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 June 30, 1999
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 (949) 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 June 30, 1999, the registrant had 36,017,022 shares outstanding
of its Common Stock, $.10 par value.
METALCLAD CORPORATION AND SUBSIDIARIES
TABLE OF CONTENTS
Page
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements:
Consolidated Balance Sheets (unaudited) at June 30, 1999
and December 31, 1998 . . . . . . . . . . . . . . . . . . . . 1-2
Consolidated Statements of Operations for the three months
and six months ended June 30, 1999 and 1998 (unaudited) . . . 3
Consolidated Statements of Cash Flows for the six months
ended June 30, 1999 and 1998 (unaudited). . . . . . . . . . . 4
Notes to Consolidated Financial Statements. . . . . . . . . . 5
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations. . . . 5
PART II. OTHER INFORMATION . . . . . . . . . . . . . . . . . 9
SIGNATURES. . . . . . . . . . . . . . . . . . . . . . . . . . 11
EXHIBIT 27. . . . . . . . . . . . . . . . . . . . . . . . . . 12
PART I
FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
METALCLAD CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE><S> <C> <C>
June 30, December 31,
1999 1998
----------- ------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 165,904 $ 523,953
Accounts receivable, less allowance for doubtful
accounts of $23,666 in June 1999 and $133,868 in
December 1998 1,780,041 817,257
Costs and estimated earnings in excess of billings
on uncompleted contracts 185,847 143,672
Inventories 168,673 176,697
Prepaid expenses and other current assets 16,870 58,813
Receivables from related parties 114,422 190,492
--------- ---------
Total Current Assets 2,431,757 910,884
Property, plant and equipment, net 4,670,339 4,631,097
Net assets of discontinued operations 1,333,719 1,754,677
Goodwill, less accumulated amortization of $353,127
in June 1999 and $305,579 in December 1998 459,625 507,173
Other assets 25,838 245,834
--------- ---------
$8,921,278 $9,049,665
========= =========
See Notes to Consolidated Financial Statements
METALCLAD CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(continued)
June 30, December 31,
1999 1998
----------- -----------
(Unaudited)
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $1,171,581 $1,031,244
Accrued expenses 807,903 1,166,050
Billings in excess of costs and estimated earnings
on uncompleted contracts 101,094 71,280
Current portion of long-term debt 29,019 18,585
--------- ---------
Total current liabilities 2,109,597 2,287,159
Long-term debt, less current portion 80,564 51,959
Convertible long-term notes 1,710,006 1,640,000
Convertible subordinated debentures 1,076,372 1,201,547
--------- ---------
Total liabilities 4,976,539 5,180,665
--------- ---------
Shareholders equity:
Preferred stock, par value $10; 1,500,000 shares authorized;
none issued - -
Common stock, par value $.10; 80,000,000 shares authorized,
36,017,022 and 30,569,122 issued and outstanding in June
1999 and December 1998, respectively 3,601,703 3,056,912
Additional paid-in capital 58,136,115 57,404,880
Accumulated deficit (55,096,544) (53,907,766)
Officers receivable collateralized by stock (556,425) (544,906)
Accumulated other comprehensive income (2,140,110) (2,140,110)
--------- ---------
3,944,739 3,869,010
--------- ---------
$8,921,278 $9,049,665
========= =========
</TABLE>
See Notes to Consolidated Financial Statements
2
METALCLAD CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE><S> <C> <C> <C> <C>
For Six Months Ended For Three Months Ended
-------------------- ----------------------
June 30, June 30, June 30, June 30,
1999 1998 1999 1998
-------- -------- -------- -------
Revenues-Insulation
Contract revenues $7,479,848 $5,300,537 $3,985,351 $2,721,209
Material sales 184,328 21,648 73,500 16,466
Other - 3,500 - -
--------- --------- --------- ---------
7,664,176 5,325,685 4,058,851 2,737,675
Operating costs and expenses-Insulation
Contract costs and expenses 6,491,445 4,578,025 3,400,166 2,347,784
Cost of material sales 146,857 15,313 60,520 11,745
Selling, general and administrative
expenses 604,876 522,998 316,126 275,875
--------- --------- --------- ---------
7,243,178 5,116,346 3,776,812 2,635,404
--------- --------- --------- ---------
Corporate expense 1,108,350 1,364,488 597,037 802,748
--------- --------- --------- ---------
Operating loss (687,352) (1,155,149) (314,998) (700,477)
--------- --------- --------- ---------
Interest expense (148,672) (59,622) (64,368) (29,675)
--------- --------- --------- ---------
Loss from continuing operations (836,024) (1,214,771) (379,366) (730,152)
Loss from discontinued operations (352,753) (641,510) (352,753) (292,274)
--------- --------- --------- ---------
Net loss ($1,188,777) ($1,856,281) ($732,119)($1,022,426)
========= ========= ======== =========
Weighted average number of common
shares 34,012,287 30,240,062 35,563,133 30,413,501
========== ========== ========== ==========
Loss per share of common stock,
continuing operations--basic
and diluted ($.02) ($.04) ($.01) ($.02)
==== ==== ==== ====
Loss per share of common stock,
discontinued operations--basic
and diluted ($.01) ($.02) ($.01) ($.01)
==== ==== ==== ====
Loss per share of common stock--
basic and diluted ($.03) ($.06) ($.02) ($.03)
==== ==== ==== ====
</TABLE>
See Notes to Consolidated Financial Statements
3
METALCLAD CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE><S> <C> <C>
For Six Months Ended
June 30,
--------------------
1999 1998
---- ----
Cash flows from operating activities:
Net loss ($1,188,777) ($1,856,281)
Adjustments to reconcile net loss to net cash used in
operating activities:
Loss from discontinued operations 352,753 641,510
Depreciation and amortization 139,545 108,540
Issuance of stock for services 108,000 8,440
Changes in operating assets & liabilities:
Decrease (increase) in accounts receivable (962,784) 72,167
Decrease (increase) in unbilled receivables (42,175) 159,711
Decrease (increase) in inventories 8,024 (16,194)
Decrease in prepaid expenses and other assets 41,943 86,100
Decrease in receivables from related parties 76,070 16,239
Increase in accounts payable and accrued expenses 124,190 437,095
Increase in billings over costs 29,814 93,328
Other 227,188 (45,744)
--------- ---------
Net cash used in continuing operations (1,086,208) (295,039)
Net cash used in discontinued operations (452,430) (501,895)
--------- ---------
Net cash used in operating activities (1,538,638) (471,326)
--------- ---------
Cash flows from investing activities:
Capital expenditures--continuing operations (67,798) (33,634)
Capital expenditures--discontinued operations - (437,692)
--------- ---------
Net cash used in investing activities (67,798) (471,326)
--------- ---------
Cash flows from financing activities:
Proceeds from long-term borrowings 133,880 -
Payments on long-term borrowings--continued operations (150,000) -
Borrowings by officers, secured by stock (net) (11,519) (11,529)
Proceeds from issuance of common stock - 67,500
Proceeds from exercise of warrants 1,276,026 392,750
--------- ---------
Net cash provided by financing activities 1,248,387 428,721
--------- ---------
Decrease in cash and cash equivalents (358,049) (839,539)
Cash and cash equivalents at beginning of period 523,953 1,510,667
--------- ---------
Cash and cash equivalents at end of period $ 165,904 $ 671,128
========= =========
</TABLE>
See Notes to Consolidated Financial Statements
4
METALCLAD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Period June 30, 1999
(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 six months ended June 30, 1999 are not
necessarily indicative of what results will be for the year ending
December 31, 1999. These statements should be read in conjunction with
the consolidated financial statements and notes thereto and the report of
independent public accountants 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, 1998.
2. During the fourth quarter of 1998, the Company committed to a plan to
discontinue its Mexican operations and to seek to identify potential
buyers for its Mexican business, consequently, the Company s Mexican
operations are now classified as discontinued operations. The financial
statements for the periods ending June 30, 1998 have been reclassified to
reflect this accounting so as to be consistent with the current
presentation.
The Company continues to pursue the sale of these operations, and is
presently in discussions with potential buyers for these operations. We
continue to believe that a transaction will be completed during 1999;
however, no assurances can be given that these discussions will be
successful.
3. For almost two years, the Company has been involved in an arbitration
proceeding with the United Mexican States over the Company s completed,
but unopened, landfill facility in San Luis Potosi, Mexico. At the pre-
hearing conference on July 6, 1999, the Tribunal reaffirmed the schedule
for the final hearing on the arbitration. The final hearing will
commence on August 30, 1999 and is anticipated to be completed on
September 10, 1999. A decision will follow completion of this hearing,
but no definitive time frame can be provided (see Part II, Item 1--Legal
Proceedings).
4. On August 2, 1999 the Company was advised by The NASDAQ-AMEX Market
Group that the Company has evidenced compliance with the requirements
necessary for continued listing and, therefore, the Company will
continued to be listed on The NASDAQ SmallCap Market and the hearing file
is now closed.
5. On July 30, 1999 the Company entered into an amendment of the terms
of its Five-Year Zero Coupon Notes with the holder. The amendment
5
included the conversion of accrued interest through July 30, 1999 into
principal notes, the interest rate was adjusted from 9.3% to 12%
effective July 31, 1999, the convertibility of the notes and the holder s
redemption option on the notes was extended until the earlier of March
31, 2000 or completion of the NAFTA proceedings and the conversion rate
per share will be at the lesser of 70% of the average market price per
share or $2.50 per share. In no event, however, can the holder convert
its principal into common shares such that it would result in the holder
obtaining shares that would exceed 19.99% of the outstanding common stock
of the Company. Should the holder exercise its right to convert the
notes, all accrued interest would be forfeited. As part of this
amendment, the note holder agreed to exercise certain of its warrants and
to purchase $250,000 in additional notes.
6. The loss per share amounts for the six months ended June 30, 1999 and
June 30, 1998 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
b e 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 differ 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 (Six Months Ended June 30, 1999 and 1998)
General. Historically, the Company s revenues were generated
primarily in the United States from insulation and asbestos abatement
services and 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.
6
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.
During the fourth quarter of 1998, the Company determined that its
efforts at building its business in Mexico would not be allowed to
succeed. The Company s investment in El Confin has resulted in an
arbitration under the NAFTA treaty, its investment in Aguascalientes has
been blocked just prior to the project s completion, and its other
business has been impacted due to the loss of these projects and the
synergy they would have provided. Consequently, the Company has
determined that its Mexican businesses must be sold to minimize future
losses and that any further investment in Mexico should be halted. The
Company will retain its investment in El Confin, with the operations of
ARI and El Llano and the development activities of ECONSA held for sale.
Insulation Business. Total revenues from the insulation business for
the six months ended June 30, 1999 were $7,664,000 as compared to
$5,326,000 for the comparable period ended June 30, 1998, an increase of
44%.
Contract revenues for the six months ended June 30, 1999 were
$7,480,000 as compared to $5,301,000 for the six months ended June 30,
1998, an increase of 41%. 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 $184,000 for the six months as compared to
$22,000 for the comparable period.
Total expenses for the six months ended June 30, 1999 were $7,243,000
as compared to $5,116,000 for the comparable period ended June 30, 1998,
an increase of 41%.
Contract costs and expenses were $6,491,000 for the six months as
compared to $4,578,000 for the six months ended June 30, 1998, an
increase of 42%. This increase is consistent with the Company s increase
in revenues.
Cost of material sales was $147,000 for the six months as compared to
$15,000, matching the increase in sales in this area.
Selling, general and administrative costs for the six months ended
June 30, 1999 were $605,000 as compared to $523,000 for the comparable
period ended June 30, 1998, an increase of 16% and due to the increased
volume of work in the period.
Discontinued Operations. Loss from discontinued operations was
$353,000 for the six months ended June 30, 1999 as compared to a loss of
$642,000 for the six months ended June 30, 1998. The Company believes
these losses will continue until a sale is completed, given that the
Company will make no further investments in Mexico, consequently limiting
working capital.
7
Corporate Expense. Corporate expenses were $1,109,000 for the six
months ended June 30, 1999 as compared to $1,364,000 for the comparable
period of 1998, a decline of 19%. This decline was achieved despite the
increasing costs associated with the Company s pursuit of its claim under
NAFTA by continued cost reductions and staffing reductions.
Interest Expense. Interest expense for the six months ended June 30,
1999 was $149,000 as compared to interest expense of $60,000 for the
comparable period. This is due to the addition of interest-bearing debt
during the second half of 1998.
Consolidated Results
The Company experienced a net loss of $1,189,000 for the six months
ended June 30, 1999 as compared to a net loss of $1,856,000 for the
comparable period ended June 30, 1998, an improvement of 36%.
Impact of Year 2000
During fiscal 1998, the Company initiated a plan to acquire and
implement new business information systems which address the year 2000
issues. On January 1, 1999, the Company converted most of its primary
internal systems to year 2000 compliant systems. The remaining systems
are in the process of being converted and tested, with no material
problems identified. All systems conversions and testing are expected to
be completed prior to December 1, 1999. The Company is currently
reviewing its contingency plan alternatives, including the modification
of existing systems to eliminate year 2000 associated problems.
To date, the Company has expended less than $100,000 and remaining
expenditures will not be material.
Liquidity and Capital Resources
In the fourth quarter of 1998, the Company committed to a plan to
discontinue its Mexican operations and to seek potential buyers for its
Mexican business. The Company is, however, retaining the El Confin
landfill facility currently in an arbitration under the NAFTA. Although
no further investments are being made in Mexico, the Company continues to
rely upon additional capital to maintain its Mexican assets until sold,
pursue its NAFTA arbitration and support its remaining operations.
During the six months ended June 30, 1999, the Company received
approximately $526,000 from the exercise of warrants under its warrant
exchange program and an additional $750,000 from the exercise of warrants
outside of any exchange offer. Additionally, the Company issued 385,000
shares of its common stock to certain employees of the Company in
exchange for $108,000 in payroll obligations.
During July 1999, the holder of the Company s $350,000 principal, 10%
Convertible Subordinated Debentures due 2001 converted the debentures
into common stock of the Company. Additionally, the holder of the
Company s 7% Convertible Subordinated Debentures due 2001 converted
$100,000 of the principal amount of the debentures into common stock of
8
the Company. The Company believes the holder of these debentures intends
to convert the remaining debentures into its common stock as well.
The Company had working capital at June 30, 1999 of $321,000 compared
to working capital deficit of $376,000 at December 31, 1998. The Company
had cash and cash equivalents at June 30, 1999 of $166,000 and $524,000
at December 31, 1998. Cash used in continuing operations for the six
months ended June 30, 1999 was $1,086,000 compared to $295,000 for 1998.
Cash used by discontinued operations for the six months ended June 30,
1999 was $452,000 compared to cash used of $502,000 for 1998. Cash used
in operating activities for the six months ended June 30, 1999 was funded
primarily by cash and cash equivalents on hand at the beginning of the
year as well as the warrant exercises completed during the six months.
The Company believes that the insulation business will generate
adequate cash flows from operations to meet its future obligations and
expenses relating to such operations. The Company will require
substantial additional financing to continue pursuit of its NAFTA claim,
and complete the sale of its Mexican operations, 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 warrant holders, investment bankers and other sources to meet its on
going needs through December 31, 1999. Given the Company s decision to
discontinue operations in Mexico, and sell its businesses, the cash
requirements in Mexico greatly diminish. The Company believes it will
obtain the necessary funds to continue its planned operations throughout
1999; however, no assurances can be given that such funds will be
available to the Company as required.
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 300, 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
I n vestment 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.
9
Pursuant to the proceedings, 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 basis 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. On August 21, 1998 the Company
filed its Reply to Mexico and on May 3, 1999 Mexico filed its rejoinder.
A pre-hearing conference was completed on July 6, 1999 with the final
hearing date set for August 30, 1999.
The Company has devoted substantial resources in the pursuit of its
claim before the NAFTA tribunal. It has given counsel broad authority in
the employment of experts and others it feels necessary to properly
pursue the Company s claim. The officers of the Company have also spent
substantial amounts of time and resources in assisting the Company s
NAFTA counsel and will continue to do so to completion. There is no
assurance, however, that the Company will be successful. If it is not,
the impact will be material and adverse. Management does not believe
that a loss of its arbitration case would cause the Company to become
insolvent or prevent it from conducting its domestic business, or in
making acquisitions or mergers with others in similar businesses seeking
a public market.
Item 2. Changes in Securities
On June 2, 1999 the shareholders of the Company approved a reverse
stock split of the Company s common stock in a ratio of one share for up
to ten shares of its outstanding common stock.
Pursuant to this approval, the Board of Directions of the Company
approved a reverse split of the common shares in a ratio of one share for
every ten shares. This reverse split was effective on The Nasdaq
SmallCap Market on July 2, 1999.
Item 3 Defaults Upon Senior Securities
Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders
On June 2, 1999, the Company held its Annual Meeting of Shareholders
in Newport Beach, California. The following matters were presented for
the approval of the shareholders with the results presented:
a. The election of five members to the Board of Directors of the
Company, to serve until the next annual meeting. The results of the
shareholders votes are as follows:
10
For Against
---------- ---------
Grant S. Kesler 29,887,554 1,053,430
Anthony C. Dabbene 29,887,554 1,053,430
Raymond J. Pacini 29,888,254 1,052,730
J. Thomas Talbot 29,887,554 1,053,430
Bruce H. Haglund 29,888,254 1,052,730
b. To ratify the appointment of Moss Adams LLP as the independent
public accountants of the Company for the year ended December 31, 1999.
The results were as follows:
For: 30,300,241
Against: 487,365
Abstain: 153,378
c. To consider and act upon a proposal to effect a one for up to ten
reverse split of the common stock of the Company, provided that it
becomes a necessary requirement of NASDAQ to maintain the Company s
listing. The results were as follows:
For: 28,857,567
Against: 1,911,727
Abstain: 171,690
Item 5. Other Information
Not Applicable
Item 6. Exhibits and Reports on Form 8-K
Not Applicable
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: August 16, 1999 By: /s/Anthony C. Dabbene
--------------------------------
Anthony C. Dabbene
Chief Financial Officer
(Principal Accounting Officer)
11
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<PERIOD-END> Jun-30-1999
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