<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
( X ) QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from -------- to --------
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
incorporation or organization)
Identification No.)
2 Corporate Plaza, Suite 125, Newport Beach, CA 92660
(Address of Principal Executive Office) (Zip Code)
Registrant's telephone number, including area code (714) 719-1234
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 ( )
As of March 31, 1998, the registrant had 30,063,870 shares
outstanding of its Common Stock, $.10 par value.<PAGE>
METALCLAD CORPORATION AND SUBSIDIARIES
TABLE OF CONTENTS
Page
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements:
Consolidated Balance Sheets (unaudited) at March 31, 1998
and December 31, 1997........................................... 1
Consolidated Statements of Operations (unaudited) for the
three months ended March 31, 1998 and 1997....................... 3
Consolidated Statements of Cash Flows (unaudited)
for the three months ended March 31, 1998 and 1997............... 4
Notes to Consolidated Financial Statements....................... 5
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.................... 6
PART II. OTHER INFORMATION........................................ 9
SIGNATURES.........................................................11
EXHIBIT 27.........................................................12<PAGE>
PART I
FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
METALCLAD CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
March 31, December 31,
1998 1997
--------- -----------
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 493,393 $1,643,521
Accounts receivable, less allowance for
doubtful accounts of $97,035 in March 1998
and $82,026 in December 1997 2,899,630 2,890,681
Costs and estimated earnings in excess of
billings on uncompleted contracts 111,947 232,073
Inventories 222,340 181,172
Prepaid expenses and other current assets 140,483 159,581
Receivables from related parties 117,073 131,825
---------- ----------
TOTAL CURRENT ASSETS 3,984,866 5,238,853
Property, plant and equipment, net 6,402,017 6,106,938
Investment and capitalized costs in unconsoli-
dated affiliates 863,506 613,601
Deposits and other assets 384,217 432,087
Goodwill, less accumulated amortization of
$261,595 in March 1998 and $232,354 in
December 1997 769,853 799,094
Real estate held for sale 25,000 25,000
---------- ----------
$12,429,459 $13,215,573
========== ==========
See Notes to Consolidated Financial Statements
1<PAGE>
March 31, December 31,
1998 1997
---------- ------------
(Unaudited)
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $1,711,364 $ 1,932,997
Accrued payroll, property and other taxes 834,657 622,379
Accrued expenses 924,001 940,511
Billings in excess of costs and estimated
earnings on uncompleted contracts 64,532 20,727
Current portion of long-term debt 19,533 19,533
---------- ----------
TOTAL CURRENT LIABILITIES 3,554,087 3,536,147
Convertible long-term debt 1,535,000 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 30,063,870
issued and outstanding in March 1998 and
December 1997, respectively 3,006,387 3,006,387
Additional paid-in capital 56,962,689 56,962,689
Accumulated deficit (49,963,232) (49,129,377)
Officers receivable collateralized by stock (525,362) (520,163)
Cumulative foreign currency translation
adjustment (2,140,110) (2,140,110)
---------- ----------
7,340,372 8,179,426
---------- ----------
$12,429,459 $13,215,573
========== ==========
See Notes to Consolidated Financial Statements
2<PAGE>
METALCLAD CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For Three Months Ended
March 31,
----------------------
1998 1997
---- ----
INSULATION BUSINESS
Revenues
Contract revenues $2,579,328 $2,446,797
Material sales 5,182 86,582
Other 3,500 179,881
---------- ----------
2,588,010 2,713,260
Operating costs and expenses
Contract costs and expenses 2,230,251 2,196,529
Cost of material sales 3,568 69,682
Selling, general and administrative expenses 247,123 332,739
---------- ----------
2,480,942 2,598,950
Operating income 107,068 114,310
WASTE MANAGEMENT
Revenues
Collection, recycling and destruction 1,448,231 52,858
---------- ----------
Operating costs and expenses
Collection, recycling and destruction 1,523,591 304,300
Landfill Development 184,348 93,534
---------- ----------
1,707,939 397,834
Equity in earnings of unconsolidated affiliates - (375,345)
---------- ----------
Operating Loss (259,708) (720,321)
---------- ----------
Corporate expense (561,740) (626,797)
---------- ----------
Operating loss (714,380) (1,232,808)
Interest income (expense) (102,756) 21,912
Loss on foreign currency translation (16,719) (38,634)
---------- ----------
Net loss $ (833,855) $(1,249,530)
========== ==========
Weighted average number of common shares 30,063,870 29,123,239
========== ==========
Net loss per share of common stock:
Basic ($0.03) ($0.04)
Diluted ($0.03) ($0.04)
See Notes to Consolidated Financial Statements
3<PAGE>
METALCLAD CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE><S> <C> <C>
For Three Months Ended
March 31,
------------------------
1998 1997
---- ----
OPERATING ACTIVITIES
Net loss $(833,855) $(1,249,530)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 103,448 113,572
Loss in earnings of unconsolidated affiliates - 375,345
Provision for losses on accounts receivable 17,886 53,495
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable (105,673) 803,939
(Increase) decrease in unbilled receivables 120,126 21,686
(Increase) decrease in inventories (42,264) 49,514
(Increase) decrease in prepaid expenses and other assets 18,418 (178,072)
Decrease in receivables from related parties 14,753 105,328
Increase (decrease) in accounts payable and accrued
expenses 114,385 (825,983)
Increase (decrease) in billings over costs 43,805 (22,823)
Increase in capitalized development costs (260,266) -
---------- ----------
NET CASH USED IN OPERATING ACTIVITIES (809,237) (753,529)
INVESTING ACTIVITIES
Purchase of property, plant and equipment (342,453) (74,690)
Investments and capitalized costs in unconsolidated affiliates - (706,087)
Restricted cash - 769,500
Other long-term assets 31,060 -
---------- ----------
NET CASH USED IN INVESTING ACTIVITIES (311,393) (11,277)
FINANCING ACTIVITIES
Borrowings from officers (5,199) -
Proceeds from sale of common stock under stock option plan - -
Proceeds from sale of common stock - -
---------- ----------
NET CASH USED BY FINANCING ACTIVITIES (5,199) -
Effect of exchange rates on cash (24,299) 28,382
(DECREASE) IN CASH AND CASH EQUIVALENTS (1,150,128) (736,424)
Cash and cash equivalents at beginning of period 1,643,521 3,074,395
---------- ----------
Cash and cash equivalents at end of period $ 493,393 $2,337,971
========= =========
Supplemental disclosures of cash flow information:
Cash paid for interest $ 3,962 $ 8,815
========= =========
</TABLE> See Notes to Consolidated Financial Statements
4<PAGE>
METALCLAD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Period Ended March 31, 1998
(Unaudited)
1. The accompanying unaudited financial statements of Metalclad
Corporation and its subsidiaries (the "Company") have been prepared in
accordance with the instructions to Form 10-Q and do not include all of
the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of
management all adjustments (which consist only of normal recurring
adjustments) necessary for a fair presentation have been included.
Operating results for the three months ended March 31, 1998 are not
necessarily indicative of what results will be for the year ending
December 31, 1998. These statements should be read in conjunction with
the consolidated financial statements and notes thereto and the report of
independent public accounts which was modified due to substantial doubt
about the Company s ability to continue as a going concern included in the
Company's Form 10-K for the year ended December 31, 1997.
2. As part of the Company s warrant exchange program initiated in
August 1997, an unintended clause in the warrants issued as part of
financings in 1994 and 1996 has been identified. Each warrant issued in
these financings contained a provision for anti-dilution protection
related to exercise price. This clause entitled the holder to effectively
have the exercise price reduced to the lower of market or subsequent
equity transaction pricing ( ratchet event). The unintended provision
further provided that the number of shares underlying each warrant would
increase upon a ratchet event, resulting in the same net proceeds to the
Company upon exercise, but creating an increase in the number of shares.
The Company believes this unintended provision to be an oversight but
has initiated actions to exchange the old warrants for new warrants,
correcting the language, on the following terms:
Original 1994 Warrants -- exchange ratio 1.5:1.0
Original 1996 Warrants -- exchange ratio 2.0:1.0
All replacement warrants will have an expiration date of five
years from the exchange date and registration rights.
The Company believes this proposal to be fair, although the total
proceeds ultimately received by the Company will be less, so as to correct
the warrants. As a result of the Company s proposal, additional warrants
in the amount of 3,728,000 would be issued. Should the warrant holders
reject the Company s proposal, the potential additional shares underlying
the old warrants could be in excess of 12,500,000. The Company is
optimistic that the proposal will be accepted, and has indeed received
some acceptances, but cannot be assured that all the holders will accept
its offer.
5<PAGE>
3. Effective January 1, 1998 the Company adopted the provisions of
SFAS No. 130, Reporting Comprehensive Income which establishes standards
for reporting and display of comprehensive income and its components in a
full set of general-purpose financial statements. Comprehensive income is
defined as the total of net income and all non-owner changes in equity.
For the periods ending March 31, 1998 and 1997, there were no adjustments
which would materially affect the net income as reported.
4. The loss per share amounts for the three months ended March 31,
1998 and March 31, 1997 were computed by dividing the net loss by the
weighted average shares outstanding during the applicable quarter.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION
All statements, other than statements of historical fact, included in
this Form 10-Q, including without limitation the statements under
Management s Discussion and Analysis of Financial Condition and Results
of Operations are, or may be deemed to be, forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934. Such
forward-looking 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-Q. 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-Q 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.
Results of Operations
General. The Company s revenues were generated primarily by (i)
revenues in the United States from insulation and asbestos abatement
services; and (ii) revenues in Mexico from the collection of waste oils
and solvents for recycling, placement and servicing 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; and the subject of
arbitration proceedings under the North American Free Trade Agreement
6<PAGE>
( NAFTA ). The Company has also completed the development of an
industrial waste landfill in the State of Aguascalientes, Mexico.
Construction of the facility has commenced, however, the Company has not,
as yet, secured the long-term financing it requires to complete and
o p erate the facility. Consequently, construction is being paced
consistent with the Company s current capital resources, while long-term
project financing is being pursued. The Company is also active in the
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 six months. However, there can
be no assurances that the Company will be successful in these efforts.
The Company s results of operations include the costs of development of
all such future waste treatment facilities in Mexico. With respect to
the Aguascalientes project, the Company has capitalized $520,000 as of
March 31, 1998.
Insulation Business. Total revenues from the insulation business for
the three months ended March 31, 1998 were $2,588,000 as compared to
$2,713,000 for the comparable period ended March 31, 1997, a decrease of
5%.
Contract revenues for the three months ended March 31, 1998 were
$2,579,000 as compared to $2,447,000 for the three months ended March 31,
1997, an increase of 5%. This increase is attributed to the Company s
efforts to diversify its client base, including its entry into the
commercial insulation market.
Material sales were $5,000 for the quarter as compared to $87,000 for
the comparable period, a decrease of 94% as the Company places less
emphasis on this market.
Total expenses for the three months ended March 31, 1998 were
$2,481,000 as compared to $2,599,000 for the comparable period ended March
31, 1997, a decline of 5%.
Contract costs and expenses were $2,230,000 for the quarter as
compared to $2,197,000 for the three months ended March 31, 1997, an
increase of 2%. This increase is consistent with the Company s increase
in revenues..
Cost of material sales was $4,000 for the quarter as compared to
$70,000, a decrease of 94%, matching the decrease in sales in this area.
Selling, general and administrative costs for the three months ended
March 31, 1998 were $247,000 as compared to $333,000 for the comparable
period ended March 31, 1997, a decrease of 26%.
7<PAGE>
Other income was $4,000 for the quarter as compared to $180,000 for
the comparable period, a decrease of 98% as the comparable quarter
contained certain one-time collections associated with the settlement of a
collection claim against a previous customer and return premiums for prior
years insurance coverages.
Waste Management Services. Revenues for the three months ended March
31, 1998 were $1,448,000 as compared to $53,000 for the comparable period
ended March 31, 1997. This increase is associated with the Company s
change in accounting for these operations from the equity method of
accounting to full consolidation of ARI due to the Company acquiring 100%
ownership of ARI in 1997. Were the revenues for 1997 consolidated, the
comparative results would be $1,448,000 and $799,000 for the quarters
ended March 31, 1998 and 1997, respectively, an increase of 81%.
Operating costs and expenses, associated with revenues, were
$1,524,000 as compared to $304,000 for the comparable period ended March
31, 1997, with this increase related to the increase in revenues and,
again, reflective of the accounting change between the periods.
Landfill development costs were $184,000 for the three months ended
March 31, 1998 compared to $94,000 for the comparable period in 1997, an
increase of 96%, associated with the Company s continuing activities in
the development of additional waste treatment facilities.
Equity in earnings of unconsolidated affiliates was $0.00 for the
current quarter compared to ($375,000), representing 100% of the loss of
ARI, for the quarter ended March 31, 1997, due to the change in accounting
for ARI.
Corporate Expense. Corporate expenses were $562,000 for the three
months ended March 31, 1998 as compared to $627,000 for the comparable
period of 1997, a decline of 10%. This decline was achieved despite the
increasing costs associated with the Company s pursuit of its claim under
NAFTA.
Interest Income (Expense). Interest expense for the quarter ended
March 31, 1998 was ($103,000) as compared to interest income of $22,000
for the comparable period.
Loss on Foreign Currency Translation. This loss of ($17,000) is due
to the accounting treatment associated with Mexico s highly inflationary
economy. During the comparable period, this loss was ($39,000).
Consolidated Results
The Company experienced a net loss of ($834,000) for the three months
ended March 31, 1998 as compared to a net loss of ($1,250,000) for the
comparable period ended March 31, 1997, an improvement of 33%.
Liquidity and Capital Resources
Working capital at March 31, 1998 was $431,000 as compared to
$1,702,000 as of December 31, 1997. The Company had cash and cash
8<PAGE>
equivalents of $493,000 at March 31, 1998 as compared to $1,644,000 at
December 31, 1997. Cash used in operations was ($809,000) as compared to
($754,000) for the comparable period ending March 31, 1997.
The Company believes that the insulation business will generate
adequate cash flows from continuing operations to meet its future
obligations and expenses relating to such operations. The Company will
r e quire substantial additional financing to construct and operate
Aguascalientes as well as additional waste treatment facilities in Mexico
and to support the continuing growth of ARI operations. Furthermore, to
the extent that the Company is required to expend additional efforts to
pursue its NAFTA claim, additional general and administrative expenses
without revenues to offset such expenses are anticipated until the
landfill is opened. The Company is aware of its ongoing cash requirements
and is reviewing alternatives for financing, including project finance,
debt securities and the potential for joint ventures in Mexico to meet its
ongoing needs. The Company has received a proposal for additional
financing, which it has accepted, however, no assurances can be given that
the company will be successful.
PART II
OTHER INFORMATION
Item 1. 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
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
9<PAGE>
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 outside expert 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 is now preparing a
reply brief to be followed by a rejoinder brief from Mexico and then a
hearing will be scheduled prior to the final determination of the case.
It is believed that this process could take six months or more to
complete.
In May 1997 a jury found Texaco oil refinery, a client of the Company
55% liable for injuries and damages sustained by a Metalclad Insulation
employee while working at the Wilmington, California refinery. The jury
determined that Texaco s portion of the damages amounted to $5.5 million.
Under terms of the Company s contract with Texaco, certain indemnities may
be applied. The Company had project specific, as well as other insurance
policies in effect at the time of the injury. This award has been
appealed and the ultimate outcome cannot be predicted; however, the
Company believes its insurance programs are adequate to address any
potential exposure.
Item 2. Changes in Securities
Not Applicable
Item 3. Defaults Upon Senior Securities
Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders
Not Applicable
Item 5. Other Information
Not Applicable
Item 6. Exhibits and Reports on Form 8-K
Not Applicable
10<PAGE>
SIGNATURES
Pursuant to the requirements 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
Date: May 15, 1998 By: /s/ Anthony C. Dabbene
----------------------------------
Chief Financial Officer
(Principal Accounting Officer)
11<PAGE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<PERIOD-TYPE) 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 2338
<SECURITIES> 0
<RECEIVABLES> 2997
<ALLOWANCES> 97
<INVENTORY> 222
<CURRENT-ASSETS> 3985
<PP&E> 6402
<DEPRECIATION> 0
<TOTAL-ASSETS> 12429
<CURRENT-LIABILITIES> 3554
<BONDS> 1535
<COMMON> 3006
0
0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 12429
<SALES> 4033
<TOTAL-REVENUES> 4036
<CGS> 0
<TOTAL-COSTS> 4750
<OTHER-EXPENSES> 17
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 103
<INCOME-PRETAX> (834)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (834)
<EPS-DILUTED> (.03)
<EPS-PRIMARY> (.03)
</TABLE>
