SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
(Mark One)
( X ) QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 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 September 30, 1999, the registrant had 4,543,892 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 September 30,
1999 and December 31, 1998. . . . . . . . . . . . . . . . . . 1
Consolidated Statements of Operations (unaudited) for the
nine months ended September 30, 1999 and 1998 . . . . . . . . 2
Consolidated Statements of Cash Flows (unaudited)
for the nine months ended September 30, 1999 and 1998 . . . . 3
Notes to Consolidated Financial Statements. . . . . . . . . . 4
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations. . . . 5
PART II. OTHER INFORMATION. . . . . . . . . . . . . . . . . . . . 12
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
<PAGE>
PART I
FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
METALCLAD CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE><S> <C> <C>
September 30, December 31,
1999 1998
------------ -----------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 937,797 $ 519,940
Accounts receivable, less allowance for doubtful accounts of $20,000
in September 1999 and $28,907 in December 1998 1,752,404 828,686
Costs and estimated earnings in excess of billings on uncompleted contracts 228,221 143,672
Inventories 189,871 176,697
Prepaid expenses and other current assets 21,372 56,492
Receivables from related parties 108,677 151,765
---------- ----------
Total Current Assets 3,238,342 1,877,252
Property, plant and equipment, net 328,571 271,592
Net assets of discontinued operations 8,643,944 9,096,300
Other assets 23,086 43,162
---------- ----------
$12,233,943 $11,288,306
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 663,382 $ 636,096
Current liabilities, net--discontinued operations 3,182,841 2,886,067
Accrued expenses 748,089 913,772
Billings in excess of costs and estimated earnings on uncompleted contracts 60,865 71,280
Current portion of long-term debt 46,669 18,585
Convertible zero coupon notes 2,011,380 1,640,000
---------- ----------
Total current liabilities 6,713,226 6,165,800
Notes payable 74,398 51,949
Convertible subordinated debentures, less discounts 1,008,761 1,201,547
---------- ----------
Total liabilities 7,796,385 7,419,296
---------- ----------
SHAREHOLDERS' EQUITY
Preferred stock, par value $10; 1,500,000 shares authorized; none issued - -
Common stock, par value $.10; 80,000,000 shares authorized, 3,695,920 and
3,056,912 issued and outstanding in September 1999 and December 1998,
respectively 454,389 305,691
Additional paid-in capital 63,247,820 60,156,101
Accumulated deficit (56,561,972) (53,907,766)
Officers' receivable collateralized by stock (562,569) (544,906)
Cumulative foreign currency translation adjustment (2,140,110) (2,140,110)
---------- ----------
4,437,558 3,869,010
---------- ----------
$12,233,943 $11,288,306
========== ==========
</TABLE>
See Notes to Consolidated Financial Statements
METALCLAD CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE><S> <C> <C> <C> <C>
For Nine Months Ended For Three Months Ended
----------------------- ----------------------
Sept.30, Sept.30, Sept.30, Sept.30,
1999 1998 1999 1998
--------- --------- --------- ---------
Revenues--Insulation
Contract revenues $9,963,449 $7,881,005 $2,483,601 $2,580,468
Material sales 209,159 50,444 24,831 28,796
Other 49,264 5,797 49,264 2,297
---------- --------- --------- ---------
10,221,872 7,937,246 2,557,696 2,611,561
Operating costs and expenses--Insulation
Contract costs and expenses 8,733,309 6,860,260 2,241,864 2,282,225
Cost of material sales 191,128 37,680 44,271 22,367
Selling, general and administrative expenses 895,308 713,877 290,432 190,879
---------- --------- --------- ---------
9,819,745 7,611,817 2,576,567 2,495,471
Corporate expense 1,502,056 1,508,449 658,733 431,788
---------- --------- --------- ---------
Operating Loss (1,099,929) (1,183,020) (677,604) (315,698)
---------- --------- --------- ---------
Interest expense (207,589) (112,466) (58,917) (52,844)
---------- --------- --------- ---------
Loss from continuing operations (1,307,518) (1,295,486) (736,521) (368,542)
Loss from discontinued operations (1,346,687) (1,395,313) (728,907) (465,976)
---------- --------- --------- ---------
Net loss $(2,654,205) $(2,690,799) $(1,465,428) $ (834,518)
========= ========= ========= =========
Weighted average number of common shares 3,666,964 3,031,244 4,179,401 3,045,062
Loss per share of common stock, continuing
operations--basic and diluted $(.35) $(.43) $(.18) $(.12)
Loss per share of common stock, discontinued
operations--basic and diluted $(.37) $(.46) $(.17) $(.15)
Loss per share of common stock--basic and diluted $(.72) $(.89) $(.35) $(.27)
</TABLE>
See Notes to Consolidated Financial Statements
METALCLAD CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<S> <C> <C>
For Nine Months Ended
September 30,
-----------------------------
1999 1998
------------ ------------
Cash flows from operating activities:
Net loss $(2,654,205) $(2,690,799)
Adjustments to reconcile net loss to net cash
used in operating activities:
Loss from discontinued operations 1,346,687 1,395,313
Depreciation and amortization 210,338 167,261
Issuance of stock for services, interest and debt 588,333 8,441
Changes in operating assets & liabilities:
Decrease (increase) in accounts receivable (923,718) 185,192
Decrease (increase) in unbilled receivables (84,549) -
Decrease (increase) in inventories (13,174) 12
Decrease (increase) in prepaid expenses and
other assets 35,120 172,087
Decrease (increase) in receivables from
related parties 43,088 (24,332)
Increase (decrease) in accounts payable and
Accrued expenses (246,397) 198,378
Increase in billings over costs (10,415) 137,648
Other 20,076 -
--------- ---------
Net cash used in continuing operations (1,688,816) (450,799)
Net cash used in discontinued operations (1,070,756) (1,585,671)
--------- ---------
Net cash used in operating activities (2,759,572) (2,036,470)
--------- ---------
Cash flows from investing activities:
Capital expenditures--continuing operations (118,525) (283,493)
Capital expenditures--discontinued operations - (519,777)
--------- ---------
Net cash used in investing activities (118,525) (803,270)
--------- ---------
Financing activities:
Proceeds from long-term borrowings 688,476 1,350,329
Payments on long-term borrowings--continued operations (27,943) (18,137)
(Borrowings) by officers, secured by stock (net) (17,663) 440,250
Proceeds from exercise of warrants 2,653,084 -
--------- ---------
Net cash provided by continuing operations 3,295,954 1,772,442
Net cash provided (used) in discontinued operations -
--------- ---------
Net cash provided by financing activities 3,295,954 1,772,442
--------- ---------
Increase (decrease) in cash and cash equivalents 417,857 (1,067,298)
Cash and cash equivalents at beginning of period 519,940 1,510,667
--------- ---------
Cash and cash equivalents at end of period $ 937,797 $ 443,369
========= =========
</TABLE>
See Notes to Consolidated Financial Statements
METALCLAD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Period September 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 nine months
ended September 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.
This Form 10-Q Amendment No. 1 to Form 10-Q which amends the 1999
Quarterly Report includes the following primary changes: the Company has
included all Mexican operations, including the unopened landfill in San Luis
Potosi, in discontinued operations. Previously, the Company included the
landfill and the costs of its ongoing NAFTA arbitration, in continued
operations, pending resolution of the claim. Consequently, this amendment
includes the landfill and all associated costs of its NAFTA claim, in
discontinued operations, since the Company believes it will not open the
landfill and the NAFTA claim will determine the landfill's disposition.
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 September 30, 1998 have been reclassified to reflect this
accounting so as to be consistent with the current presentation. As of
September 30, 1999, the Company was in negotiations to sell all of its
ownership interests in certain Mexican assets classified as discontinued
operations, specifically excluding those Mexican assets involved in the
NAFTA claim. The proposed terms of this sale stipulate payment of the
purchase price in stages as various benchmarks are achieved in the operation
of the business. If the sale is completed, no gain or loss will be recorded
on the payments until 100% of the Company's net investment is recovered.
Until a sale is consummated, the book value of these assets, of
approximately $904,000, is included in the long-term assets as Net Assets
of Discontinued Operations and Current liabilities, net discontinued
operations. Net assets totaling $5,461,000 are related to the NAFTA claim,
are not a part of this sale and the disposition of which is dependent on the
final decision.
Under the terms of the proposed sale, the Company can receive up to
$5,000,000 in payments as certain specific milestones are met. An initial
payment of $125,000 will be due on closing. The most significant milestone
payments are associated with the buyer's ability to complete and open the
Aguascalientes landfill project. If the buyer can obtain all necessary
authorizations, complete construction and open the facility, payments
totaling $1,125,000 would be due the Company under the milestone payment
schedule. In the event that the buyer is not successful in its efforts to
open the project, the Company will be required to write down its receivable
in the transaction.
Relative to the NAFTA assets, the Company's claim is for $90,000,000;
however, the Tribunal is the final arbiter on value and damages.
In October 1999, the Company completed the sale of these operations in
exchange for an initial cash payment of $125,000 and a series of payments
based upon achievement of certain milestones and the assumption of all
liabilities. Future financial presentations will reflect this event.
3. For approximately three 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. The
final hearing in these proceedings commenced August 30, 1999 and was
completed on September 9, 1999. Post hearing briefs were filed by the
parties on November 9, 1999 and a decision is anticipated in January 2000.
4. In October 1999, the Company announced the signing of a non-binding
letter of intent for the sale of its insulation contracting subsidiaries to
PDG Environmental, Inc. ("PDG"). The letter of intent provides for the sale
to PDG of all of Metalclad's shares of its insulation subsidiaries in
consideration of 3.4 million shares of PDG common stock and warrants to
purchase up to an additional 4.4 million shares of PDG common stock at an
exercise price of $.75 per share. PDG's common stock closed at $0.47 on
October 20, 1999. The PDG warrants will expire twelve months after the
closing of the sale and may be exercised for cash or shares of Metalclad
common stock valued at the lesser of 1.5 times Metalclad's book value per
share or 90% of the average of the closing bid and ask prices of Metalclad
common stock for the ten trading days prior to the exercise.
Both companies are completing due diligence and other requisite
activities with the objective of executing a definitive agreement and
closing during the fourth quarter of 1999. The sale also requires the
consent of the holder of the Company's Zero Coupon Notes. There is no
assurance that this transaction will be completed.
5. The loss per share amounts for the nine months ended September 30, 1999
and September 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 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 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 (Nine Months Ended September 30, 1999 and 1998)
General. Historically, the Company's revenues were generated primarily
by revenues in the United States from insulation and asbestos abatement
services and 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 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.
Insulation Business. Total revenues from the insulation business for
the nine months ended September 30, 1999 were $20,222,000 as compared to
$7,937,000 for the comparable period ended September 30, 1998, an increase
of 29%.
Contract revenues for the nine months ended September 30, 1999 were
$9,963,000 as compared to $7,881,000 for the nine months ended September 30,
1998, an increase of 26%. This increase is attributed to the Company's
efforts to diversify its client base, including its entry into the
commercial insulation market. The Company's accounts receivable have also
increased due to the increased contract revenues and the timing of cash
receipts.
Material sales were $209,000 for the nine months as compared to $50,000
for the comparable period.
Total expenses for the nine months ended September 30, 1999 were
$9,820,000 as compared to $7,612,000 for the comparable period ended
September 30, 1998, an increase of 29%.
Contract costs and expenses were $8,733,000 for the nine months as
compared to $6,860,000 for the nine months ended September 30, 1998, an
increase of 27%. This increase is consistent with the Company's increase
in revenues.
Cost of material sales was $191,000 for the nine months as compared to
$38,000, matching the increase in sales in this area.
Selling, general and administrative costs for the nine months ended
September 30, 1999 were $895,000 as compared to $714,000 for the comparable
period ended September 30, 1998, an increase of 25% and due to the increased
volume of work in the period.
Discontinued Operations. Effective October 8, 1999, the Company sold
its interests in Administracion Residuos Industriales, S.A. de C.V.,
Ecosistemas Nacionales, S.A. de C.V. and Ecosistemas El Llano, S.A. de C.V.
The Company also intends to dispose of its interests in Ecosistemas del
Potosi, S.A. de C.V. and Confinamiento Tecnico de Residuos Industriales,
S.A. de C.V., pending resolution of the NAFTA claim. Due to losses incurred
in excess of Company estimates at the measurement date, the Company recorded
additional losses from discontinued operations was $1,347,000 for the nine
months ended September 30, 1999, net of previously accrued losses of
$450,000 at December 31, 1998. Such additional losses are a result of the
following changes in fact from the December 31, 1998 measurement date: A)
The Company's Mexican operating losses exceeded management's original
estimate by $798,000. These additional losses were a direct result of a
delay in the closing of the sale of the non-NAFTA related assets due to
unforeseen additional legal document requirements in Mexico as well as
impacts on the businesses' operations as the sale was made known. B) The
$450,000 accrual did not contain any provisions for the Company's direct
costs of pursuing its NAFTA claim. The full extent of the NAFTA hearing
process was unknown until the middle of the third quarter, as witness lists,
court fees, procedures, etc. could not have been anticipated earlier. As
a result of the hearing process, the Company incurred additional costs of
$549,000, which it could not have reasonably foreseen at December 31, 1998.
The Company concluded the NAFTA arbitration hearing on September 9,
1999. A short post-hearing brief is to be filed by the Company, with the
NAFTA tribunal, by the end of October 1999. The Company anticipates final
resolution of this claim during first quarter 2000. Until that time, the
Company believes that legal, consulting and other administrative expenses
may continue to be incurred. The Company is also actively pursuing a
disposition of the NAFTA assets, but management cannot reasonably estimate
future losses going forward as the schedule on completion of this claim is
beyond the Company's control. However, the Company is currently not aware
of any other requirements or filings necessary while it awaits the
Tribunal's decision. It is believed that future costs, if any, will not be
material, pending the final decision. Future costs, if any, will be charged
to operations as incurred.
Corporate Expense. Corporate expenses were $1,502,000 for the nine
months ended September 30, 1999 as compared to $1,508,000 for the comparable
period of 1998.
Interest Expense. Interest expense for the nine months ended September
30, 1999 was $208,000 as compared to interest expense of $112,000 for the
comparable period. This is due to the addition of interest-bearing debt
during the second half of 1998 and amendments to the zero coupon notes
increasing the interest rate during 1999.
Consolidated Results
The Company experienced a net loss of $2,654,000 for the nine months
ended September 30, 1999 as compared to a net loss of $2,691,000 for the
comparable period ended September 30, 1998, a decrease of 1%.
Impact of Year 2000
Certain computer programs written with two digits rather than four to
define the applicable year may experience problems handling dates beyond the
year 1999. This may cause computer applications to fail or create erroneous
results unless corrective measures are taken. The Year 2000 ("Y2K") problem
can arise at any point in the Company's supply and customer chains. The
Company acknowledges that its failure to resolve a material Y2K issue could
result in the interruption in, or failure of, certain normal business
activities or operations. Such failures could materially and adversely
affect the Company's results of operations. In addition, the Company could
be materially impacted by the widespread economic or financial market
disruption by Y2K computer system failures at suppliers, customers and other
third parties. Possible risks of Y2K failure could include, among other
things, delays or errors with respect to payments and third party delivery
of materials.
During fiscal 1998, the Company initiated a plan to assess its Y2K
exposure. The Company's Y2K project is expected to significantly reduce the
Company's level of uncertainty and exposure to the Y2K issue. In connection
with this assessment, the Company initiated a plan to acquire and implement
new business systems that will address its Y2K issues. To date, the Company
has not identified any operating systems, either of its own or of a material
third party relationship, that present a material risk of not being Y2K
ready or for which a suitable alternative cannot be implemented. The
Company believes that it will have all of its own systems Y2K compliant by
December 1, 1999.
As part of the Company's assessment of the risk of the Y2K problem, the
Company's relationships with significant suppliers, customers, and other
third parties are being examined to determine the status of these third
parties' efforts to comply with the Y2K requirements. There is no assurance
that such third parties will not suffer a Y2K business disruption. While
it is conceivable that such failures could have a material adverse effect
on the Company's liquidity, financial condition and results of its
operations, management believes that the risk is low.
The following outlines the various phases of the Company's Y2K project,
as well as the expected completion date of the phase:
Expected
Description of Task Completion
Date
- ------------------------------------------------------- -------------
Address Compliance of IT Systems with Year 2000 issues:
--Address Business Information IT System Completed
--Address Operations IT System Completed
Assessment of third-Party Risk regarding Y2K issues 10/15/1999
Assessment of Non-IT Systems Completed
Update of IT Systems to meet Year 2000 requirements 10/15/1999
Development of contingency plan for non-compliance of
systems to Y2K requirements 11/30/1999
The Company's ability to complete the Y2K modifications in the timeline
outlined above is dependent upon numerous factors, including the ability of
third party software and hardware suppliers to make necessary modifications
to current versions of their products, the availability of resources to
install and test the modified systems and other factors. Accordingly, there
can be no assurance that these modifications will be successful. If the
Company is not successful in the above implementation, management will
consider the necessity of implementing a contingency plan to mitigate any
adverse effects associated with the Y2K issue. At this time, management
does not have such a plan.
To date, the Company's effort to modify its accounting and information
systems to comply to the Y2K requirements has been focused on its core
business applications (i.e. systems used for the Company's day-to-day
operations). As of September 30, 1999, the Company has spent approximately
$66,000 to modify its computer systems (including software) to process dates
beyond 12/31/99. The Company does not estimate that its future costs
related to its Y2K initiatives will be material. The Company currently
anticipates that all of its operating systems will be Y2K compliant well
before January 1, 2000, and that the Y2K issue will not have a material
adverse effect upon the Company's liquidity, financial position or results
of operations.
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. 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 nine months ended September 30, 1999, the Company received
approximately $2,653,000 from the exercise of warrants. 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 the Company. The
Company believes the holder of these debentures intends to convert the
remaining debentures into its common stock as well.
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 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.
During August and September 1999, the company issued $360,000 in
additional three-year 10% Convertible Subordinated Debentures on terms
similar to the previously issued debentures.
The Company had negative working capital at September 30, 1999 of
$3,475,000 compared to negative working capital of $4,289,000 at December
31, 1998. The Company had cash and cash equivalents at September 30, 1999
of $938,000 and $520,000 at December 31, 1998. Cash used in continuing
operations for the nine months ended September 30, 1999 was $1,689,000
compared to $451,000 for 1998. Cash used by discontinued operations for the
nine months ended September 30, 1999 was $1,071,000 compared to cash used
of $1,586,000 for 1998. Cash used in operating activities for the nine
months ended September 30, 1999 was funded primarily by cash and cash
equivalents on hand at the beginning of the year as well as the warrant
exercises and issuances of convertible debt completed during the nine
months.
For the nine months ended September 30, 1999 the Company generated
negative cash flow from continuing operations of $1,689,000, of which
$458,000 in negative cash flow related to the insulation business due
primarily to larger than usual collection of accounts receivable in December
1998. The remaining negative cash flow is related to corporate activities,
primarily the Company's NAFTA claim. 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 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.
Foreign Currency Translation
Effective January 1, 1999, Mexico is no longer considered to be "highly
inflationary". However, the Company is discontinuing its Mexican
operations, therefore, the impact of this change had no effect on the
Company's financial statements.
<PAGE>
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 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.
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 August 30, 1999 the final hearing commenced in Washington, D.C. and
was completed on September 9, 1999. Post hearing briefs were filed on
November 9, 1999 and the final decision of the tribunal is expected in
January 2000.
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
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
Form 8-K, dated October 20, 1999, regarding the Company's sale of some
of its Mexican operations.
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: February 9, 2000 By: /s/Anthony C. Dabbene
----------------------------------
Anthony C. Dabbene
Chief Financial Officer
(Principal Accounting Officer)
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