Compensation
Effective January 1, 1996, the Company adopted the disclosure provisions
of SFAS No. 123, Accounting for Stock-Based Compensation . SFAS No. 123
requires the Company to disclose pro forma net income and earnings per
share as if the fair value based accounting method of SFAS No. 123 had
been used to account for stock based compensation. These disclosures are
included in Note J.
Income Taxes
The Company accounts for income taxes using the liability method as
prescribed by Financial Accounting Standards No. 109, Accounting for
F13<PAGE>
Income Taxes .
Foreign Currency Translation
Through December 31, 1996, all assets and liabilities of the Mexican
subsidiaries were translated at the current exchange rate as of the end of
the accounting period. Items in the statements of operations were
translated at average currency exchange rates. The value of the Mexican
Peso relative to the U.S. Dollar declined from approximately 3.4 Mexican
Pesos in June 1994 to approximately 8.07 Mexican Pesos to the U.S. Dollar
at December 31, 1997. The resulting translation adjustments were recorded
as a separate component of shareholders equity (deficit).
As of January 1, 1997, Mexico has been deemed a highly inflationary
economy. This results in the U.S. dollar being the functional currency of
the Company s Mexican entities and the net exchange gain or losses
resulting from the translation of assets and liabilities of the Mexican
entities now being included in income, except for the effects of exchange
rate changes on intercompany transactions of a long-term investment
nature, which are still recorded as a separate component of shareholders
equity.
Reclassifications
Certain reclassifications have been made to prior period consolidated
financial statements to conform with the current year presentation.
Use of Estimates
The preparation of 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
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
NOTE B - REALIZATION OF ASSETS
Effective June 1, 1996, the Company has implemented the Financial
Accounting Standards Board (FASB) Statement No. 121 Accounting for the
Impairment of Long- Lived Assets and for Long-Lived Assets to be Disposed
of . This statement requires that long-lived assets and certain
identifiable intangibles to be held and used be reviewed for impairment
whenever events or changes in circumstances indicate that the carrying
value of an asset may not be recoverable. The Company has conducted this
review and believes that no impairment currently exists and no material
adjustments are necessary to the valuation of its assets.
El Confin
F14<PAGE>
Included in property, plant and equipment at December 31, 1997 is
approximately $4,018,000 representing the Company s investment in its
completed hazardous waste treatment facility in the State of San Luis
Potosi, Mexico, known as El Confin . Additionally, the Company has
unamortized goodwill of approximately $602,000 associated with this
facility. The Company has been granted all necessary federal governmental
authorizations to open and operate the facility but, as yet, has not
received the support of the state and local governments. Consequently, on
October 2, 1996, the Company filed a Notice of Intent to File Claim Under
the North American Free Trade Agreement ( NAFTA ). The Claim was filed
with the International Centre for Settlement of Investment Disputes
( ICSID ) in Washington, D.C. On January 13, 1997, the Secretary General
of ICSID registered the Company s claim and notified both the United
States and Mexican governments of the registration. On October 13, 1997,
the Company filed its detailed memorial, or claim, and on February 17,
1998, Mexico filed its counter-memorial, or response. The Company now
awaits certain administrative rulings and procedural direction as to the
next steps in the process. These steps could include hearings, additional
filings by the parties, expert testimony, etc., with the Company having no
ability to predict a date upon which the process will be completed. The
Company s claim is one under the category of Likened to Expropriation
wherein the Company, having been denied the right to operate its
constructed and permitted facility, claims its property has therefore
been, as a practical matter, expropriated, entitling the Company to the
fair market value of the facility as damages. Although the Company
remains confident in its position, no assurances can be given that it will
be successful in this arbitration process. The realization of the
capitalized landfill costs and goodwill associated with El Confin is
dependent upon a successful resolution or settlement of the Company s
NAFTA arbitration process.
Aguascalientes
As of December 31, 1997, the Company has capitalized costs of $244,000
associated with the development of this project. The realization of these
costs is dependent upon the Company obtaining any remaining permits
necessary for construction and operation, as well as the financing
necessary to successfully complete and operate the facility.
NOTE C - WASTE MANAGEMENT BUSINESS
During the year ended May 31, 1994, the Company formed a Mexican holding
company, Ecosistemas Nacionales, S.A. de C.V. (ECONSA), to ultimately hold
the common stock of Ecosistemas del Potosi, S.A. de C.V. (ECOPSA),
Confinamiento Tecnico de Residuos Industriales, S.A. de C.V. (COTERIN),
Consultoria Ambiental Total, S.A. de C.V. (CATSA), Quimica Omega, S.A. de
C.V. (QUIMICA OMEGA), Administracion de Residuos Industriales, S.A. de
C.V. ( ARI ) and Ecosistemas El Llano, S.A. de C.V. (Llano ).
COTERIN
F15<PAGE>
In September 1993, the Company entered into an agreement to acquire 94% of
COTERIN which owns a permitted landfill which was operated as a waste
transfer station prior to the acquisition. In January, 1996 the original
agreement was amended whereby the Company paid an additional $200,000 in
cash plus 125,000 shares of common stock in the Company in exchange for a
reduction in certain future contingent payments based on the landfill
opening to $300,000 and a reduction in the royalty payment to 1% of gross
revenues. In addition, the Company acquired the remaining shares of
COTERIN that it did not own, essentially vesting 100% of the ownership of
the landfill to the Company. The Company has the obligation to remediate
the landfill due to its prior use as a transfer station, conditional upon
the landfill opening. The agreement with the sellers jointly obligates
them to compensate COTERIN for the costs of remediation in excess of
$500,000 in total or $100,000 annually. This obligation can be offset by
any royalties that may be due the sellers from the Company. COTERIN is
the owner of the landfill site which is presently the subject of the
Company s claim under NAFTA.
QUIMICA OMEGA
On May 5, 1994, the Company acquired all of the issued and outstanding
common and preferred stock of QUIMICA OMEGA in exchange for 2,800,000
restricted shares of the Company s common stock. QUIMICA OMEGA
specializes in the collection of hazardous waste for recycling and
disposal at landfills or cement kilns, which supplement their fuel
requirements with fuels reblended by QUIMICA OMEGA. The transaction has
been accounted for as a purchase. The purchase price of $6,300,000 was
based upon management s estimate of the fair value of the Company s common
stock issued to the Quimica shareholders. In May 1995, the Company wrote
off goodwill in the amount of $6,377,000 associated with this transaction.
On April 9, 1996, the Company and BFI-MEXICO, formed BFI-OMEGA as a 50%-
50% owned joint venture corporation. Effective with this agreement, BFI-
OMEGA assumed management of QUIMICA OMEGA S operations and implemented a
transition to BFI-OMEGA. The joint venture commenced operations under the
BFI-OMEGA name in July, 1996. As of December 31, 1996, the Company had
capitalized organizational costs of $516,000 representing direct costs of
forming the joint venture. These costs are being amortized over five
years commencing July, 1996.
In January 1997, QUIMICA OMEGA and BFI-MEXICO reached agreement for
QUIMICA OMEGA to acquire BFI s 50% interest in the joint venture. As part
o f this transaction, BFI contributed certain waste transportation
equipment to QUIMICA OMEGA.
NOTE D - INVESTMENTS IN UNCONSOLIDATED AFFILIATES
BFI-OMEGA
In April 1996, the Company, through its Mexican subsidiary QUIMICA OMEGA,
formed a 50%-50% jointly owned company with BFI-MEXICO to provide a full
F16<PAGE>
range of industrial waste collection, transportation, recycling, treatment
and disposal services in Mexico. The Company, known as BFI-OMEGA was
accounted for under the equity method. In July, 1996, the joint venture
commenced operations as BFI-OMEGA.
In January 1997, QUIMICA OMEGA and BFI-Mexico reached agreement for
QUIMICA OMEGA to acquire BFI-MEXICO s 50% interest in BFI-OMEGA.
Therefore, effective January 1, 1997, the Company controlled 100% of the
outstanding stock of BFI-OMEGA and assumed management control of its
operations. The BFI-OMEGA joint venture was subsequently renamed
Administracion de Residuos Industriales ( ARI ). For the first six months
of 1997, the Company pursued a strategy of identifying a new partner to
acquire 50% of ARI. Because of this strategy, the Company maintained the
equity method of accounting for ARI. In August 1997, the Board of
Directors decided to maintain ARI as a 100% owned subsidiary and not
continue the pursuit of a partner. Consequently, the Company has
consolidated ARI effective July 1, 1997.
The following is unaudited summarized financial information for BFI-OMEGA,
presented in U.S. dollars:
Balance Sheets
(Unaudited)
June 30, 1997 December 31,
1996
------------- -----------
Cash $ 181,571 $ 261,520
Accounts receivable 1,037,313 639,113
Prepaid expenses 66,256 13,363
Other assets 149,768 228,228
Property, plant and equipment 1,019,024 549,078
--------- ---------
Total assets $2,453,932 $1,691,302
========= =========
Accounts payable and accrued expenses $1,671,180 $ 682,843
Common stock 3,045,139 2,332,085
Accumulated deficit (2,262,387) (1,323,626)
--------- ---------
Total liabilities and equity $2,453,932 $1,691,302
========= =========
Statements of Operations
(Unaudited)
Six Months Seven Months Year
Ended Ended Ended
June 30, 1997 December 31, 1996 May 31, 1996
------------- ----------------- ------------
Revenues $2,049,799 $ 872,427 $ -
F17<PAGE>
Cost of Sales (1,890,266) (872,674) -
Expenses (902,378) (1,084,675) (238,704)
--------- --------- ---------
Loss from operations $ (742,845) $(1,084,922) $ (238,704)
========= ========== =========
Curtom-Metalclad
In 1989, the Company entered into a joint venture with a minority service
firm ( Curtom-Metalclad ) to perform industrial insulation and industrial
asbestos abatement services similar to those performed by the Company.
When contracts are obtained by the joint venture, the Company performs the
work specified in the contract as a subcontractor to the joint venture.
The following is unaudited summarized financial information for Curtom-
Metalclad:
Balance Sheets
(Unaudited)
December 31, December 31,
------------ -----------
1997 1996
---- ----
Cash $ 3,651 $ 7,207
Accounts receivable 375,083 717,648
-------- --------
Total assets $ 378,734 $ 724,855
======== ========
Accounts payable $ 363,553 $ 691,332
Curtom-equity 7,741 17,097
Metalclad-equity 7,440 16,426
-------- --------
Total liabilities and partners
capital $ 378,734 $ 724,855
======== ========
Statements of Operations
(Unaudited)
Year Seven Months Year
Ended Ended Ended
December 31, December 31, May 31,
------------ ------------ ------------------------
1997 1996 1996 1995
---- ---- ---- ----
F18<PAGE>
Revenue $3,679,907 $3,427,699 $1,417,601 $2,505,697
Costs of sales (3,684,288) (3,335,786) (1,231,613) (2,341,019)
Expenses (1,255) (904) (646) (1,386)
--------- --------- --------- ---------
Income from
operations $ (5,636) $ 91,009 $ 185,342 $ 163,292
========= ========= ========= =========
NOTE E - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following:
December 31, December 31,
1997 1996
----------- -----------
Buildings $ 177,060 $ 93,690
Land 248,235 239,955
Machinery and equipment 2,218,719 1,524,616
Automotive equipment 718,238 505,667
Leasehold improvements 1,039 4,454
--------- ---------
3,363,291 2,368,382
Less accumulated depreciation
and amortization (1,274,096) (924,614)
--------- ---------
2,089,195 1,443,768
Hazardous waste treatment facilities 4,017,743 3,875,641
--------- ---------
$6,106,938 $5,319,409
========= =========
NOTE F - REAL ESTATE HELD FOR SALE
Real estate held for sale was acquired in 1986 as settlement on amounts
owing from an affiliate. The real estate is carried at the lower of the
cost or fair value less estimated costs to sell. During the year ended
May 31, 1996 the Company wrote down the value of this property. This
property was collateral on the Company s note payable to supplier (Note
G). During the year ended May 31, 1996, this note was paid in its
entirety.
NOTE G - DEBT
F19<PAGE>
Long-term debt consists of the following:
December 31,
1997
----------
Zero Coupon Convertible Notes $1,500,000
==========
In September 1993, the Company obtained a loan in the amount of $2,500,000
from a financial institution pursuant to the terms of a promissory note
due on September 1, 1995. The note bore interest at the prime rate plus
7% and was collateralized by all of the assets of the Company, including
its shares of certain subsidiaries. In connection with this financing the
Company issued the financial institution a five-year warrant to purchase
375,000 shares of common stock at a price of $4.50.
In September 1994, the Company obtained a short-term loan in the amount of
$525,000 from the same financial institution pursuant to the terms of a
promissory note due on November 30, 1994. The note accrued interest at
the prime rate plus 7%. In connection with this financing the Company
issued the financial institution a five-year warrant to purchase 75,000
shares of common stock at a price of $2.625 per share.
In May 1995, the Company re-negotiated the terms of this financing
agreement and extended the maturity date of previous borrowings and
accrued interest totaling approximately $2,800,000 to June 30, 1996. In
connection with this re-negotiation, the Company issued the institution
87,578 shares of common stock, issued the institution a five-year warrant
to purchase 600,000 shares of common stock at a price of $1.908 per share,
and lowered the exercise price on all previously issued warrants to $1.59
per share, which approximated or exceeded the fair market value of the
Company s common stock as of the measurement date. The agreement with the
financial institution contained covenants which gave the lender the right
to convert the debt into shares of common stock at the rate of $1.59 per
share. The Company paid the institution an additional $100,000 for an
extension of the payment date for the loan.
In February 1996, the lender exercised its option to convert 100% of the
outstanding loan balance of $1,924,797 into 1,210,564 shares of the
Company s common stock at the conversion rate of $1.59 per share.
In December 1997, the Company issued $2,200,000 Five Year Zero Coupon
Secured Convertible Notes, netting the Company $1,500,000. These notes
are convertible into 1,000,000 shares of common stock and 1,500,000
warrants of the Company upon certain events related to the common stock
price performance of the Company. Additionally, the notes are callable at
the option of the holder, any time after April 15, 1999. These notes are
secured by 100% of the stock of Metalclad Insulation Corporation.
NOTE H - CONVERTIBLE SUBORDINATED DEBENTURES
F20<PAGE>
I n N ovember 1993, the Company issued $3,840,000 of convertible
subordinated debentures due in 60 months, bearing interest at 9% and
convertible into shares of common stock at the rate of $5.50 per share
subject to certain adjustments. During the year ended May 31, 1994, the
Company also issued an additional $732,359 principal amount of convertible
subordinated debentures due in 60 months, bearing interest at 8%, and
convertible into shares of common stock at the rates of $4.00 and $5.00
per share subject to certain adjustments.
In August 1995, the Company offered to convert all outstanding debentures
into shares of common stock at a conversion price below the stated price
on the debentures. As of May 31, 1996, approximately $8,600,000 of these
debentures converted at the rate of $2.50 per share and the Company
recognized a charge of $729,000 due to the lower conversion price offer.
As of December 31, 1997 the remaining debentures outstanding, all bearing
interest at 8% per annum, were $19,533. All such amounts are due in 1998.
NOTE I - INCOME TAXES
There was no provision for income taxes for the periods presented due to
losses incurred. The major deferred tax asset (liability) items at
December 31, 1997 and May 31, 1996 are as follows:
December 31, December 31,
1997 1996
----------- -----------
Assets:
Allowances established against
realization of certain assets $ 12,000 $ 12,000
Net operating loss carryforwards 8,630,200 7,331,000
Accrued liabilities and other 139,200 259,000
---------- ---------
8,781,400 7,602,000
Valuation allowance (8,781,400) (7,602,000)
---------- ---------
$ 0 $ 0
========== =========
The difference between the actual income tax benefit and the tax benefit
computed by applying the statutory Federal income tax rate to the net loss
before income taxes is attributable to the inability to recognize
currently the future benefit of net operating loss carryforwards.
At December 31, 1997, the Company has available for U.S. Federal and
California income tax purposes net operating loss carryforwards of
approximately $17,086,000 and $7,212,000, respectively. These
carryforward amounts expire in the years 2000 through 2012 and 1998
through 2002, respectfully. At December 31, 1997, the Company has
available investment credits of approximately $32,300 to offset future
U.S. Federal income tax liability. The ultimate utilization of the net
F21<PAGE>
operating loss and investment credit carryforwards may be restricted in
the future due to changes in the ownership of the Company. The Company
also has Mexican net operating loss carryforwards of approximately
$6,669,000 which may be utilized to offset future taxable income. The
Mexican losses are subject to a ten-year tax carryforward period and
expire in the years 2002 through 2007.
The Company has recorded a valuation allowance for that portion of the
deferred tax asset that the Company does not believe to be realizable.
NOTE J - SHAREHOLDERS EQUITY
Stock Options
In 1988, the Company adopted an incentive stock option plan (300,000
shares authorized). Under the incentive stock option plan, options may be
granted to employees at a price which is not less than 100% of the fair
market value on the date of grant. Options granted under the incentive
stock option plan vest over a three-year period commencing six months from
the date of grant and are exercisable for five years from the date of
grant. At December 31, 1997, there were no options outstanding under the
incentive stock option plan, and 134,500 options are available for grant.
The incentive stock option plan will expire 10 years from the date of
adoption.
On August 18, 1992, the Company adopted an omnibus stock option plan (the
1992 Plan ) which authorized the issuance of 1,600,000 options to acquire
the Company s common stock. At December 31, 1997, there were options
outstanding under the 1992 Plan for 826,000 shares (of which 756,000 were
vested), and 62,500 options available for grant. These options will
expire 10 years from the date of grant.
On March 24, 1993, the Company adopted an omnibus stock option plan (the
1993 Plan ) which authorized the issuance of 1,000,000 options to acquire
the Company s common stock. The terms of the 1993 Plan are the same as
the 1992 Plan. At December 31, 1997, there were options outstanding under
the 1993 Plan for 380,000 shares (of which 326,000 shares were vested),
and 295,000 options available for grant. These options expire 10 years
from the date of the grant.
During fiscal 1995, the Board of Directors approved the grant to various
officers, directors, and employees of the Company of nonstatutory stock
options to purchase an aggregate of 2,412,500 shares of common stock. The
options were granted at exercise prices equal to or exceeding the fair
market value of the Company s common stock on the measurement date, expire
10 years from the date of grant, and have various vesting schedules.
During fiscal 1996, the Board of Directors approved the grant to various
officers, directors and employees of the Company of non-statutory stock
options to purchase an aggregate of 5,040,000 shares of common stock. The
options were granted at exercise prices equal to or exceeding the fair
F22<PAGE>
market value of the Company s common stock on the measurement date, expire
10 years from the date of grant and have various vesting schedules. In
December, 1996, the Company rescinded its granting of 3,195,000 of these
options and deferred issuance of 1,300,000 of these options pending
shareholder approval, which was subsequently denied. During the seven
months ended December 31, 1996, the Company granted options to purchase
300,000 shares of common stock, inclusive of options for 250,000 shares at
$3.00 associated with the BFI-OMEGA transaction.
On May 15, 1997, the Company adopted an omnibus stock option plan (the
1997 Plan ) which authorized the issuance of 6,000,000 options to acquire
the Company s common stock. At December 31, 1997 there were no options
outstanding under this plan.
During the year ended December 31, 1997, the Board of Directors approved
the grant to various officers, directors and employees of the Company of
options to purchase an aggregate of 890,000 shares of common stock. The
options were granted at exercise prices equal to or exceeding the fair
market value of the Company s common stock on the measurement date, expire
10 years from the date of grant and have various vesting schedules.
The following is a summary of options granted:
<TABLE><S> <C> <C> <C>
Year ended Seven months ended Year ended
December 31, 1997 December 31, 1996 May 31, 1995
----------------- ------------------ ------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------ -------- ------ -------- ------ -------
Options outstanding
at beginning of the
year 4,848,250 $2.75 7,904,250 $3.07 4,487,500 $2.17
Granted 890,000 1.47 300,000 3.00 5,040,000 3.56
Exercised - - (161,000) 1.38 (1,547,000) 2.10
Canceled (1,815,250) 3.25 (3,195,000) 3.63 (76,250) 2.25
---------- ---- ---------- ---- ---------- ----
Options outstanding
at end of the year 3,923,000 $2.23 4,848,250 $2.75 7,904,250 $3.07
Options Exercisable 3,699,000 2,982,000 2,855,750
</TABLE>
Of the 300,000 options granted during the seven months ended December 31,
1996, 50,000 were issued at fair market value and 250,000 were issued
below fair market value, with the Company recording a charge of $125,000
representing the discount.
The following significant assumptions were utilized to calculate the fair
value information presented utilizing the Black-Scholes Multiple Option
F23<PAGE>
Approach:
December, 1997 December, 1996 May, 1996
-------------- -------------- ---------
Risk Free interest rate 6.00% 6.10% 6.10%
Expected life 1.31 years 1.2 years 4.7 years
Expected volatility .9877 1.05 1.05
Expected dividends - - -
Weighted average fair
value of options granted .615 3.36 3.54
<TABLE><S><C> <C> <C> <C> <C> <C>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------------------ -------------------------
Weighted
average Weighted Weighted
Number remaining average Number average
Range of outstanding contractual life exercise exercisable exercise
exercise prices as of 12/31/97 in years price as of 12/31/97 price
--------------- -------------- ---------------- -------- -------------- --------
$1.250 - $1.625 890,000 9.10 $1.4716 820,000 $1.4848
$2.250 - $2.250 2,313,000 6.33 $2.2500 2,159,000 $2.2500
$2.500 - $2.500 200,000 8.37 $2.5000 200,000 $2.5000
$3.000 - $3.000 380,000 8.62 $3.0000 380,000 $3.0000
$3.625 - $3.625 50,000 8.01 $3.6250 50,000 $3.6250
$4.500 - $4.500 90,000 8.01 $4.5000 90,000 $4.5000
--------- ---- ------ --------- ------
$1.250 - $4.500 3,923,000 7.34 $2.2279 3,699,000 $2.2443
========= ==== ====== ========= ======
</TABLE>
As the Company has adopted the disclosure requirements of SFAS 123, the
following table shows pro forma net loss and loss per share as if the fair
value based accounting method had been used to account for stock based
compensation cost.
<TABLE><S> <C> <C> <C>
Year ended Seven months ended Year ended
December 31, 1997 December 31, 1996 May 31, 1996
----------------- ------------------ ------------
Net Loss $(4,610,133) $(3,280,000) $(6,780,000)
Pro forma compensation expense (547,000) (355,000) (1,023,000)
---------- ---------- ----------
Pro forma net loss $(5,157,133) $(3,635,000) $(7,803,000)
========== ========== ==========
Pro forma loss per share $(.17) $(.13) $(.34)
===== ===== =====
F24<PAGE>
</TABLE>
The effects of applying FASB 123 in this pro forma disclosure are not
indicative of future amounts.
Stock Purchase Warrants
In connection with various debt offerings, stock placements and services
provided, the Company has issued various stock purchase warrants. All
such warrants were issued at prices which approximated or exceeded fair
market value of the Company s common stock at the date of grant and are
exercisable at dates varying from one to five years.
Summarized information for stock purchase warrants follows:
<TABLE><S> <C> <C>
Number Price
of Warrants Per Share
----------- ---------
Warrants outstanding at May 31, 1995 5,229,585 $1.51-2.25
Issued 4,690,636 1.91-5.00
Exercised (2,554,836) 1.51-2.25
--------- ---------
Warrants outstanding at May 31, 1996 7,365,385 1.59-5.00
Issued - -
Exercised (210,000) 1.51-2.00
--------- ---------
Warrants outstanding at December 31, 1996 7,155,385 1.51-5.00
Issued 1,110,626 1.50
Exercised (910,626) 1.50
Expired (693,500) 2.00-2.25
--------- ---------
Warrants outstanding at December 31, 1997 6,661,885 $1.50
========= ====
</TABLE>
Common Stock
During the fiscal year ended May 31, 1996, the Company issued 3,525,000
shares in conversion of approximately $8,600,000 of its 8% and 9%
debentures (see Note H). In addition, the Company issued 1,500,000 shares
as the result of the exercise of stock options, at prices ranging from
$1.375 to $2.25 per share. Shares totaling 4,044,000 were issued in
private placements at prices ranging from $1.05 to $4.00 per share.
Approximately 2,450,000 shares were issued as a result of the exercise of
warrants, at prices ranging from $1.51 to $2.25. Shares totaling
1,210,564 were issued in conversion of the CVD debt (see Note G) at a
conversion price of $1.59 per share.
T h e Company realized net cash proceeds of $16,500,000 from the
F25<PAGE>
aforementioned year ended May 1996 transactions. Additionally, debt
totaling $10,700,000, representing debentures, was converted into equity.
During the seven months ended December 31, 1996, the Company issued a
total of 390,000 shares, with 161,000 being the result of option
exercises, 210,000 being the result of warrants being exercised, 4,000
from a debenture conversion and 15,000 from a previously accrued award.
The Company realized net proceeds of $620,000 from these transactions.
During the year ended December 31, 1997, the Company issued a total of
940,600 shares, with 910,600 being the result of warrant exercises and
30,000 issued as stock bonuses previously accrued in 1996. The Company
realized net proceeds of $1,366,000 from these transactions.
NOTE K - EMPLOYEE BENEFIT PLANS
Effective January 1, 1990, the Company established a contributory profit
sharing and thrift plan for all salaried employees. Discretionary
matching contributions are made by the Company based upon participant
contributions, within limits provided for in the plan. No contributions
were made in the year ended December 31, 1997, the seven months ended
December 31, 1996 or the years ended May 31, 1996 and 1995, respectively.
Additionally, the Company participates in several multi-employer plans,
which provide defined benefits to union employees of its participating
companies. The Company makes contributions determined in accordance with
the provisions of negotiated labor contracts. The contributions were
$257,000, $127,000, $296,000 and $320,000 for the year ended December 31,
1997, the seven months ended December 31, 1996 and for the fiscal years
ended May 31, 1996 and 1995, respectively.
NOTE L - SIGNIFICANT CUSTOMERS
Sales for the twelve months ended December 31, 1997 to Curtom-Metalclad
were approximately $3,573,000, including $3,533,000 performed at Edison
plants under the strategic alliance program.
The Company had trade accounts receivable of $355,000 from Curtom-
Metalclad as of December 31, 1997. Additionally, the Company had sales of
$1,455,000 and $1,557,000 to Texaco and Arco, respectively, during 1997.
Accounts receivable from these two customers were $128,000 and $489,000,
respectively, as of December 31, 1997.
Sales for the seven months ended December 31, 1996 to Curtom-Metalclad
were approximately $3,445,000, including $3,345,000 performed at Edison
plants.
S a l e s to Southern California Edison and Curtom-Metalclad were
F26<PAGE>
approximately $2,417,000 and $1,267,000, respectively, in the year ended
May 31, 1996.
Sales to Brown & Root and Curtom-Metalclad were approximately $3,894,000
and $2,296,000, respectively in the year ended May 31, 1995. The Company
had trade accounts receivable from Brown & Root and Curtom-Metalclad of
approximately $194,000 and $408,000, respectively, as of May 31, 1995.
NOTE M - COMMITMENTS AND CONTINGENT LIABILITIES
The Company has employment agreements with its executive officers. These
agreements continue until terminated by the executive or the Company and
provide for minimum salary levels, as adjusted for cost of living changes.
These agreements include incentive bonuses based upon specified management
goals, and a covenant against competition with the Company extending for a
period of time after termination.
The Company leases its facilities under non-cancelable operating lease
agreements which expire at various dates through 2002. Total rent expense
under operating leases was $307,839, $168,722, $404,647 and $373,371 for
the year ended December 31, 1997, seven months ended December 31, 1996 and
for the years ended May 31, 1996 and 1995, respectively. Future minimum
non-cancelable lease commitments are as follows:
Year ending December 31, 1998 $380,805
1999 150,117
2000 106,605
2001 102,055
2002 63,917
--------
$803,499
========
In the ordinary course of its insulation business, certain parties have
filed a substantial number of claims against the Company for actual and
punitive damages. Throughout its history, the Company has maintained
insurance policies that typically respond to these claims. Based on the
opinion of counsel, it is management s opinion that these actions,
individually and in the aggregate, will not have a significant adverse
impact on the Company s financial position or results of operations.
NOTE N - RELATED PARTY TRANSACTIONS
Receivables from related parties are comprised of the following:
December 31, December 31,
1997 1996
------------ ------------
Parc-Metalclad $ 12,644 $ -
F27<PAGE>
Metalclad Pacific - other - 10,000
Loans to executive officers, directors
and employees 119,181 230,379
------- -------
$131,825 $240,379
======= =======
Loans to executive officers, directors and employees are represented by
promissory notes, due on demand and bear interest at 6%.
An officer of the Company is a partner in a law firm which has received
payments for legal fees of approximately $47,000, $54,000, $283,000 and
$280,000 for the year ended December 31, 1997, the seven months ended
December 31, 1996 and years ended May 31, 1996 and 1995, respectively.
During fiscal 1995 the Company loaned $370,000 each to Grant S. Kesler and
T. Daniel Neveau, officers of the Company. Each loan is collateralized by
300,000 shares of Company stock. The loans accrued interest at 7% over
prime which was 9% at May 31, 1995. In February 1996, Messrs. Kesler and
Neveau each repaid $150,000 to the Company. In March 1996, the notes were
amended to modify the loan principal between Messrs. Kesler and Neveau as
well as to adjust the interest rates, effective March 1, to a variable
rate based upon the Company s quarterly investment rate. The amendment
also stipulated that the notes be re-paid by May 31, 1997. The Board of
Directors has extended repayment of these notes until March 31, 1998.
In June 1996, Mr. Neveau, Chairman of the Board, Senior Vice President,
and a Director of the Company, resigned his positions. As a result, the
Company and Mr. Neveau renegotiated the terms of his employment agreement
relative to compensation, benefits and stock options. As of May 31, 1996,
the Company accrued $275,000, representing the Company s remaining
obligation to Mr. Neveau. As of December 31, 1996, $175,000 remained
accrued by the Company. Since May 1997, the Company has been offsetting
payments due Mr. Neveau against his outstanding loan balance to the
Company. As of December 31, 1997, the Company s remaining receivable from
Mr. Neveau was $151,400.
During the fiscal year ended May 31, 1996, the Company agreed to pay
consulting fees of $51,000 to Gordon M. Liddle, a former director of the
Company. These fees are for services in connection with management
oversight and other consulting to the Company. Additionally, the Company
has entered into an 18-month consulting agreement with Mr. Liddle for on-
going consulting services at a rate of $5,000 per month. Mr. Liddle s
consulting agreement expired on December 31, 1997.
During the fiscal year ended May 31, 1996, the Company entered into an
agreement with The Chesapeake Group, whose Managing Director is Douglas S.
Land, a former director of the Company. The agreement engages Chesapeake
as a financial consultant to the Company in matters pertaining to its
Mexican waste operations. During the period ended May 31, 1996, the
Company agreed to pay to Chesapeake $100,000 for consulting services
F28<PAGE>
rendered during calendar year 1995 and $8,000 per month for on-going
consulting services. In addition, the Company agreed to pay a transaction
fee for the successful closing of the BFI-OMEGA joint venture, of $325,000
plus the granting of 250,000 options for the purchase of common stock of
the Company exercisable at $3.00 per share. In May 1997, the consulting
agreement with Chesapeake was terminated by mutual consent.
In December, 1996, the Company loaned $150,000 to Mr. Javier Guerra
Cisneros, a Director and Vice President of Mexico Operations. The loan is
collateralized by 300,000 shares of stock of the Company and is
represented by a promissory note bearing interest at 10%. In February,
Mr. Guerra repaid $120,000 of this note. The Board of Directors has
extended repayment of the remaining balance until March 31, 1998.
NOTE O - SEGMENT INFORMATION
The following segment information is provided for the Company s two
primary segments: commercial insulation (located in the United States)
and waste management (located in Mexico).
Segments of Business by Industry
<TABLE><S> <C> <C> <C> <C>
Year Seven Months Year
Ended Ended Ended
December 31, December 31, May 31,
------------ ------------ --------------------------
1997 1996 1996 1995
---- ---- ---- ----
Gross sales
Insulation $ 8,971,103 $5,518,606 $11,445,086 $15,723,915
Waste management 2,913,720 631,884 3,456,680 2,228,169
---------- --------- ---------- ----------
Total 11,884,823 6,150,490 14,901,766 17,952,084
========== ========= ========== ==========
Operating profit (loss)
Insulation 107,712 (20,867) (853,919) 257,295
Waste management (2,216,764) (1,281,747) (560,082) (9,111,722)
Corporate expense (2,468,973) (1,940,147) (3,676,907) (4,773,292)
---------- --------- ---------- ----------
Total (4,578,025) (3,242,761) (5,090,908) (13,627,719)
Interest expense, net (29,695) (37,054) (960,220) (1,771,394)
Other expense (2,413) - - (728,644)
---------- --------- ---------- ----------
Net Loss $(4,610,133) $(3,279,815) $(6,779,772) $(15,399,113)
========== ========= ========== ==========
Identifiable assets
Insulation $ 2,247,331 $ 3,321,304 $ 3,264,649 $ 4,572,010
Waste management 8,436,379 6,899,214 6,962,264 4,808,400
F29<PAGE>
Corporate 2,501,863 4,710,934 7,475,120 1,329,807
---------- --------- ---------- ----------
Total $13,215,573 $14,931,452 $17,702,033 $10,710,217
========== ========= ========== ==========
Capital expenditures
Insulation $ - $ 31,028 $ 29,792 $ 489,915
Waste management 104,113 180,083 705,988 2,921,165
---------- --------- ---------- ----------
Total $ 104,113 $ 211,111 $ 735,780 $ 3,411,080
========== ========= ========== ==========
Depreciation and amortization
Insulation $ 235,045 $ 132,026 $ 154,555 $ 1,032,011
Waste management 283,661 150,542 205,087 223,105
---------- --------- ---------- ----------
Total $ 518,706 $ 282,568 $ 359,642 $ 1,255,116
========== ========= ========== ==========
</TABLE>
NOTE P - UNAUDITED INTERIM INFORMATION
The following condensed financial information for the twelve month and
seven month periods ended December 31, 1997 and 1996 is unaudited and is
being presented for comparative purposes.
<TABLE><S> <C> <C> <C> <C>
Twelve Months Ended Seven Months Ended
December 31, December 31,
------------------------- ----------------------
1997 1996 1996 1995
---- ---- ---- ----
Revenues - Insulation Business $8,971,103 $10,144,474 $5,518,606 $6,910,000
Revenues - Waste Management 2,913,720 2,320,398 631,884 1,450,860
Operating Loss - Insulation Business 107,712 (873,517) (20,867) (1,269)
Operating Loss - Waste Management (2,216,764) (1,917,915) (1,281,747) 76,086
Corporate Expense 2,468,973 3,828,047 1,940,147 1,789,007
Interest Expense 29,695 163,123 37,054 834,149
Other Expense 2,413 - - 728,644
---------- ---------- ---------- ----------
Net Loss $(4,610,133) $(6,782,602) $(3,279,815) (3,276,983)
========== ========== ========== ==========
Net Loss Per Share - Basic and Diluted $(.16) $(.24) $(.11) $(.17)
===== ===== ===== =====
</TABLE>
F30<PAGE>
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
<TABLE><S> <C> <C> <C> <C> <C> <C>
Additions
Balance at Charged to Charged to Balance at
Beginning Costs and Other End of
Description Of period Expenses Accounts Deductions Other Period
---------------------------------------- ---------- ---------- ---------- ---------- ------------ -----------
Year ended December 31, 1997
Deducted from asset accounts:
Allowance for doubtful accounts $67,972 $8,340 $38,018 $(31,416) $ (888)(A) $82,026
Allowance for excess and
obsolete inventory 25,289 0 0 (9,280) 0 16,009
Seven months ended December 31, 1996
Deducted from asset accounts:
Allowance for doubtful accounts 66,566 4,044 0 0 (2,638)(A) 67,972
Allowance for excess and
obsolete inventory 25,000 289 0 0 0 25,289
Year ended May 31, 1996
Deducted from asset accounts:
Allowance for doubtful accounts 44,480 30,894 0 6,521 (2,287)(A) 66,566
Allowance for excess and
obsolete inventory 25,000 0 0 0 0 25,000
Year ended May 31, 1995
Deducted from asset accounts:
Allowance for doubtful accounts 72,983 0 0 0 (28,503)(B) 44,480
Allowance for excess and
obsolete inventory 25,000 0 0 0 0 25,000
------------------------------------
(A) Exchange rate effect
(B) Represents net change in valuation account
</TABLE>
EXHIBIT 10.23
AMENDMENT
Metalclad Corporation ( Company ) and Anthony C. Dabbene ( Employee )
amend their Employment Agreement, dated July 10, 1996, as follows:
1. TERM: The term is extended to July 22, 1998.
2. COMPENSATION: Base salary is increased to $180,000 per year
effective May 1, 1997. Annual Christmas Bonus is increased to 20%.
3. OTHER TERMS: All other terms and conditions not amended herein
shall remain in full force and effect for the life of the contract.
Dated this 22nd day of July, 1997.
METALCLAD CORPORATION
By:
------------------------------------
Grant S. Kesler, President
EMPLOYEE
---------------------------------------
Anthony C. Dabbene
EXHIBIT 10.24
NON-STATUTORY
STOCK OPTION AGREEMENT
of
METALCLAD CORPORATION
THIS NON-STATUTORY STOCK OPTION AGREEMENT, hereinafter referred to as
the "Option" or the "Agreement" is made as of the 2nd of January, 1997
between METALCLAD CORPORATION, a Delaware corporation (the "COMPANY") and
Grant S. Kesler (the OPTIONEE"), residing at 2 Atoll Drive, Corona del
Mar, California 92665
The Board of Directors of the COMPANY hereby grants an option on
500,000 shares of common stock of the COMPANY ("Common Stock") to the
OPTIONEE at the price and in all respects subject to the terms,
definitions and provisions of the Agreement.
1. Option Price. The option price is $1.625 per share.
2. Exercise of Option.
2.1 Right to Exercise. The options shall be exercisable by the
OPTIONEE, his personal representative, or his assignee, in whole or in
part in accordance with the terms of this Agreement and is exercisable for
a period of (10) years from the date hereof; expiring on January 2, 2007.
2.2 Method of Exercise. This Option shall be exercisable by a
written notice which shall:
(a) State the election to exercise the Option, the number
of shares in respect of which it is being exercised, the person in whose
name the shares are to be issued (if the shares are issued to
individuals), the names, addresses and Social Security Numbers of such
persons; and
(b) Contain such representations and agreements as to the
holder's investment intent with respect to such shares of Common Stock as
are required by law may be satisfactory to the COMPANY's counsel; and
(c) Be signed by the person or persons entitled to exercise
the Option and, if the Option is being exercised by any person or persons
other than the OPTIONEE, be accompanied by proof, satisfactory to counsel
for the COMPANY, of the right of such person or persons to exercise the
Option; and
(d) Be accompanied by a payment for the purchase price of
those shares with respect to which the Option is being exercised in the
form of a certified or bank cashier's or teller's check. The certificate
or certificates for shares of Common Stock as to which the Option shall be
exercised shall be registered in the name of the person or persons
exercising the Option.
2.3 Restriction on Exercise. As a condition to his exercise of<PAGE>
this Option, the COMPANY may require the person exercising this Option to
comply with applicable laws or regulations.
3. Transferability of Option. This Option may be transferred in any
manner by will or the laws of descent or distribution and may be exercised
during the lifetime of the OPTIONEE by an assignee of the OPTIONEE.
4. Stock Subject to the Option. The COMPANY shall set aside 500,000
shares of the Common Stock which it now holds as authorized and unissued
shares. If the Option should expire or become unexercisable for any
reason without having been exercised in full, the unpurshased shares which
were subject thereto shall be free from any restrictions occasioned by
this Option Agreement. If the COMPANY has been listed on the stock
exchange, the COMPANY will not be required to issue or deliver any
certificate or certificates for shares to be issued hereunder until such
shares have been listed (or authorized for listing upon official notice of
issuance) upon each stock exchange on which outstanding shares of the same
class may then be listed and until the COMPANY has taken such steps as
may, in the opinion of counsel for the CORPORATION, be required by law and
applicable regulations, including the rules and regulations of the
Securities and Exchange Commission, and state blue sky laws and
regulations, in connection with the issuance or sale of such shares, and
the listing of such shares on each such share on each such exchange. The
COMPANY will use its best efforts to comply with any such requirements
forthwith upon the exercise of the Option.
5. Adjustments Upon Changes in Capitalization. If all or any
portion of the Option is exercised subsequent to any stock dividend,
split-up, capitalization, combination or exchange of shares, merger,
transaction of or by the COMPANY, as a result of which shares of any class
shall be issued in respect of outstanding shares of the class covered by
the Option or shares of the class covered by the Option shall be changed
into the same or a different number of shares of the same or another class
or classes, the person or persons so exercising such an Option shall
receive, for the aggregate option price payable upon such exercise of the
Option, the aggregate number and class of shares equal to the number and
class of shares he or she would have had on the date of exercise had the
shares been purchased for the sale aggregate price at the date the Option
was granted and had not been disposed of, taking into consideration any
such stock dividend, split-up, recapitalization, combination or exchange
of shares, merger, consolidation, acquisition of property or stock,
separation, reorganization, or other similar change or transaction;
provided, however, that no fractional share shall be issued upon any such
exercise, and the aggregate price paid shall be appropriately reduced on
account of any fractional share not issued. Provided, however, any shares
which are issued at or about this option price or pursuant to warrant or
options whose exercise price is at or above the exercise price provided in
the agreement shall not be considered to be diluted for the purpose of
this agreement and no adjustment will be made.
6. Notices. Each notice relating to this Agreement shall be in
writing and delivered in person or by certified mail to the proper
address. Each notice shall be deemed to have been given on the date it is
received. Each notice to the COMPANY shall be addressed to it at its
principal office, at 3737 Birch Street, Suite 300, Newport Beach,
California 92660, to the attention of the Secretary of the COMPANY. Each<PAGE>
notice to the OPTIONEE or other person or persons then entitled to
exercise the Option shall be addressed to the OPTIONEE or such other
person or persons at the OPTIONEE's address set forth in the heading of
this Agreement. Anyone to whom a notice may be given under this Agreement
may designate a new address by notice to that effect.
7. Benefits of Agreement. This Agreement shall inure to the benefit
of and be binding upon each successor of the COMPANY. All obligations
imposed upon the OPTIONEE and all rights granted to the COMPANY under this
Agreement shall be binding upon the OPTIONEE's heirs, legal
representatives, and successors. This Agreement shall be the sole and
exclusive source of any and all rights which the OPTIONEE, his heirs,
legal representatives, or successors may have in respect to the Plan or
any options or Common Stock granted or issued thereunder, whether to him,
or herself, or to any other person.
8. Resolution of Disputes. Any dispute or disagreement which
should arise under, or as a result of, or in any way relate to, the
interpretation, construction or application of this Agreement will be
determined by the Board of Directors of the COMPANY. Any determination
made hereunder shall be final, binding, and conclusive for all purposes.
IN WITNESS WHEREOF, the COMPANY and the OPTIONEE have caused this
Agreement to be executed as the day, month and year first above-written.
COMPANY: METALCLAD CORPORATION
a Delaware corporation
By:
------------------------------
(CORPORATE SEAL)
OPTIONEE:
------------------------------
Grant S. Kesler
EXHIBIT 10.25
NON-STATUTORY
STOCK OPTION AGREEMENT
of
METALCLAD CORPORATION
THIS NON-STATUTORY STOCK OPTION AGREEMENT, hereinafter referred to as
the "Option" or the "Agreement" is made as of the 15th of May, 1997
between METALCLAD CORPORATION, a Delaware corporation (the "COMPANY") and
Jose Akle Fierro (the OPTIONEE"), residing at Jose Vasconcelos 218-6,
Mexico, Federal District 06140, Mexico.
The Board of Directors of the COMPANY hereby grants an option on
100,000 shares of common stock of the COMPANY ("Common Stock") to the
OPTIONEE at the price and in all respects subject to the terms,
definitions and provisions of the Agreement.
1. Option Price. The option price is $1.25 per share.
2. Exercise of Option.
2.1 Right to Exercise. The options shall be exercisable by the
OPTIONEE, his personal representative, or his assignee, in whole or in
part in accordance with the terms of this Agreement and is exercisable for
a period of (10) years from the date hereof; expiring on May 29, 2007.
2.2 Method of Exercise. This Option shall be exercisable by a
written notice which shall:
(a) State the election to exercise the Option, the number
of shares in respect of which it is being exercised, the person in whose
name the shares are to be issued (if the shares are issued to
individuals), the names, addresses and Social Security Numbers of such
persons; and
(b) Contain such representations and agreements as to the
holder's investment intent with respect to such shares of Common Stock as
are required by law may be satisfactory to the COMPANY's counsel; and
(c) Be signed by the person or persons entitled to exercise
the Option and, if the Option is being exercised by any person or persons
other than the OPTIONEE, be accompanied by proof, satisfactory to counsel
for the COMPANY, of the right of such person or persons to exercise the
Option; and
(d) Be accompanied by a payment for the purchase price of
those shares with respect to which the Option is being exercised in the
form of a certified or bank cashier's or teller's check. The certificate
or certificates for shares of Common Stock as to which the Option shall be<PAGE>
exercised shall be registered in the name of the person or persons
exercising the Option.
2.3 Restriction on Exercise. As a condition to his exercise of
this Option, the COMPANY may require the person exercising this Option to
comply with applicable laws or regulations.
3. Transferability of Option. This Option may be transferred in any
manner by will or the laws of descent or distribution and may be exercised
during the lifetime of the OPTIONEE by an assignee of the OPTIONEE.
4. Stock Subject to the Option. The COMPANY shall set aside 100,000
shares of the Common Stock which it now holds as authorized and unissued
shares. If the Option should expire or become unexercisable for any
reason without having been exercised in full, the unpurshased shares which
were subject thereto shall be free from any restrictions occasioned by
this Option Agreement. If the COMPANY has been listed on the stock
exchange, the COMPANY will not be required to issue or deliver any
certificate or certificates for shares to be issued hereunder until such
shares have been listed (or authorized for listing upon official notice of
issuance) upon each stock exchange on which outstanding shares of the same
class may then be listed and until the COMPANY has taken such steps as
may, in the opinion of counsel for the CORPORATION, be required by law and
applicable regulations, including the rules and regulations of the
Securities and Exchange Commission, and state blue sky laws and
regulations, in connection with the issuance or sale of such shares, and
the listing of such shares on each such share on each such exchange. The
COMPANY will use its best efforts to comply with any such requirements
forthwith upon the exercise of the Option.
5. Adjustments Upon Changes in Capitalization. If all or any
portion of the Option is exercised subsequent to any stock dividend,
split-up, capitalization, combination or exchange of shares, merger,
transaction of or by the COMPANY, as a result of which shares of any class
shall be issued in respect of outstanding shares of the class covered by
the Option or shares of the class covered by the Option shall be changed
into the same or a different number of shares of the same or another class
or classes, the person or persons so exercising such an Option shall
receive, for the aggregate option price payable upon such exercise of the
Option, the aggregate number and class of shares equal to the number and
class of shares he or she would have had on the date of exercise had the
shares been purchased for the sale aggregate price at the date the Option
was granted and had not been disposed of, taking into consideration any
such stock dividend, split-up, recapitalization, combination or exchange
of shares, merger, consolidation, acquisition of property or stock,
separation, reorganization, or other similar change or transaction;
provided, however, that no fractional share shall be issued upon any such
exercise, and the aggregate price paid shall be appropriately reduced on
account of any fractional share not issued. Provided, however, any shares
which are issued at or about this option price or pursuant to warrant or
options whose exercise price is at or above the exercise price provided in
the agreement shall not be considered to be diluted for the purpose of
this agreement and no adjustment will be made.<PAGE>
6. Notices. Each notice relating to this Agreement shall be in
writing and delivered in person or by certified mail to the proper
address. Each notice shall be deemed to have been given on the date it is
received. Each notice to the COMPANY shall be addressed to it at its
principal office, at 3737 Birch Street, Suite 300, Newport Beach,
California 92660, to the attention of the Secretary of the COMPANY. Each
notice to the OPTIONEE or other person or persons then entitled to
exercise the Option shall be addressed to the OPTIONEE or such other
person or persons at the OPTIONEE's address set forth in the heading of
this Agreement. Anyone to whom a notice may be given under this Agreement
may designate a new address by notice to that effect.
7. Benefits of Agreement. This Agreement shall inure to the benefit
of and be binding upon each successor of the COMPANY. All obligations
imposed upon the OPTIONEE and all rights granted to the COMPANY under this
Agreement shall be binding upon the OPTIONEE's heirs, legal
representatives, and successors. This Agreement shall be the sole and
exclusive source of any and all rights which the OPTIONEE, his heirs,
legal representatives, or successors may have in respect to the Plan or
any options or Common Stock granted or issued thereunder, whether to him,
or herself, or to any other person.
8. Resolution of Disputes. Any dispute or disagreement which
should arise under, or as a result of, or in any way relate to, the
interpretation, construction or application of this Agreement will be
determined by the Board of Directors of the COMPANY. Any determination
made hereunder shall be final, binding, and conclusive for all purposes.
IN WITNESS WHEREOF, the COMPANY and the OPTIONEE have caused this
Agreement to be executed as the day, month and year first above-written.
COMPANY: METALCLAD CORPORATION
a Delaware corporation
By:
------------------------------------
GRANT S. KESLER, President
(CORPORATE SEAL)
OPTIONEE:
------------------------------------
Jose Akle Fierro
EXHIBIT 10.26
NON-STATUTORY
STOCK OPTION AGREEMENT
of
METALCLAD CORPORATION
THIS NON-STATUTORY STOCK OPTION AGREEMENT, hereinafter referred to as
the "Option" or the "Agreement" is made as of the 15th of May, 1997
between METALCLAD CORPORATION, a Delaware corporation (the "COMPANY") and
Juan Morales, Jr. (the OPTIONEE"), residing at Calzada Del Valle No. 1
Ote., Garza Garcia, Nueve Leon, 66220, Mexico.
The Board of Directors of the COMPANY hereby grants an option on
100,000 shares of common stock of the COMPANY ("Common Stock") to the
OPTIONEE at the price and in all respects subject to the terms,
definitions and provisions of the Agreement.
1. Option Price. The option price is $1.25 per share.
2. Exercise of Option.
2.1 Right to Exercise. The options shall be exercisable by the
OPTIONEE, his personal representative, or his assignee, in whole or in
part in accordance with the terms of this Agreement and is exercisable for
a period of (10) years from the date hereof; expiring on May 29, 2007.
2.2 Method of Exercise. This Option shall be exercisable by a
written notice which shall:
(a) State the election to exercise the Option, the number
of shares in respect of which it is being exercised, the person in whose
name the shares are to be issued (if the shares are issued to
individuals), the names, addresses and Social Security Numbers of such
persons; and
(b) Contain such representations and agreements as to the
holder's investment intent with respect to such shares of Common Stock as
are required by law may be satisfactory to the COMPANY's counsel; and
(c) Be signed by the person or persons entitled to exercise
the Option and, if the Option is being exercised by any person or persons
other than the OPTIONEE, be accompanied by proof, satisfactory to counsel
for the COMPANY, of the right of such person or persons to exercise the
Option; and
(d) Be accompanied by a payment for the purchase price of
those shares with respect to which the Option is being exercised in the
form of a certified or bank cashier's or teller's check. The certificate
or certificates for shares of Common Stock as to which the Option shall be
exercised shall be registered in the name of the person or persons<PAGE>
exercising the Option.
2.3 Restriction on Exercise. As a condition to his exercise of
this Option, the COMPANY may require the person exercising this Option to
comply with applicable laws or regulations.
3. Transferability of Option. This Option may be transferred in any
manner by will or the laws of descent or distribution and may be exercised
during the lifetime of the OPTIONEE by an assignee of the OPTIONEE.
4. 100,000 shares of the Common Stock which it now holds as
authorized and unissued shares. If the Option should expire or become
unexercisable for any reason without having been exercised in full, the
unpurshased shares which were subject thereto shall be free from any
restrictions occasioned by this Option Agreement. If the COMPANY has been
listed on the stock exchange, the COMPANY will not be required to issue or
deliver any certificate or certificates for shares to be issued hereunder
until such shares have been listed (or authorized for listing upon
official notice of issuance) upon each stock exchange on which outstanding
shares of the same class may then be listed and until the COMPANY has
taken such steps as may, in the opinion of counsel for the CORPORATION, be
required by law and applicable regulations, including the rules and
regulations of the Securities and Exchange Commission, and state blue sky
laws and regulations, in connection with the issuance or sale of such
shares, and the listing of such shares on each such share on each such
exchange. The COMPANY will use its best efforts to comply with any such
requirements forthwith upon the exercise of the Option.
5. Adjustments Upon Changes in Capitalization. If all or any
portion of the Option is exercised subsequent to any stock dividend,
split-up, capitalization, combination or exchange of shares, merger,
transaction of or by the COMPANY, as a result of which shares of any class
shall be issued in respect of outstanding shares of the class covered by
the Option or shares of the class covered by the Option shall be changed
into the same or a different number of shares of the same or another class
or classes, the person or persons so exercising such an Option shall
receive, for the aggregate option price payable upon such exercise of the
Option, the aggregate number and class of shares equal to the number and
class of shares he or she would have had on the date of exercise had the
shares been purchased for the sale aggregate price at the date the Option
was granted and had not been disposed of, taking into consideration any
such stock dividend, split-up, recapitalization, combination or exchange
of shares, merger, consolidation, acquisition of property or stock,
separation, reorganization, or other similar change or transaction;
provided, however, that no fractional share shall be issued upon any such
exercise, and the aggregate price paid shall be appropriately reduced on
account of any fractional share not issued. Provided, however, any shares
which are issued at or about this option price or pursuant to warrant or
options whose exercise price is at or above the exercise price provided in
the agreement shall not be considered to be diluted for the purpose of
this agreement and no adjustment will be made.
6. Notices. Each notice relating to this Agreement shall be in
writing and delivered in person or by certified mail to the proper
address. Each notice shall be deemed to have been given on the date it is
received. Each notice to the COMPANY shall be addressed to it at its
principal office, at 3737 Birch Street, Suite 300, Newport Beach,<PAGE>
California 92660, to the attention of the Secretary of the COMPANY. Each
notice to the OPTIONEE or other person or persons then entitled to
exercise the Option shall be addressed to the OPTIONEE or such other
person or persons at the OPTIONEE's address set forth in the heading of
this Agreement. Anyone to whom a notice may be given under this Agreement
may designate a new address by notice to that effect.
7. Benefits of Agreement. This Agreement shall inure to the benefit
of and be binding upon each successor of the COMPANY. All obligations
imposed upon the OPTIONEE and all rights granted to the COMPANY under this
Agreement shall be binding upon the OPTIONEE's heirs, legal
representatives, and successors. This Agreement shall be the sole and
exclusive source of any and all rights which the OPTIONEE, his heirs,
legal representatives, or successors may have in respect to the Plan or
any options or Common Stock granted or issued thereunder, whether to him,
or herself, or to any other person.
8. Resolution of Disputes. Any dispute or disagreement which
should arise under, or as a result of, or in any way relate to, the
interpretation, construction or application of this Agreement will be
determined by the Board of Directors of the COMPANY. Any determination
made hereunder shall be final, binding, and conclusive for all purposes.
IN WITNESS WHEREOF, the COMPANY and the OPTIONEE have caused this
Agreement to be executed as the day, month and year first above-written.
COMPANY: METALCLAD CORPORATION
a Delaware corporation
By:
------------------------------------
GRANT S. KESLER, President
(CORPORATE SEAL)
OPTIONEE:
------------------------------------
Juan Morales, Jr.
EXHIBIT 10.27
NON-STATUTORY
STOCK OPTION AGREEMENT
of
METALCLAD CORPORATION
THIS NON-STATUTORY STOCK OPTION AGREEMENT, hereinafter referred to as
the "Option" or the "Agreement" is made as of the 15th of May, 1997
between METALCLAD CORPORATION, a Delaware corporation (the "COMPANY") and
Anthony C. Dabbene (the OPTIONEE"), residing at 26921 Magnolia Court,
Laguna Hills, California 92653.
The Board of Directors of the COMPANY hereby grants an option on
100,000 shares of common stock of the COMPANY ("Common Stock") to the
OPTIONEE at the price and in all respects subject to the terms,
definitions and provisions of the Agreement.
1. Option Price. The option price is $1.25 per share.
2. Exercise of Option.
2.1 Right to Exercise. The options shall be exercisable by the
OPTIONEE, his personal representative, or his assignee, in whole or in
part in accordance with the terms of this Agreement and is exercisable for
a period of (10) years from the date hereof; expiring on May 29, 2007.
2.2 Method of Exercise. This Option shall be exercisable by a
written notice which shall:
(a) State the election to exercise the Option, the number
of shares in respect of which it is being exercised, the person in whose
name the shares are to be issued (if the shares are issued to
individuals), the names, addresses and Social Security Numbers of such
persons; and
(b) Contain such representations and agreements as to the
holder's investment intent with respect to such shares of Common Stock as
are required by law may be satisfactory to the COMPANY's counsel; and
(c) Be signed by the person or persons entitled to exercise
the Option and, if the Option is being exercised by any person or persons
other than the OPTIONEE, be accompanied by proof, satisfactory to counsel
for the COMPANY, of the right of such person or persons to exercise the
Option; and
(d) Be accompanied by a payment for the purchase price of
those shares with respect to which the Option is being exercised in the
form of a certified or bank cashier's or teller's check. The certificate
or certificates for shares of Common Stock as to which the Option shall be
exercised shall be registered in the name of the person or persons
exercising the Option.
2.3 Restriction on Exercise. As a condition to his exercise of
this Option, the COMPANY may require the person exercising this Option to<PAGE>
comply with applicable laws or regulations.
3. Transferability of Option. This Option may be transferred in any
manner by will or the laws of descent or distribution and may be exercised
during the lifetime of the OPTIONEE by an assignee of the OPTIONEE.
4. Stock Subject to the Option. The COMPANY shall set aside 100,000
shares of the Common Stock which it now holds as authorized and unissued
shares. If the Option should expire or become unexercisable for any
reason without having been exercised in full, the unpurshased shares which
were subject thereto shall be free from any restrictions occasioned by
this Option Agreement. If the COMPANY has been listed on the stock
exchange, the COMPANY will not be required to issue or deliver any
certificate or certificates for shares to be issued hereunder until such
shares have been listed (or authorized for listing upon official notice of
issuance) upon each stock exchange on which outstanding shares of the same
class may then be listed and until the COMPANY has taken such steps as
may, in the opinion of counsel for the CORPORATION, be required by law and
applicable regulations, including the rules and regulations of the
Securities and Exchange Commission, and state blue sky laws and
regulations, in connection with the issuance or sale of such shares, and
the listing of such shares on each such share on each such exchange. The
COMPANY will use its best efforts to comply with any such requirements
forthwith upon the exercise of the Option.
5. Adjustments Upon Changes in Capitalization. If all or any
portion of the Option is exercised subsequent to any stock dividend,
split-up, capitalization, combination or exchange of shares, merger,
transaction of or by the COMPANY, as a result of which shares of any class
shall be issued in respect of outstanding shares of the class covered by
the Option or shares of the class covered by the Option shall be changed
into the same or a different number of shares of the same or another class
or classes, the person or persons so exercising such an Option shall
receive, for the aggregate option price payable upon such exercise of the
Option, the aggregate number and class of shares equal to the number and
class of shares he or she would have had on the date of exercise had the
shares been purchased for the sale aggregate price at the date the Option
was granted and had not been disposed of, taking into consideration any
such stock dividend, split-up, recapitalization, combination or exchange
of shares, merger, consolidation, acquisition of property or stock,
separation, reorganization, or other similar change or transaction;
provided, however, that no fractional share shall be issued upon any such
exercise, and the aggregate price paid shall be appropriately reduced on
account of any fractional share not issued. Provided, however, any shares
which are issued at or about this option price or pursuant to warrant or
options whose exercise price is at or above the exercise price provided in
the agreement shall not be considered to be diluted for the purpose of
this agreement and no adjustment will be made.
6. Notices. Each notice relating to this Agreement shall be in
writing and delivered in person or by certified mail to the proper
address. Each notice shall be deemed to have been given on the date it is
received. Each notice to the COMPANY shall be addressed to it at its
principal office, at 3737 Birch Street, Suite 300, Newport Beach,
California 92660, to the attention of the Secretary of the COMPANY. Each
notice to the OPTIONEE or other person or persons then entitled to
exercise the Option shall be addressed to the OPTIONEE or such other<PAGE>
person or persons at the OPTIONEE's address set forth in the heading of
this Agreement. Anyone to whom a notice may be given under this Agreement
may designate a new address by notice to that effect.
7. Benefits of Agreement. This Agreement shall inure to the benefit
of and be binding upon each successor of the COMPANY. All obligations
imposed upon the OPTIONEE and all rights granted to the COMPANY under this
Agreement shall be binding upon the OPTIONEE's heirs, legal
representatives, and successors. This Agreement shall be the sole and
exclusive source of any and all rights which the OPTIONEE, his heirs,
legal representatives, or successors may have in respect to the Plan or
any options or Common Stock granted or issued thereunder, whether to him,
or herself, or to any other person.
8. Resolution of Disputes. Any dispute or disagreement which
should arise under, or as a result of, or in any way relate to, the
interpretation, construction or application of this Agreement will be
determined by the Board of Directors of the COMPANY. Any determination
made hereunder shall be final, binding, and conclusive for all purposes.
IN WITNESS WHEREOF, the COMPANY and the OPTIONEE have caused this
Agreement to be executed as the day, month and year first above-written.
COMPANY: METALCLAD CORPORATION
a Delaware corporation
By:
------------------------------------
GRANT S. KESLER, President
(CORPORATE SEAL)
OPTIONEE:
------------------------------------
Anthony C. Dabbene
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 1644
<SECURITIES> 0
<RECEIVABLES> 2973
<ALLOWANCES> 82
<INVENTORY> 181
<CURRENT-ASSETS> 5239
<PP&E> 7381
<DEPRECIATION> 1274
<TOTAL-ASSETS> 13216
<CURRENT-LIABILITIES> 3536
<BONDS> 1500
<COMMON> 3006
0
0
<OTHER-SE> 5173
<TOTAL-LIABILITY-AND-EQUITY> 13216
<SALES> 11885
<TOTAL-REVENUES> 11142
<CGS> 13251
<TOTAL-COSTS> 15720
<OTHER-EXPENSES> 2
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 30
<INCOME-PRETAX> (4610)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4610)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4610)
<EPS-PRIMARY> (.16)
<EPS-DILUTED> (.16)
</TABLE>
