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, 1999
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 (949) 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 ( )
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 15, 2000 was approximately $17,000,000, based
upon the average of the bid and asked prices of the Common Stock, as
reported on The Nasdaq Stock Market .
The number of shares of the Common Stock of the registrant
outstanding as of March 15, 2000 was 5,150,498.
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 2000
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-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-K. Such potential risks and
uncertainties include, without limitation, the ability to recover the
consideration for the sale of the Company's businesses in Mexico, the
outcome of the Company's NAFTA claim for damages against Mexico, 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
differ 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
Corporate Structure. The Company, incorporated originally in 1947 as
an Arizona corporation, was reincorporated in Delaware on November 24, 1993.
The Company has wholly owned subsidiaries in both the United States and
Mexico. The Company's United States subsidiaries include Eco-Metalclad
("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 Eco
Administracion, S.A. de C.V. ("ECOPSA"), Consultoria Ambiental Total, S.A.
de CV. ("CATSA") and Confinamiento Tecnico de Residues Industriales, S.A. de
C.V. ("COTERIN"). Each of the Mexican subsidiaries is a corporation of
variable capital.
Unless otherwise indicated, the term "Company" refers to Metalclad
Corporation and its United States and Mexican subsidiaries.
The Company's principal executive offices are located at 2 Corporate
Plaza Drive, Suite 125, Newport Beach, California 92660 and its telephone
number is (949) 719-1234. MIC and MEC serve their clients from their
headquarters in Anaheim, California. Eco-MTLC maintains its offices in
Newport Beach, California and the Company's Mexican subsidiaries' offices
are located in the city of San Luis Potosi, Mexico.
Business in the United States. For over 30 years, the Company has been
providing insulation and asbestos abatement services, primarily on the West
Coast. Through MIC and MEC, the Company provides these services to a wide
range of industrial, commercial and public agency 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 to other contractors. A diverse list of clientele
includes refineries, utilities, chemical/petrochemical plants, manufacturing
facilities, commercial properties, office buildings, and various
governmental facilities.
Business in Mexico. In 1991, the Company embarked on a strategy to
develop an integrated industrial waste management business in Mexico.
Through acquisitions and development of projects, it was the Company's
intent to provide a full-service network of locations, including treatment
and disposal facilities, to provide professional, environmentally safe,
handling and disposal of industrial waste streams.
After eight years of developing this business, the Company determined
that its efforts would not be successful due to political opposition in
Mexico. In 1997, the Company filed a $90 million claim under the North
American Free Trade Agreement ("NAFTA") to recover the value of its
investment in a completed, but unopened, treatment, storage and disposal
("TSD") facility in San Luis Potosi. This facility is held by ECOPSA and
COTERIN. See Item 3 Legal Proceedings and Note B of the Financial
Statements. Because of political interference with a second project that
was under construction and approximately 90 percent complete in
Aguascalientes, the Company is considering the filing of a second NAFTA
claim. In 1999, the Company sold its operating and project development
subsidiaries in Mexico and withdrew from the Mexican market. See Note B of
the Financial Statements.
(b) 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, had previously
been reported as a separate industry segment for 1995, 1996 and 1997 and is
now being reported as discontinued operations.
<PAGE>
(c) Narrative Description of Business
Introduction
Industrial Waste Management Business. Since the Company has sold its
operations and withdrawn from Mexico and this market segment, its only
activity in this segment is the ongoing NAFTA arbitration.
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").
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 "glovebags" 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 that 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 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. Two of the Company's full-time
employees and 54 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 that covers all activities 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 regulations, 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
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
joint venture with a minority service firm, which qualifies for preferential
contract bidding because of minority status, with the Company owning a 49%
interest in the 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
processors, other heavy manufacturers, and engineering/construction
companies. The Commercial customers are primarily government installations,
schools, hospitals, institutions, an array of manufacturing/commercial
facilities, and the general or mechanical construction contractors. The
Company anticipates that a significant portion of its revenues in 2000 will
continue to be from work performed for Southern California Edison, ARCO, and
Equilon.
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 that
provide integrated services and many regional and local companies that
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 anticipates that in the
future its bids will continue to be competitively priced with bids submitted
by others.
Insurance and Bonding. The Company's general liability insurance
policy provides base coverage of $1,000,000 per occurrence and excess
liability coverage of $10,000,000. Additionally, the Company maintains
separate policies for contractor pollution coverage in the amount 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. The Company has historically
carried insurance for liability associated with the sale of asbestos bearing
materials. Because of the age of the Company there have been several
different insurance carriers. As claims are made for liability associated
with asbestos those claims are managed by counsel for the Company and
submitted to the appropriate insurance carrier for defense depending upon
the date the claim originated. It has been more than 25 years since the
Company sold any asbestos bearing material. The Company believes that there
is adequate insurance coverage remaining and believes it has no material
exposure to any future claims.
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
subject 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 undertake 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 has
all material government permits, licenses, qualifications and approvals
required for its operations.
Backlog. The Company's backlog for insulation services at December 31,
1999, and December 31, 1998 was $21,700,000 and $7,200,000, respectively.
Backlog is calculated in terms of estimated revenues on 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, 1999 will be completed during the next eighteen
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, 1999, the Company had 5 full-time
employees in its executive offices and 12 full-time employees in its
insulation business for a total of 17 employees. These include three
executive officers, project managers/estimators, purchasing, accounting, and
office staff.
As of December 31, 1999, the Company employed approximately 110 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 that 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 recent work
stoppages due to strikes by such employees. Additionally, the trade union
agreements the Company is a party to include no strike, no work stoppage
provisions.
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:
<TABLE><S> <C> <C> <C>
Director
or Officer
Name Age Since Current Position with the Company
- ------------------ --- ---------- --------------------------------------------
Anthony C. Dabbene 48 1996 Chief Financial Officer, Director
Bruce H. Haglund 48 1983 Secretary, General Counsel, Director
Grant S. Kesler 56 1991 President, Chief Executive Officer, Director
Raymond J. Pacini 44 1999 Director
Robert D. Rizzo 54 1999 President MIC/MEC
J. Thomas Talbot 64 1999 Director
</TABLE>
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.
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
and again in 1999. Mr. Haglund is a principal in the law firm of Gibson,
Haglund & Paulsen in Orange County, California where he has been engaged in
the private practice of law since 1980. He is also a member of the Boards
of Directors of Aviation Distributors, Inc., HydroMaid International, Inc.,
Renaissance Golf Products, Inc., and VitriSeal, Inc.
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.
Raymond J. Pacini is the President, Chief Executive Officer, and a
Director of California Coastal Communities, Inc. (formerly Koll Real Estate
Group, Inc.), where he has been since 1990. Prior to 1998, he was the
Executive Vice President and Chief Financial Officer of Koll Real Estate
Group, Inc.
Robert D. Rizzo joined the Company as President of Metalclad Insulation
in November 1999. Prior to joining Metalclad, Mr. Rizzo was project manager
for major projects at PDG Environmental, Inc. He has over 25 years
experience in finance, engineering and construction. Mr. Rizzo has a B.S.
in Civil Engineering and an MBA.
J. Thomas Talbot is the owner of The Talbot company, an investment and
asset management company. Mr. Talbot has been the Chief Executive Officer
of HAL, Inc., the parent company of Hawaiian Airlines and was a founder or
co-founder of Jet American Airlines (sold to Alaska Airlines), Air
California, and Southwest Airlines. He currently serves on the boards of
directors of The Hallwood Group, Inc., Fidelity National Financial, Inc.,
California Coastal Communities, Inc., Competisys LLC and The Pacific Club.
Mr. Talbot holds a B.A. in Economics from Stanford University and a J.D.
from Hastings College of Law, University of California, Berkeley.
ITEM 2. PROPERTIES
The Company leases space for its offices and warehouse facilities under
leases of varying terms at rentals aggregating approximately $19,619 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 $6,143 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 that is leased at the current rate of $13,476 per month.
The Anaheim lease expires in April 2002.
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.
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. While the
number of these claims is over 300, the Company believes it has adequate
insurance in place, had adequate insurance in prior years and is rigorously
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 May 14, 1999, two shareholders, as individuals, filed almost
identical litigations in both state and federal courts in Los Angeles
against the Company, its officers, directors and certain advisors. Their
claims include violations of the California Corporations Code, intentional
misrepresentation, negligent misrepresentation, constructive fraud, breach
of fiduciary duty, and negligence. No specific amount of damages is
claimed. The federal cases have been consolidated and 10 of the 11
individual defendants have been dismissed with prejudice. In state court
there is pending an Order to Show Cause as to why the cases should not be
either consolidated with the federal cases or dismissed. The Company
believes these cases have no merit and that an adverse decision would not be
material to the Company. The Company intends to defend the cases rigorously
and seek recovery of its costs and fees from the plaintiffs.
On July 7, 1999, Morton Associates, a Virgin Islands Corporation, filed
suit in federal court in Los Angeles against the Company requesting a
declaratory judgment interpreting certain anti-dilution provisions of a
warrant agreement owned by Morton. The Company has defended the case on the
ground that there was no consideration for the provision in the warrant
agreement, upon which Morton relies. Other holders of similar warrant
agreements have reached a settlement with the Company. The Company cannot
predict the outcome, but believes that an adverse ruling would not be
material to its operations.
No assurances can be given that the Company will be successful in its
defense of these litigations. The Company maintains directors and officers
liability insurance, which has been noticed on these claims, and believes
its insurance coverages to be adequate to cover any potential damages, if
awarded.
On October 2, 1996, following a long period of unsuccessful negotiation
with the Mexican government in an effort to open its hazardous waste TSD
facility in San Luis Potosi, Mexico, the Company filed a Notice of Claim
under the provisions of the North American Free Trade Agreement ("NAFTA").
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
ICSID, 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
basis of the Company's claim against Mexico is one like unto 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 by filing a "counter-memorial". On
August 21, 1998 the Company filed its "reply" to Mexico's counter-memorial
and on April 19, 1999 Mexico filed its "rejoinder". A pre-hearing conference
took place July 6, 1999 and the final hearing took place in Washington, D.C.
from August 30 to September 9, 1999. Post-hearing briefs were filed by
Metalclad, Mexico and the United States government on November 8, 1999. The
Company has been advised by the NAFTA tribunal that a final decision will be
unlikely before late April 2000; however, there can be no assurance, if an
award is made, that the Company will not encounter collection difficulties.
If a favorable decision were received by the Company, any damages
awarded to the Company would be payable by the United Mexican States as an
obligation of the government of Mexico. Both NAFTA and other international
treaties provide mechanisms for ensuring collection and it is anticipated
that any damages would be collected in the year 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 until completion. There is no assurance,
however, that the Company will be successful. If it is not, the impact will
be material and adverse (see Note C to the financial statements).
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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 Stock
Market under the symbol "MTLC." Effective July 2, 1999 the Company
implemented a 1 for 10 reverse stock split. The following table sets forth,
for the fiscal periods indicated, the high and low sales prices for the
Common Stock, adjusted for the stock split, as reported by Nasdaq:
Sales Price
----------------------
High Low
-------- --------
Fiscal Year Ended December 31, 1997
1st Fiscal Quarter Ended March 31, 1997 16 1/4 10 15/16
2nd Fiscal Quarter Ended June 30, 1997 20 10 15/16
3rd Fiscal Quarter Ended September 30, 1997 15 5/16 11 7/8
4th Fiscal Quarter Ended December 31, 1997 12 13/16 9 3/8
Fiscal Year Ended December 31, 1998
1st Fiscal Quarter Ended March 31, 1998 11 7/8 11 1/4
2nd Fiscal Quarter Ended June 30, 1998 10 5/8 13 1/3
3rd Fiscal Quarter Ended September 30, 1998 6 7/8 6 1/4
4th Fiscal Quarter Ended December 31, 1998 4 1/16 3 3/4
Fiscal Year Ended December 31, 1999
1st Fiscal Quarter Ended March 31, 1999 6 5/8 2 3/16
2nd Fiscal Quarter Ended June 30, 1999 4 11/16 1 1/4
3rd Fiscal Quarter Ended September 30, 1999 4 15/16 1 9/16
4th Fiscal Quarter Ended December 31, 1999 6 5/8 3 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 15, 2000, the approximate number of record holders of the Company's
Common Stock was 1,362.
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.
<PAGE>
<TABLE><S> <C> <C> <C> <C> <C> <C>
7 Months
Year Ended December 31, Ended Dec 31,(5) Year Ended May 31,
------------------------------- ------------ ------------------
1999 1998 1997 1996 1996 1995
-------- ------- ------- ------- ------- -------
(in thousands, except per share amounts)
Statement of Operations Data (1)
Revenues from
continuing operations $13.422 $10,009 $8,971 $5,519 $11,445 $15,724
Loss from continuing operations (1,971) (1,775) (2,000) (1,706) (5,630) (6,287)
Loss from discontinued operations (2) (2,228) (3,003) (2,610) (1,574) (1,150) (9,112)
Net loss (4,199) (4,778) (4,610) (3,280) (6,780) (15,399)
Earnings per share:(4)
Net loss per common share, continuing
operations - basic and diluted $(0.50) $(0.58) $(0.68) $(0.60) $(2.50 $(4.60)
Net loss per common share,
discontinued operations basic
and diluted $(0.57) $(0.99) $(0.89) $(0.50) $(0.50) $(6.70)
----- ----- ----- ----- ----- -----
Net loss per common share - basic
and diluted $(1.07) $(1.57) $(1.57) $(1.10) $(3.00) $(11.30)
===== ===== ===== ===== ===== ======
Balance Sheet Data
Total assets $8,903 $11,288 $11,533 $14,106 $16,554 $10,710
Convertible notes 2,071 1,640 1,500 - - 2,050
Convertible debentures (3) 360 1,202 20 229 239 8,636
Shareholders' equity (deficit) (3) 4,586 3,869 8,179 11,115 14,066 (6,173)
- ------------------------
(1) In the fourth quarter of 1998, the Company committed to a plan to discontinue its operations in Mexico
and to seek a buyer. Consequently, the Statement of Operations Data has been restated to reflect this
decision.
(2) Includes $6,378,000 write off in May 1995 of the goodwill associated with the May 1994 purchase of
QUIMICA OMEGA.
(3) 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.
(4) Effective July 2, 1999, the Company implemented a 1 for 10 reverse stock split.
(5) Effective June 1, 1996, the Company changed is fiscal year end to December 31.
</TABLE>
No dividends were paid or declared during the years ended December 31,
1999, 1998, 1997 or the seven months ended December 31, 1996, or the fiscal
years ended May 31, 1996, or 1995.
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.
<PAGE>
Presentation of Financial Statements
The financial statements of the Company reflect the Company's ongoing
business in the insulation contracting segment and the discontinuance of its
waste management segment in Mexico. The net assets of the Company's
business in Mexico are now classified as discontinued operations. Financial
statements of prior periods have been restated to reflect the Company's
decision to discontinue operations in Mexico.
With the Company having significant financial transactions in Mexico,
it has been affected by the continued decline of the Mexico peso. In
November 1994, the value of the peso was 3.4 to the U.S. dollar. As of
December 31, 1999, the value of the peso was 9.49 to the U.S. dollar. As of
December 31, 1999, the Company has a foreign currency translation adjustment
of $(1,555,423) in the equity section of its balance sheet.
Results of Operations
General. Historically, 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 from
the collection of waste oils and solvents for recycling, rental of parts
washing machines, brokering the disposal of waste and remediation services.
As discussed in Note B to the consolidated financial statements, 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
classified as discontinued operations. In October 1999, the Company
completed the sale of its ownership interests in certain Mexican assets
previously classified as discontinued operations. The sale specifically
excluded those Mexican assets involved in the NAFTA claim. The terms of
this sale stipulate payment of the purchase price in stages as various
benchmarks are achieved in the operation of the business, as well as the
buyer's assumption of all liabilities. The Company received an initial cash
payment of $125,000 and recorded a receivable of $779,402; however, no gain
or loss will be recorded on the payments until 100% of the Company's net
investment is recovered.
Under the terms of the sale, the Company can receive up to $5,000,000
in payments as certain specific milestones are met. 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 or continue the businesses, the Company will be
required to write down its receivable in the transaction.
Net assets totaling $4,476,000 are related to the NAFTA claim, are not
a part of this sale and the disposition of which is dependent on the final
decision. 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, if any.
Twelve Months Ended December 31, 1999
Compared to Twelve Months Ended December 31, 1998.
Insulation Business. Total revenues from the insulation business for
the twelve months ended December 31, 1999 were $13,422,000 as compared to
$10,009,000 for the twelve months ended December 31, 1998, an increase of
34%.
Contract Revenues. Contract revenues for the twelve months ended
December 31, 1999 were $13,135,000 as compared to $9,912,000 for the twelve
months ended December 31, 1998, an increase of 33%. 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.
Contract and Material Costs. Contract and material costs and expenses
for the twelve months ended December 31, 1999 were $11,606,000 as compared
to $8,620,000 for the twelve months ended December 31, 1998, an increase of
35%. This increase is consistent with the Company's increase in revenues.
Selling, General and Administrative Costs. Selling, general and
administrative costs for the twelve months ended December 31, 1999 were
$1,297,000 as compared to $993,000 for the twelve months ended December 31,
1998, an increase of 31% due to the increased volume of work for the year.
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 of $2,228,000 for the twelve
months ended December 31, 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 $780,000. 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 $868,000,
which it could not have reasonably foreseen at December 31, 1998.
Additionally, the Company wrote off $585,000 of foreign currency losses
previously included in the equity section of its balance sheet and
associated with the assets sold.
The Company concluded the NAFTA arbitration hearing on September 9,
1999. A short post-hearing brief was filed by the Company, with the NAFTA
tribunal, in early November 1999. The Company anticipates final resolution
of this claim during second quarter 2000. Until that time, the Company
believes that legal, consulting and other administrative expenses may
continue to be incurred. The Company is also awaiting the tribunal's
decision to determine the disposition of the NAFTA assets. 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 $2,140,000 for the twelve
months ended December 31, 1999 as compared to $1,984,000 for the twelve
months ended December 31, 1998, an increase of 8%. The net increase was
primarily an increase in outside services for accounting, consulting and
shareholder expenses related to various statutory filings.
Interest Expense. Interest expense for the twelve months ended
December 31, 1999 was $360,000 as compared to interest expense of $187,000
for the twelve months ended December 31, 1998. 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, as well as
new interest bearing debt in 1999.
Income Taxes. Due to the losses incurred during the twelve months
ended December 31, 1999 and 1998, the Company did not record a provision for
income taxes. At December 31, 1999, the Company has approximately
$22,000,000 and $8,000,000 in net operating losses carryforwards available
for U.S. federal and California taxes, respectively. See Note I of the
consolidated financial statements.
Consolidated Results. The net loss for the twelve months ended
December 31, 1999 was $4,199,000 as compared to a net loss of $4,778,000 for
the twelve months ended December 31, 1998. This loss is attributed to the
increased interest cost associated with new capital to complete the NAFTA
claim as well as the write off of foreign currency losses associated with
the sold Mexican assets. The 1999 loss is less than 1998 primarily due to
the discontinuance of the Mexican operations.
Twelve Months Ended December 31, 1998
Compared to Twelve Months Ended December 31, 1997.
Insulation Business. Total revenues were $10,009,000 in 1998 as
compared to $8,971,000 for 1997, an increase of 12%. This increase is
attributed to work performed under the Company's various maintenance
agreements, particularly with ARCO, and the Company's continuing efforts in
the commercial insulation market.
Contract and Material Costs. Contract and material costs and expenses
were $8,620,000 in 1998 compared to $7,686,000 in 1997 an increase of 12%,
attributed to the increased level of direct costs associated with higher
revenues.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses were $993,000 in 1998 compared to $1,177,000 for the
same period in 1997, a decrease of 16%. This decrease reflects the full
year results of the Company's cost reduction program, initiated in 1997.
Discontinued Operations. Loss from discontinued operations for the
twelve months ended December 31, 1998 was $3,003,000 compared to a loss of
$2,610,000 for the twelve months ended December 31, 1997. The 1998 loss
includes an accrual of $450,000 associated with the decision to discontinue
the Mexican waste management business. In addition, the 1998 and 1997 loss
includes approximately $598,000 and $298,000 of legal and consulting
expenses associated with the Company's ongoing NAFTA arbitration.
Corporate Expense. Corporate expenses were $1,984,000 for the twelve
months ended December 31, 1998 as compared to $2,171,000 for the twelve
months ended December 31, 1997, a decrease of 9%. The decline was achieved
by reductions in staffing and costs.
Interest Expense. Interest expense was $187,000 for the twelve months
ended December 31, 1998 compared to interest income of $62,000 for the
twelve months ended December 31, 1997, largely due to the Company's issuance
of notes and debentures in 1998.
Consolidated Results. The net loss for the year ended December 31,
1998 was $4,778,000 as compared to $4,610,000 for 1997, an increase of 4%.
This increased loss is attributable to accruals associated with discontinued
operations in Mexico and the costs to pursue the Company's NAFTA claim.
Liquidity and Capital Resources
In November 1991, the Company completed the acquisition of Eco-Metalclad,
Inc. ("ECO-MTLC"), commenced the development of the hazardous
industrial 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 required substantial capital.
To obtain capital for the development of the business of the Company in
Mexico, the Company made private placements of its common stock and
convertible subordinated debentures and obtained loans from financial
institutions.
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 NAFTA
related assets, complete its NAFTA arbitration and support its remaining
operations.
In July 1998, the Company issued $1,000,000 in 7% Convertible
Debentures due in July 2001, netting the Company $875,000. In February,
1999 the Company redeemed $150,000 of these debentures. During 1999, the
holder of these debentures converted all of the remaining principal and
interest due into common stock of the Company.
In August 1998, the Company issued $350,000 in 10% Convertible
Subordinated Debentures due in August 2001, netting the Company $308,000.
During July 1999, the holder of these debentures converted the entire
principal amount into common stock of the Company.
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
three-year 10% Convertible Subordinated Debentures on terms similar to the
previously issued debentures, with the conversion price being the lower of
$2.50 or 75% of market.
During the twelve months ended December 31, 1999, the Company received
approximately $2,783,000 from the exercise of warrants. Additionally, the
Company issued 38,500 shares of its common stock to certain employees of the
Company in exchange for $108,000 in payroll obligations.
The Company had negative working capital at December 31, 1999 of
$145,000 compared to negative working capital of $4,289,000 at December 31,
1998. The Company had cash and cash equivalents at December 31, 1999 of
$769,000 and $520,000 at December 31, 1998. Cash used in continuing
operations for the twelve months ended December 31, 1999 was $1,953,000
compared to $662,000 for 1998. Cash used by discontinued operations for the
twelve months ended December 31, 1999 was $1,104,000 compared to cash used
of $1,567,000 for 1998. Cash used in operating activities for the twelve
months ended December 31, 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 twelve
months.
For the twelve months ended December 31, 1999 the Company generated
negative cash flow from continuing operations of $1,953,000, of which
$72,000 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, along with
general and administrative expenses without revenues to offset such
expenses. The Company is aware of its ongoing cash needs and continues to
work with its investment bankers and other sources to meet its ongoing needs
through December 31, 2000. Given the Company's decision to discontinue
operations in Mexico, and sell its businesses, the cash requirements in
Mexico have greatly diminished. The Company believes it will obtain the
necessary funds to continue its planned operations throughout 2000; however,
no assurances can be given that such funds will be available to the Company
as required.
Reverse Stock Split
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 Directors 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 July 2, 1999.
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.
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 remaining operations.
<PAGE>
Year 2000 Issues
As previously reported, over the past year the Company developed and
implemented a plan to address the anticipated impacts of the Year 2000
problem. The Company also surveyed selected third parties to determine the
status of their Year 2000 compliance programs. In addition, the Company
developed contingency plans specifying what the Company would do if we or
important third parties experienced disruptions to critical business
activities as a result of the Year 2000 problem.
The Company's Year 2000 plan was completed in all material respects
prior to the anticipated Year 2000 failure dates. As of March 15, 2000, the
Company has not experienced any materially important business disruptions or
system failures as a result of Year 2000 issues, nor is it aware of any Year
2000 issues that have impacted its customers, suppliers or other significant
third parties to an extent significant to the Company. However, Year 200
compliance has many elements and potential consequences, some of which may
not be foreseeable or may be realized in future periods. Consequently,
there can be no assurance that unforeseen circumstances may not arise, or
that the Company will not in the future identify equipment or systems that
are not Year 2000 compliant.
As of December 31, 1999, the Company incurred total incremental costs
of $74,500 addressing Year 2000 issues. The Company does not anticipate
that it will incur any more material costs related to the Year 2000 issue.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements and schedules listed in the
accompanying Index to Consolidated Financial Statements are attached 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.
<PAGE>
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 2000 Annual Meeting Proxy Statement which will be filed with
the Securities and Exchange Commission not later than 120 days after
December 31, 2000. The Company's 2000 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 2000 Annual Meeting Proxy Statement which will be filed with
the Securities and Exchange Commission not later than 120 days after
December 31, 1999. The Company's 2000 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 2000 Annual Meeting Proxy Statement which will be filed with
the Securities and Exchange Commission not later than 120 days after
December 31, 1999. The Company's 2000 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 75,500 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%. 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, 1996 to a variable rate based upon the Company's quarterly
investment rate. Repayment of these notes has been extended until
completion of the NAFTA arbitration. Mr. Kesler's note is secured by his
employment agreement.
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. There are no remaining payments due Mr. Neveau and his
indebtedness to the Company as of December 31, 1999 was $71,000.
During the twelve months ended December 31, 1999, the Company incurred
legal fees of $77,000 from the law firm of Gibson, Haglund & Paulsen, of
which Bruce H. Haglund, general counsel, Director, and Secretary of the
Company, is a principal; however, none of such fees have yet been paid.
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) The following documents are filed as part of this report on Form 10-K:
1. Financial Statements
Reports of Independent Public Accountants
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Shareholders' Equity
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:
3. Restated and Amended Certificate of Incorporation and Bylaws of
the Company, and all amendments thereto. (1)
3.1 Form of Certificate for Common Stock (2)
10.1 Form of 1993 Omnibus Stock Option and Incentive Plan (3)
10.2 Form of 1996 Omnibus Stock Option and Incentive Plan (4)
10.3 Employment Agreement between the Company and Grant S. Kesler
dated January 1, 1998 (5)
10.4 Employment Agreement between the Company and Anthony C.
Dabbene dated January 1, 1998 (5)
- ----------------
(1) Filed with the Company's Annual Report on Form 10-K for the year
ended December 31, 1997 and incorporated herein by this reference.
(2) Filed with the Company's Registration Statement on Form S-1 dated
December 15, 1987 and incorporated by reference.
(3) 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.
(4) Filed with the Company's Preliminary Proxy Statement dated September
10, 1996 and incorporated herein by this by reference.
(5) Filed with the Company's Annual Report on Form 10-K for the year ended
December 31, 1998 and incorporated herein by this reference.
10.5 Form of 7% Convertible Debenture Due July 31, 2001 between
the Company and The Shaar Fund Ltd. Dated July 30, 1998 (6)
10.6 Amendatory Agreement between the Company and Sundial
International Fund Limited and Ultra Pacific Holdings S.A. dated July 30,
1999
10.7 Form of 10% Convertible Subordinated Debentures Due 2002
between the Company and various parties dated August and September 1999
22. List of Subsidiaries of the Registrant
23. Consents of Experts and Counsel
(b) Reports on Form 8-K
A Current Report on Form 8-K dated October 8, 1999 was filed on October
20, 1999 reporting the completion of the sale to Geologic, S.A. de C.V., of
all the Company's interest in the businesses known as Administracion
Residuos Industriales, S.A. de C.V., Ecosistemas Nacionales, S.A. de C.V.,
Quimica Omega, S.A. de C.V., and Ecosistemas El Llano, S.A. de C.V. An
amended Current Report on Form 8-K/A-1 was filed on February 9, 2000
providing the required pro forma financial statements relating to the sale.
- ----------------
(6) Filed with the Company's Form S-3/A dated July 2, 1999 and incorporated
herein by this reference.
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.
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: March 30, 2000
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 March 30, 2000
- --------------------- (Principal Executive Officer)
Grant S. Kesler
/s/Anthony C. Dabbene Chief Financial Officer & Director March 30, 2000
- --------------------- (Principal Financial and
Anthony C. Dabbene Accounting Officer)
/s/Bruce H. Haglund Secretary & Director March 30, 2000
- ---------------------
Bruce H. Haglund
/s/J. Thomas Talbot Director March 30, 2000
- ---------------------
J. Thomas Talbot
/s/Raymond J. Pacini Director March 30, 2000
- ---------------------
Raymond J. Pacini
CONSOLIDATED FINANCIAL STATEMENTS
and
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
For the year ended
December 31, 1999
METALCLAD CORPORATION
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 Moss Adams LLP.......................................F-1
Report of Arthur Andersen LLP...................................F-2
Financial Statements:
Consolidated Balance Sheets - December 31, 1999 and 1998........F-3
Consolidated Statements of Operations - the Years Ended
December 31, 1999, 1998 and 1997................................F-4
Consolidated Statements of Shareholders' Equity - the Years
Ended December 31, 1999, 1998 and 1997.........................F-5
Consolidated Statements of Cash Flows - the Years Ended
December 31, 1999, 1998 and 1997...............................F-6
Notes to Consolidated Financial Statements......................F-7
Supplementary Financial Statement Schedules:
Schedule II - Valuation and Qualifying Accounts................F-22
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, 1999 and 1998, and the related consolidated statements of
operations, shareholders' equity and cash flows for each of the two years in
the period ended December 31, 1999. 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.
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, 1999 and 1998, and the
results of their operations and their cash flows for each of the two years
in the period ended December 31, 1999 in conformity with generally accepted
accounting principles.
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.
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 years ended December 31, 1999 and
1998 has been subjected to the auditing procedures applied in the audits of
the basic financial statements and, in our opinion, fairly state in all
material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
MOSS ADAMS LLP
Costa Mesa, California
March 17, 2000
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
The Board of Directors and Shareholders of Metalclad Corporation:
We have audited the consolidated balance sheet of Metalclad Corporation
as of December 31, 1997 (not separately presented herein) and the related
consolidated statements of operations, shareholders' equity and cash flows
for the year then ended. 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 audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States. 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 financial position of
Metalclad Corporation as of December 31, 1997 and the consolidated results
of their operations and their cash flows for the year then ended, in
conformity with accounting principles generally accepted in the United
States.
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.
Our audit was 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 has
been subjected to the auditing procedures applied in the audit of the basic
financial statements and, in our opinion, fairly states in all 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
<PAGE>
Metalclad Corporation and Subsidiaries
CONSOLIDATED BALANCE SHEETS
<TABLE><S> <C> <C>
December 31,
------------------------------
1999 1998
----------- -----------
ASSETS
Current assets:
Cash and cash equivalents $ 769,176 $ 519,940
Accounts receivable, less allowance for doubtful
accounts of $20,000 at December 1999 and 1998 1,644,991 828,686
Costs and estimated earnings in excess of billings
on uncompleted contracts 147,991 143,672
Inventories 161,832 176,697
Prepaid expenses and other current assets 125,630 56,492
Receivables from related parties, net 77,686 151,765
Note receivable--sale of Mexican assets 779,402 -
---------- ----------
Total current assets 3,706,708 1,877,252
Property, plant and equipment, net 357,769 271,592
Net assets of discontinued operations 4,815,811 9,096,300
Other assets 23,086 43,162
---------- ----------
$ 8,903,374 $11,288,306
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 898,745 $ 636,096
Current liabilities, net -discontinued operations 339,936 2,886,067
Accrued expenses 499,076 913,772
Billings in excess of costs and estimated
earnings on uncompleted contracts - 71,280
Current portion of long-term debt 42,798 18,585
Convertible zero coupon notes 2,071,003 1,640,000
---------- ----------
Total current liabilities 3,851,558 6,165,800
Long-term debt, less current portion 105,915 51,949
Convertible subordinated debentures 360,000 1,201,547
---------- ----------
Total liabilities 4,317,473 7,419,296
---------- ----------
Commitments and Contingencies (Note M)
Shareholders' equity :
Preferred stock, par value $10; 1,500,000 shares
authorized; none issued - -
Common stock, par value $.10; 80,000,000 shares
authorized; 4,859,498, and 30,569,122 issued and
outstanding at December 1999 and 1998, respectively 485,950 3,056,912
Additional paid-in capital 64,330,947 57,404,880
Accumulated deficit (58,106,460) (53,907,766)
Officers' receivable (569,113) (544,906)
Accumulated other comprehensive income (1,555,423) (2,140,110)
---------- ----------
4,585,901 3,869,010
---------- ----------
$ 8,903,374 $11,288,306
========== ==========
</TABLE>
The accompanying notes are an integral part
of these consolidated balance sheets.
Metalclad Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE><S> <C> <C> <C>
Year ended December 31,
-------------------------------------
1999 1998 1997
----------- ---------- ----------
Revenues
Contract revenues $13,134,928 $9,912,194 $8,533,425
Material sales 224,850 92,227 201,976
Other 62,136 4,250 235,702
---------- --------- ---------
13,421,914 10,008,671 8,971,103
---------- --------- ---------
Operating costs and expenses
Contract costs and expenses 11,404,866 8,548,872 7,525,047
Cost of material sales 200,623 71,316 161,297
Selling, general and administrative 1,296,615 993,369 1,177,047
---------- --------- ---------
12,902,104 9,613,557 8,863,391
---------- --------- ---------
Corporate expense (2,140,338) (1,983,578) (2,170,683)
Operating loss (1,620,528) (1,588,464) (2,062,971)
Interest income (expense) (359,777) (187,011) 62,460
Other income 9,145 - -
---------- --------- ---------
Loss from continuing operations (1,971,160) (1,775,475) (2,000,511)
Loss from discontinued operations (2,227,534) (3,002,914) (2,609,622)
---------- --------- ---------
Net loss $(4,198,694) $(4,778,389) $(4,610,133)
========== ========== ==========
Weighted average number of common shares 3,918,912 3,036,277 2,943,806
========== ========== ==========
Loss per share of common stock, continuing
operations basic and diluted $ (.50) $ (.58) $ (.68)
===== ===== =====
Loss per share of common stock, discontinued
operations basic and diluted $ (.57) $ (.99) $ (.89)
===== ===== =====
Loss per share of common stock basic and
diluted $(1.07) $(1.57) $(1.57)
===== ===== =====
</TABLE>
The accompanying notes are an integral part
of these consolidated statements.
Metalclad Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
The Years Ended December 31, 1999, 1998 and 1997
<TABLE><S> <C> <C> <C> <C> <C> <C> <C>
Accumulated Total
Additional Other Share-
Common Stock Paid-in Accumulated Officers' Comprehensive holders'
Shares Amounts Capital Deficit Receivable Income Equity
---------- ---------- ----------- ------------- ----------- ------------- -----------
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 and warrants 910,626 91,063 1,274,876 - - - 1,365,939
Officers' loans; interest
and repayments - - - - 56,477 - 56,477
Stock issued under bonus plans 30,000 3,000 105,750 - - - 108,750
Other - - - 124,334 - - 124,334
Foreign currency 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
Issuance of common stock 6,752 675 7,765 - - - 8,440
Common stock issued under
stock option and warrants 498,500 49,850 434,426 - - - 484,276
Officers' loans; interest
and repayments - - - - (24,743) - (24,743)
Net loss - - - (4,778,389) - - (4,778,389)
---------- --------- ---------- ----------- --------- ---------- ----------
Balance at December 31, 1998 30,569,122 3,056,912 57,404,880 (53,907,766) (544,906) (2,140,110) 3,869,010
Reverse stock split 1 for 10 (27,512,210) (2,751,221) 2,751,221 - - - -
Issuance of common stock
for services 38,500 3,850 103,950 - - - 107,800
Debt conversions and interest 612,753 61,275 1,403,058 - - - 1,464,333
Common stock issued under
warrants 1,151,333 115,134 2,667,838 - - - 2,782,972
Officers' loans; interest - - - - (24,207) - (24,207)
Foreign currency translation
adjustment - - - - - 584,687 584,687
Net loss - - - (4,198,694) - - (4,198,694)
---------- --------- ---------- ----------- --------- ---------- ----------
Balance at December 31, 1999 4,859,498 $ 485,950 $64,330,947 $(58,106,460) $ (569,113) $(1,555,423) $ 4,585,901
========== ========= ========== =========== ========= ========== ==========
</TABLE>
The accompanying notes are an integral part
of these consolidated statements.
Metalclad Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE><S> <C> <C> <C>
Year Ended December 31,
-------------------------------------------------
1999 1998 1997
------------ ------------ -------------
Cash flows from operating activities:
Net loss $(4,198,694) $(4,778,389) $(4,610,133)
Adjustments to reconcile net loss to net cash used in
operating activities:
Loss from discontinued operations 2,227,534 3,002,914 2,609,622
Depreciation and amortization 229,327 128,921 235,045
Provision for losses on accounts receivable - (8,907) -
Issuance of stock for services and interest 107,800 8,441 108,750
Non-cash (see below) issuance of stock for debt conversions 1,464,333 - -
Changes in operating assets and liabilities:
Decrease (increase) in accounts receivable (816,305) 595,205 690,149
Decrease (increase) in unbilled receivables (4,319) 88,401 (57,305)
Decrease (increase) in inventories 14,865 (15,456) 152,916
Decrease (increase) in prepaid expenses and other assets (69,138) 84,833 789,093
Distributions from Curtom-Metalclad - - 12,588
Decrease (increase) in receivables from related parties 74,079 (55,299) 16,375
Increase (decrease) in accounts payable and accrued expenses (152,047) 236,394 (1,402,629)
Increase (decrease) in billings over cost (71,280) 50,553 (24,741)
Increase in note receivable sale of Mexican assets (779,402) - -
Decrease in other assets 20,076 - 1,164
--------- --------- ---------
Net cash used in continuing operations (1,953,171) (662,389) (1,479,106)
Net cash used in discontinued operations (1,103,729) (1,566,810) (1,922,081)
--------- --------- ---------
Net cash used in operating activities (3,056,900) (2,229,199) (3,401,187)
--------- --------- ---------
Cash flows from investing activities:
Capital expenditures continuing operations (171,809) (274,104) -
Capital expenditures discontinued operations - (388,940) (705,240)
--------- --------- ---------
Net cash used in investing activities (171,809) (663,044) (705,240)
--------- --------- ---------
Cash flows from financing activities:
Proceeds from long-term borrowings 901,472 1,392,548 1,500,000
Payments on long-term borrowings continued operations (182,292) - (210,000)
(Borrowings) repayments by officers (24,207) (24,743) 56,477
Proceeds from exercise of stock options - 111,527 -
Proceeds from exercise of warrants 2,782,972 372,750 1,365,939
--------- --------- ---------
Net cash provided by continuing operations 3,477,945 1,852,082 2,712,416
Net cash provided (used) in discontinued operations - 120,391 -
--------- --------- ---------
Net cash provided by financing activities 3,477,945 1,972,473 2,712,416
--------- --------- ---------
Effects of exchange rates on cash - 139,969 (22,672)
Loss on foreign currency translations - (210,926) (2,413)
--------- --------- ---------
Increase (decrease) in cash and cash equivalents 249,236 (990,727) (1,419,096)
Cash and cash equivalents at beginning of period 519,940 1,510,667 2,929,763
--------- --------- ---------
Cash and cash equivalents at end of period $ 769,176 $ 519,940 $1,510,667
========= ========= =========
Supplemental disclosures of cash flow information:
Cash paid for interest $ 71,060 $ 1,603 $ 114,820
========= ========= =========
</TABLE>
The accompanying notes are an integral part
of these consolidated statements.
NOTE A DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
Description of Business
Metalclad Corporation (the "Company") is engaged in insulation services,
including asbestos abatement and material sales, to customers primarily in
California (the "Insulation Business"). The Company has also been engaged
in the development of hazardous and non-hazardous industrial waste
treatment and storage facilities, as well as the collection and recycling
of industrial waste for disposition to landfills or as alternative fuels
for cement kilns in Mexico (the "Mexican Business").
After several years of developing the Mexican Business, the Company
determined that its efforts would not be successful due to political
opposition in Mexico. On October 13, 1997, the Company filed a "memorial"
with the NAFTA tribunal for its claim to recover the value of its landfill
investment in Mexico. On February 17, 1998, the United Mexican States
("Mexico") responded to the Company's claim to the tribunal by filing a
"counter-memorial". On August 21, 1998 the Company filed its "reply" to
Mexico and on April 19, 1999 Mexico filed its "rejoinder". A pre-hearing
conference took place July 6, 1999 and the final hearing took place in
Washington, D.C. from August 30 to September 9, 1999. Post-hearing briefs
were filed by the Company, the Mexican government and the United States
government on November 8, 1999. The Company has been advised by the NAFTA
Tribunal that a final decision will be unlikely before late April 2000.
Because of this arbitration, the Company's other businesses in Mexico,
including its development of a second landfill facility in the State of
Aguascalientes, have been impacted dramatically. Consequently, the
Company has discontinued its businesses in Mexico, selling its operating
and development businesses, while maintaining its NAFTA assets until
completion of its arbitration. (See Note B.)
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 complete its NAFTA claim to fund
general and administrative expenses without sufficient revenues to offset.
These matters raise substantial doubt about the Company's ability to
continue as a going concern. The Company is continuing its efforts to
reduce costs and increase its revenues. The Company is pursuing
additional financing alternatives to maintain its operations which may
include a continuation of its warrant exchange program. The financial
statements to 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.
<PAGE>
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. Direct costs incurred relating to the
acquisition or formation of an equity method investment are capitalized
and are amortized over five years.
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.
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.
Depreciation and Amortization
Property, plant and equipment is stated at cost. Depreciation and
amortization 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. Assets related
to the Company's hazardous waste treatment facility located in Mexico are
included in discontinued operations and will be disposed of upon
resolution of the NAFTA claim. (See Note B.)
Revenue Recognition
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.
Loss Per Share
The Company computes loss per share in accordance with Statement of
Financial Accounting Standards ("SFAS") 128, "Earnings Per Share". This
statement requires the presentation of both basic and diluted net loss per
share for financial statement purposes. Basic net loss per share is
computed by dividing loss available to common shareholders by the weighted
average number of common shares outstanding. Diluted net 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. Weighted average share calculations for all periods
presented have been adjusted to reflect the 1 for 10 reverse stock split.
(See Note J.)
Stock-Based Compensation
The Company accounts for stock-based compensation for employees under the
provisions of APB 25. As required, the Company complies with the
disclosure provisions of SFAS 123, "Accounting for Stock-Based
Compensation". SFAS 123 requires the Company to disclose pro forma net
income and earnings per share as if the fair value based accounting method
of SFAS 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 SFAS 109, "Accounting for Income Taxes".
Comprehensive Income - Foreign Currency Translation
In 1998, the Company adopted SFAS 130, "Reporting Comprehensive Income".
This statement establishes rules for the reporting of comprehensive income
and its components. Comprehensive income consists of net income and
foreign currency translation adjustments and is presented in the
Consolidated Statement of Shareholders' Equity. The adoption of SFAS 130
had no impact on total shareholders' equity. Prior year financial
statements have been reclassified to conform to the SFAS 130 requirements.
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. 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.
Beginning January 1, 1999, Mexico is no longer deemed highly inflationary.
However, the Company has discontinued its Mexican operations and therefore
this will not impact future reported results of operations. (See Note B.)
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 DISCONTINUED OPERATIONS
In 1991, the Company embarked on a strategy to develop an integrated
industrial waste management business in Mexico. After seven years of
developing this business, the Company determined that its efforts would
not be successful due to political opposition in Mexico. Consequently, in
the fourth quarter of 1998, Management committed to a plan to sell its
Mexican operations to a third party.
The Company's discontinued operations contain two components: 1) ongoing
operations and development and 2) the landfill assets associated with its
NAFTA claim. In the fourth quarter of 1999, the Company completed a sale
of its ongoing businesses (see Note C). The Company's NAFTA assets will
be retained until a final decision is rendered in the claim.
The loss for discontinued operations during fiscal 1999 includes a
provision for anticipated costs to complete the ongoing NAFTA claim
process of $107,000. Based upon the decision in the NAFTA claim, the
Company may have to write down assets of discontinued operations without
an offsetting damage award. Additionally, accumulated foreign currency
losses of $1,555,000, currently a component of shareholders' equity, will
be written off upon disposition of the NAFTA assets.
The consolidated financial statements for prior periods have been restated
to reflect the accounting for discontinued operations.
Net sales and loss from discontinued operations are as follows:
Year Ended December 31,
--------------------------------------
1999 1998 1997
---------- ---------- ----------
Net sales $ 4,140,571 $ 5,232,554 $ 2,913,720
Operating loss (2,116,496) (2,587,300) (2,517,467)
Interest expense (111,038) (415,614) (92,155)
Loss from discontinued operations (2,227,534) (3,002,914) (2,609,622)
<PAGE>
The net assets of discontinued operations are as follows:
December 31,
--------------------------
1999 1998
------------ ------------
Current assets $ 14,554 $ 1,068,803
Current liabilities (354,490) (3,954,870)
---------- ----------
Net current liabilities (339,936) (2,886,067)
---------- ----------
Property, plant and equipment, net 4,377,369 7,676,774
Other assets 438,442 1,419,526
---------- ----------
Net non-current assets 4,815,811 9,096,300
---------- ----------
Net assets of discontinued operations $4,475,875 $6,210,233
========= =========
Included in net assets of discontinued operations, at December 31, 1999 is
approximately $4,476,000 representing the Company's investment in its
completed hazardous waste treatment facility in the State of San Luis
Potosi, Mexico, known as "El Confin". 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. A final hearing on the claim was completed on September 9,
1999. A binding decision by ICSID tribunal is expected in the second
quarter of 2000. 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 of the Company's NAFTA
claim. Based upon independent appraisal and management's best estimate,
the Company believes that the proceeds from the NAFTA claim will
significantly exceed the carrying value of the El Confin assets. The
Company intends to dispose of this asset upon resolution of the NAFTA
claim. However, should a decision be rendered against the Company, assets
totaling $4,816,000 may be impaired and could potentially result in a
write down should the Company be unable to sell or otherwise recover its
investment.
NOTE C NOTE RECEIVABLE SALE OF MEXICAN ASSETS
In October 1999, the Company completed a sale of its operating businesses
and development project located in Aguascalientes. The sale specifically
excluded those Mexican assets involved in the NAFTA claim. The terms of
this sale stipulate payment of the purchase price in stages as various
benchmarks are achieved in the operation of the business as well as the
buyer's assumption of all liabilities. The Company received an initial
cash payment of $125,000 and recorded a receivable of $779,402; however,
no gain or loss will be recorded on the payments until 100% of the
Company's net investment is recovered.
Under the terms of the sale, the Company can receive up to $5,000,000 in
payments as certain specific milestones are met. 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 will be due the Company under the milestone
payment schedule. Presently, the buyer has not completed any of the
milestones associated with the Aguascalientes project. It is at least
reasonably possible that the buyer may not complete any of the milestones.
In the event that the buyer is not successful in its efforts to open the
project or continue the businesses, the Company will be required to write
down its receivable in the transaction.
The Company addresses the realization of its assets as required by SFAS
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.
NOTE D - INVESTMENTS IN UNCONSOLIDATED AFFILIATES
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.
Curtom-Metalclad's operations and financial position are not material to
the Company taken as a whole.
<PAGE>
NOTE E -- PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following:
December 31,
--------------------------
1999 1998
------------ ------------
Machinery and equipment $ 570,105 $ 525,766
Automotive equipment 308,557 183,087
Leasehold improvements 3,039 1,039
-------- --------
881,701 709,892
Less accumulated depreciation
and amortization (523,932) (438,300)
-------- --------
$ 357,769 $ 271,592
======== ========
NOTE F -- ACCRUED EXPENSES
Accrued expenses consist of the following:
December 31,
--------------------------
1999 1998
------------ ------------
Accrued interest $ 124,947 $ 59,439
Wages, bonuses and taxes 46,893 467,873
Union dues - 97,933
Accounting fees and legal fees 205,000 112,700
Other 122,236 175,827
-------- --------
$ 499,076 $ 913,772
======== ========
NOTE G CONVERTIBLE DEBT
Convertible Zero Coupon Notes
In December 1997, the Company issued $2,200,000 Five Year Zero Coupon
Secured Notes, due December 31, 2002, netting the Company $1,500,000. The
effective interest rate of these notes is 9.33%. The Company is
amortizing the difference between the value at maturity and the purchase
price over five years. Upon the market price of the Company's common
stock closing at or above $1.50 for ten consecutive trading days, the
notes become convertible into common stock of the Company at $1.50 per
share and the Company is to issue warrants to purchase 1,500,000 common
shares of stock with an exercise price of $1.50 per share. Both the
conversion price and warrant exercise price also contain anti-dilution
provisions. Additionally, the notes are redeemable at the option of the
holder, or the Company, any time after March 31, 2000. These notes are
secured by 100% of the stock of Metalclad Insulation Corporation. The
carrying value of Insulation is $1,568,000 as of December 31, 1999. In
February 1998, the conditions triggering convertibility of the notes and
the issuance of warrants were met.
In June 1998, the Company negotiated a bridge loan with the holder of
these notes in the amount of $250,000. As additional consideration for
the bridge loan, the Company issued 250,000 warrants exercisable at $1.25.
In connection with this financing, certain amendments were made to the
original Five Year Zero Coupon Notes which granted the holder an
additional 400,000 warrants exercisable at $1.50 as part of the
anti-dilution provision of the original warrants and clarifying the
anti-dilution language contained in the original notes. The bridge loan was
paid in its entirety from the proceeds of the Company's July 1998
financing. Due to the anti-dilution provisions contained in both the
notes and the warrants, the holder of these notes had rights similar to
those of the Company's existing warrant holders. As part of the Company's
negotiations with the warrant holders to solve the issue of the ongoing
anti-dilution effects on the number of shares underlying the warrants, the
holder of these notes also had to be addressed to solve the anti-dilution
provisions contained in the notes. In February 1999, the Company and the
holder reached agreement on the conversion price of the notes, originally
priced to convert at $15.000 per share, and are now convertible into
shares of the Company's common stock at $2.50 per share.
Convertible Subordinated Debentures
In July 1998, the Company issued $1,000,000 in 7% Convertible Debentures
due in July 2001. The debentures are convertible into shares of the
Company's common stock at $1.25 or 75% of current market price, whichever
is lower. The Company has the option to redeem all or portions of this
debenture at 125% of the principal amount of the redemption. The
debenture also allows for a mandatory redemption in the event of an award
in the NAFTA arbitration or, in certain cases, if the Company obtains
additional equity investment. The mandatory redemption is also at 125% of
the then-outstanding principal balance. In February 1999, the Company
redeemed $150,000 of the principal amount of the debentures. As of
December 31, 1999, all of these remaining debentures were converted into
common stock of the Company.
In August 1998, the Company issued $350,000 in 10% Convertible
Subordinated Debentures due in August 2001 on terms similar to the
previously issued debentures. The debentures are convertible into shares
of the Company's common stock at $1.25 per share through June 30, 1999.
After June 30, the debentures are convertible at 75% of current market
price or $1.25 whichever is lower. As of December 31, 1999 all of these
debentures were converted into common stock of the Company.
During the third quarter of 1999, the Company issued $360,000 in three-year
10% convertible subordinated debentures on terms similar to the
previously issued debentures, with the conversion price being the lower of
$2.50 per share or 75% of the market price per share. These debentures
are due in August and September, 2002.
NOTE H LONG-TERM DEBT
Long-term debt consists of various notes payable to a finance company for
vehicles used in the ordinary course of the Company's insulation business.
The notes are secured by automotive equipment and bear interest at rates
ranging from .9% to 5.9% for periods of 48 months with the last payment
due in 2003.
NOTE I - INCOME TAXES
There was no provision for income taxes for the periods presented due to
losses incurred and the Company's inability to recognize certain loss
carry forwards. The major deferred tax items at December 31, 1998 and
1997 are as follows:
Year Ended December 31,
--------------------------
1999 1998
------------ ------------
Assets
Allowances established against
realization of certain assets $ 43,000 $ 10,000
Net operating loss carryforwards 8,887,000 8,878,800
Capital loss carryforwards 2,680,000 -
Accrued liabilities and other 94,000 206,165
--------- ---------
11,704,000 9,094,965
Valuation allowance (11,704,000) (9,094,965)
--------- ---------
$ - $ -
========= ==========
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, 1999, the Company has available for U.S. federal and
California income tax purposes net operating loss carryforwards of
approximately $22,000,000 and $8,000,000, respectively. These
carryforward amounts expire in the years 2000 through 2019 and 2000
through 2004, respectfully. The ultimate utilization of the net operating
loss carryforwards may be limited in the future due to changes in the
ownership of the Company. This limitation, if imposed, has not been
determined by the Company. The Company also has Mexican net operating
loss carryforwards of approximately $2,000,000 which may be available to
offset future taxable income. The Mexican losses are subject to a ten-year
tax carryforward period and expire in the years 2004 through 2009.
The Company has recorded a 100% valuation allowance against deferred tax
assets due to the uncertainty regarding their realizability.
NOTE J - SHAREHOLDERS' EQUITY
Reverse Stock Split
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 for up to ten shares
of its outstanding common stock. Pursuant to this approval, the Board of
Directors 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 July 2, 1999. All reference to shares and per share amounts in the
accompanying footnotes have been restated to reflect this action.
Stock Options
On August 18, 1992, the Company adopted an omnibus stock option plan (the
"1992 Plan") which authorized the issuance of 160,000 options to acquire the
Company's common stock. At December 31, 1999, there were options
outstanding under the 1992 Plan for 62,000 shares, and 15,000 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 100,000 options to acquire the
Company's common stock. The terms of the 1993 Plan are the same as the 1992
Plan. At December 31, 1999, there were options outstanding under the 1993
Plan for 42,600 shares, and 24,900 options available for grant. These
options expire 10 years from the date of the grant.
On May 15, 1997, the Company adopted an omnibus stock option plan (the "1997
Plan") which authorized the issuance of 600,000 options to acquire the
Company's common stock. At December 31, 1999 there were 390,000 options
outstanding under this plan and 210,000 options available for grant.
During the year ended December 31, 1999, the Board of Directors and its
Compensation Committee approved the grant to various officers, directors and
employees of the Company of options to purchase an aggregate of 390,000
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.
<PAGE>
The following is a summary of options granted:
<TABLE><S> <C> <C> <C> <C> <C> <C>
Year ended December 31,
-----------------------------------------------------------------------
1999 1998 1997
--------------------- --------------------- ---------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
-------- ----- -------- ----- -------- -----
Options outstanding at
beginning of the year 607,650 $19.30 392,300 $22.28 484,825 $27.51
Granted 390,000 2.99 246,300 13.79 89,000 14.72
Exercised - - (17,850) 7.50 - -
Canceled (42,850) 22.69 (13,100) 20.88 (181,525) 32.55
-------- ----- -------- ----- -------- -----
Options outstanding at
end of the year 954,800 $12.49 607,650 $19.30 392,300 $22.28
======== ===== ======== ===== ======== =====
Options Exercisable 886,430 572,100 369,900
======== ======== ========
</TABLE>
The following significant assumptions were utilized to calculate the fair
value information presented utilizing the Black-Scholes Multiple Option
Approach:
<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 12/31/99 in years price as of 12/31/99 price
--------------- -------------- ---------------- -------- -------------- --------
$2.50 - $3.00 380,000 9.61 $2.96 350,000 $3.00
$4.09 - $12.50 68,800 8.01 $9.79 56,000 $10.68
$15.00 - $16.25 250,800 7.82 $15.25 235,230 $15.27
$22.50 - $45.00 255,200 5.11 $24.68 245,200 $24.77
--------------- ------- ---- ----- ------- ------
$2.50 - $45.00 954,800 7.82 $12.49 886,430 $12.76
=============== ======= ==== ===== ======= ======
</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.
Year Ended December 31,
----------------------------------------------
1999 1998 1997
------------ ------------ ------------
Net loss as reported $(4,199,000) $(4,778,000) $(4,610,000)
Pro forma compensation
expense (651,000) (1,497,000) (547,000)
---------- ---------- ----------
Pro forma net loss $(4,850,000) $(6,275,000) $(5,157,000)
========== ========== ==========
Pro forma loss per share $(1.24) $(2.07) $(1.75)
===== ===== =====
The effects of applying SFAS 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 is as follows:
Number Price
of Warrants Per Share
----------- -----------
Warrants outstanding at December 31, 1997 666,189 $15.00
Issued 256,840 12.50 15.00
Exercised (32,000) 12.50
Expired (22,100) 15.00
--------- ------------
Warrants outstanding at December 31, 1998 868,929 12.50 22.50
Issued 596,433 3.50
Exercised (1,151,336) 2.50 3.50
Expired (15,885) 3.50 22.50
Ratchet Adjustment 1,840,372 2.50 3.50
--------- ------------
Warrants outstanding at December 31, 1999 2,138,513 $2.50 $12.50
========= ============
Common Stock
During the year ended December 31, 1997, the Company issued a total of
94,060 shares, with 91,060 being the result of warrant exercises and 3,000
issued as stock bonuses previously accrued in 1996. The Company realized
net proceeds of $1,366,000 from these transactions.
During the year ended December 31, 1998, the Company issued 50,525 shares,
with 32,000 being the result of warrant exercises, 17,850 being from the
exercise of options and 6,75 being for services. The Company realized net
proceeds of $484,000 from these transactions.
During the year ended December 31, 1999, the Company issued 1,802,586
shares, with 1,151,336 being the result of warrant exercises, 38,500 to
certain employees in exchange for payroll obligations and 612,336 being the
result of debt conversions.
<PAGE>
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
years ended December 31, 1999, 1998 and 1997.
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
$334,670, $222,443 and $257,000 for the years ended December 31, 1999, 1998
and 1997, respectively.
NOTE L - SIGNIFICANT CUSTOMERS
Sales for the year ended December 31, 1999 to Curtom-Metalclad were
approximately $4,287,000 representing work at Edison plants. Additionally,
the Company had sales of $3,093,000 to ARCO and $2,930,000 to Equilon. As of
December 31, 1999 the Company had accounts receivables of $609,000 from
Curtom-Metalclad, $124,000 from ARCO and $78,000 from Equilon.
Sales for the year ended December 31, 1998 to Curtom-Metalclad were
approximately $3,136,000 representing work performed at Edison plants under
the strategic alliance program. Additionally, the Company had sales of
$3,776,000 to ARCO and $1,357,000 to Equilon (formerly Texaco). As of
December 31, 1998, the Company had accounts receivable from Curtom-Metalclad
of $150,000, ARCO of $110,000, Edison of $177,000 and Equilon of $118,000.
Sales for the year 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.
NOTE M - COMMITMENTS AND CONTINGENCIES
Employment Agreements
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.
<PAGE>
Collective Bargaining Agreements
Approximately 85% of the Company's employees are covered under collective
bargaining arrangements. Certain of these agreements expire in December
2000 and October 2001. The Company anticipates a timely renewal of these
contracts.
Leases
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 $209,042, $178,245 and $307,839 for the years
ended December 31, 1999, 1998 and 1997, respectively. Future minimum
non-cancelable lease commitments are as follows:
Year ending December 31,
------------------------
2000 $237,910
2001 249,422
2002 117,973
-------
$605,305
=======
Litigation
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. Presently, the number of these claims exceed 300. The
potential value of the claims is in the range of $1,000,000 to $5,500,000.
The Company continues to have adequate insurance coverage with financially
sound carriers responding to these claims and does not foresee any
significant financial exposure resulting from these claims. Throughout its
history, the Company has maintained insurance policies that typically
respond to these claims. Based on the advice 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.
On May 14, 1999, two shareholders, as individuals, filed almost identical
litigations in both state and federal courts in Los Angeles against the
Company, its officers, directors and certain advisors. Their claims
include violations of the California Corporations Code, intentional
misrepresentation, negligent misrepresentation, constructive fraud, breach
of fiduciary duty, and negligence. No specific amount of damages is
claimed. The federal cases have been consolidated and 10 of the 11
individual defendants have been dismissed with prejudice. In state court
there is pending an Order to Show Cause as to why the cases should not be
either consolidated with the federal cases or dismissed. The Company
believes these cases have no merit and that an adverse decision would not
be material to the Company. The Company intends to defend the cases
rigorously and seeks recovery of its costs and fees from the plaintiffs.
On July 7, 1999, Morton Associates, a Virgin Islands Corporation, filed
suit in federal court in Los Angeles against the Company requesting a
declaratory judgment interpreting certain anti-dilution provisions of a
warrant agreement owned by Morton. The Company has defended the case on
the ground that there was no consideration for the provision in the
warrant agreement, upon which Morton relies. Other holders of similar
warrant agreements have reached a settlement with the Company. The
Company cannot predict the outcome, but believes that an adverse ruling
would not be material to its operations.
No assurances can be given that the Company will be successful in its
defense of these litigations. The Company maintains directors and
officers liability insurance, which has been noticed on these claims, and
believes its insurance coverages to be adequate to cover any potential
damages, if awarded.
NOTE N - RELATED PARTY TRANSACTIONS
Receivables from related parties are comprised of the following:
December 31,
--------------------------
1999 1998
--------- ---------
Loans to executive officers, directors
and employees $ 30,845 $ 61,570
Other 46,841 90,195
-------- --------
$ 77,686 $151,765
======== =======
Loans to executive officers, directors and employees are represented by
promissory notes, due on demand and bear interest at 6%.
An officer and director of the Company is a partner in a law firm which
has received payments for legal fees of approximately $37,000, $0, and
$47,000 for the years ended December 31, 1999, 1998 and 1997,
respectively.
During fiscal 1995 the Company loaned $740,000 to two officers of the
Company. In February 1996, the officers each repaid $150,000 to the
Company. In March 1996, the notes were amended to modify the loan
principal and to adjust the interest rates, effective March 1, to a
variable rate based upon the Company's quarterly investment rate. The
repayment of these notes has been extended until completion of the NAFTA
proceedings.
<PAGE>
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
<TABLE><S> <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 Period
- --------------------------------- --------- ---------- ---------- ---------- ----------
Year ended December 31, 1999
- ----------------------------
Deducted from asset accounts:
Allowance for doubtful accounts $20,000 - - - $20,000
====== ======
Allowance for excess and
obsolete inventory $ 5,000 - - - $ 5,000
====== ======
Year ended December 31, 1998
- ----------------------------
Deducted from asset accounts:
Allowance for doubtful accounts $28,907 - - 8,907 $20,000
====== ======
Allowance for excess and
obsolete inventory $16,009 - - 11,009 $ 5,000
====== ======
Year ended December 31, 1997
- ----------------------------
Deducted from asset accounts :
Allowance for doubtful accounts $28,907 - - - $28,907
====== ======
Allowance for excess and
obsolete inventory $25,289 - - 9,280 $16,009
====== ======
</TABLE>
AMENDATORY AGREEMENT
WHEREAS, Sundial International Fund Limited ("Sundial") and
Ultra Pacific Holdings S.A. ("Ultra"), on the one hand, and Metalclad
Corporation ("MTLC"), on the other hand, heretofore entered into a
Purchase Agreement dated as of the 31st day of December, 1997 as amended
by Section 2.7.3 of that certain Purchase Agreement by and between Ultra
and MTLC dated as of the 18th day of June, 1998, and as further amended by
that certain Offer from Metalclad to Ultra, Sundial and others dated
February 23, 1999 as subsequently amended by the substitution of various
schedules thereto as accepted by Ultra, sundial and such others (said
Offer from Metalclad as so amended and accepted being sometimes referred
to as the "Offer", and said Purchase Agreement dated as of the 31st day of
December, 1997 as so amended by the Purchase Agreement dated as of June
18, 1998 and by the Offer being hereinafter sometimes referred to as the
"Original Purchase Agreement".
WHEREAS, capitalized terms used herein and not defined herein
are used herein as defined in the Original Purchase Agreement, the Pledge
Agreement or the Registration Rights Agreement, as the same may be
modified by this Agreement;
WHEREAS, the original Purchase Price of the Notes was $1,500,00
("Original Purchase Price"), $1,000,000 being attributable to the Sundial
Note and $500,000 being attributable to the Ultra Note;
WHEREAS, the parties hereto wish to increase the Purchase Price
of the Notes (i) by capitalizing interest accrued through and including
July 30, 1999; and (ii) by the making by Sundial and Ultra of an
additional loan to MTLC in the amount of $250,000.
WHEREAS, the original Principal Amount of the Notes, being the
amount due at maturity of the Notes on December 31, 2002, the Notes being
Zero Coupon Notes, was $2,200,000 ("Former Principal Amount"), of which
$1,466,666.67 was attributable to the Sundial Note ("Sundial Former
Principal"), and $783,333.33 was attributable to the Ultra note ("Ultra
Former Principal Amount");
WHEREAS, the parties have agreed effective July 30 to increase
the imputed interest rate on the Notes to 12% and as a consequence thereof
and of the transactions contemplated by the second preceding recital
hereof, the Former Principal Amounts of the Notes will be increased to
the "New Principal Amounts" (defined Below) and the definition of
Discounted Present Value will be modified accordingly;
WHEREAS, it has been previously agreed that the Conversion Rate
would be changed to the lesser of (i) 70% of the Market Price of the MTLC
Common Stock or (ii) 25 cents per share of the Common Stock of MTLC, said
Common Stock upon conversion to be paid for by cancellation of such
portion of the Original Purchase Price of the Notes being converted equal
to the number of shares being acquired multiplied by the lesser of (i) or
(ii), and the concurrent cancellation of all interest accrued attributable
to such portion of the Original Purchase Price being converted;
WHEREAS, MTLC effected a 10 for 1 reverse stock split following
the execution and delivery of the Original Purchase Agreement and has
agreed that the right to convert the "New Purchase Price" (as defined
below) of each of the Notes, in one or more tranches, into shares of MTLC
Common Stock, shall be at the lesser of 70% of the Market Price of the
MTLC Common Stock or $2.50 per share, said Common Stock upon conversion to
be paid for by cancellation of such portion of the New Purchase Price
equal to the number of shares of Common Stock being acquired multiplied by
the lesser of (i) or (ii) and the concurrent cancellation of all interest
accrued from and after July 30, 199 attributable to the tranche being
converted;
WHEREAS, after giving effect to the reverse stock split referred
to above, pursuant to the Offer, the accepting parties thereto, market
conditions permitting, had agreed to exercise warrants to acquire 400,000
shares (of which 300,00 shares were acquired by such exercise) and MTLC
has requested that such parties either exercise warrants to acquire an
additional 100,000 shares in whole or in part or resell to third parties
the unexercised warrants at 30 cents per share, any such warrants to be
warrants of Sundial and Ultra's choosing, held by Sundial, Ultra or the
other accepting parties to the Offer, and Sundial and Ultra have
determined to resell to such parties or their nominees concurrently with
or following the execution and delivery hereof warrants to acquire 70,000
shares for a purchase price of $21,00, and to exercise warrants to acquire
30,000 shares by payment to MTLC of $75,000, to the Agent by wire transfer
for the account of Sundial and Ultra, the Agent's account being account
No. 042 78931 maintained with Citibank N.A., ABA No. 021000089;
WHEREAS, Sundial, Ultra and MTLC have agreed to modify, among
other provisions, the provisions of the Original Purchase Agreement and
the Notes to extend the time within which the Notes may be converted and
to modify the terms of the Notes respecting the ability of MTLC, Sundial
and Ultra to require redemption of the Notes in whole or in part; and
WHEREAS, MTLC has agreed to provide certain additional
collateral for the loans evidenced by the Notes.
NOW, THEREFORE, in consideration of the premises and other good
and valuable consideration, receipt whereof is hereby acknowledged by each
party hereto, the parties hereto hereby agree as of the 30th day of July,
1999 as follows:
Section 1. Capitalization of Interest; Increase in Amount of Loans
Evidenced by the Notes; Prospective Change in Interest Rate.
(a) As of July 30, 1999 the accrued and unpaid interest on
the Notes was $221,200.00, of which $147,467.00 was attributable to the
Sundial Note and $73,733.00 was attributable to the Ultra Note which
interest the parties hereby agree to capitalize by increasing the Former
Purchase Price of the Notes. On or as of July 30, 1999, Sundial and
Ultra, at the request of MTLC, hereby agree to loan an additional $250,000
to MTLC to be secured as provided in the Original Purchase Agreement as
herein modified, of which $166,666.67 will be loaned by Sundial and
$83,333.33 will be loaned by Ultra, which loans will also increase the
Former Purchase Price of the Notes. Accordingly, the parties agree that
the "New Purchase Price" of the Notes aggregates $1,971,200.00, of which
$1,314,134.00 is attributable to the Sundial Note, and $657,066.00 is
attributable to the Ultra Note.
(b) Effective July 30, 1999, the imputed interest rate on the
Notes is hereby changed from 9 1/3% simple interest without compounding to
12% simple interest without compounding so that the "New Principal Amount"
of the Notes on the maturity date of December 31, 2002 will be
$2,780,771.00, of which $1,863,117.00 will be the New Principal Amount of
the Sundial Note, and $917,654.00 will be the New Principal Amount of the
Ultra Note. It is agreed that the interest accrual on both Notes from and
including July 30, 1999 for the 1,249 days remaining to maturity of the
Notes is $648.17 per day, of which $432.11 per day is attributable to the
Sundial Note and $216.06 per day is attributable to the Ultra Note. All
such interest accruing on or after July 30, 1999 shall be paid at maturity
or upon redemption or by cancellation in whole or in part in the event of
the conversion of the Notes in whole or in part, or upon the occurrence
and declaration of an Event of Default (which shall include any default
under this Agreement).
Section 2. Reverse Stock Split.
Prior to the date hereof, MTLC effected a 10 to 1 reverse
stock split. The Original Purchase Agreement is hereby revised to take
account of such reverse stock split and all provisions thereof shall be
deemed amended accordingly.
Section 3. Occurrence of Trigger Event.
It is acknowledged and agreed that the Trigger Event referred
to in the Original Purchase Agreement has occurred and that all warrants
issuable to Sundial and Ultra as a consequence thereof have been issued
and that MTLC's obligation in that regard has been fully discharged.
Section 4. Conversion Rate; Conversion; and Redemption.
Any provision of the Original Purchase Agreement to the
contrary notwithstanding, it is understood and agreed as follows:
(a) The Conversion Rate shall be equal to the lesser of (i)
70% of the average Market Price of MTLC Common Stock for the 5 trading
days preceding the receipt by MTLC of any notice of conversion, or (ii)
$2.50 per share. As used herein "Market Price" shall mean the average
closing bid price as shown on the NASDAQ screen for parties bidding for
100 or more shares as at 4:00 p.m. New York time on each such date.
(b) Conversion of the New Purchase Price of each Note into
shares of MTLC Common Stock may be made in one or more tranches of not
less than $25,000 per tranche at the option of Sundial and/or Ultra,
provided, however, that no conversion may occur without MTLC's prior
consent before the earlier to occur of (i) March 31, 2000, or (ii) the
final conclusion of MTLC and affiliated companies' arbitration dispute
with the United Mexican States. As used herein "final conclusion" shall
mean the first to occur of any of the following: (a) final settlement of
the litigation, (b) final decision from the arbitral tribunal after the
time for appeals and motions for rehearing have expired or been decided,
or (c) in the event of an award in favor of MTLC and/or affiliated
companies, the payment in full in United States dollars in the United
States of such award. The Notes, once they shall have become convertible,
shall remain so until paid at maturity or until redeemed by Sundial or
Ultra and until the redemption price has been paid in full.
(c) All shares of MTLC Common stock required to be issued by
MTLC upon any conversion shall be fully registered and tradeable;
provided, however, that it is understood and agreed that, in accordance
with NASDAQ listing requirements, the total number of shares of Common
Stock issuable upon conversion of the Notes may not exceed 19.99% in the
aggregate (including any conversion of the Notes prior thereto) of the ten
issued and outstanding shares of MTLC Common Stock. MTLC had 3,601,702
issued and outstanding shares of Common Stock as of June 30, 1999.
Accordingly, by way of example, were the Notes to have been converted as
at such date, no more than 720,000 shares could have been converted, any
balance of debt outstanding to remain fully payable in accordance with its
terms. By way of further example, if on the date of conversion there were
5,000,000 shares of Common Stock outstanding, the Notes can be converted
into 999,999 shares without regard to the conversion of other issues of
debt into Common Stock.
(d) The Noteholders shall have the right, but not the
obligation, to require the redemption of the Notes for their Discounted
Present Value at the time of redemption at any time after but not prior to
March 31, 2000 provided, however, that nothing contained herein shall
affect the rights of the Noteholders upon the occurrence of any Event of
Default.
(e) MTLC shall have no right to redeem the Notes.
Section 5. Warrant Offer Program.
Sundial and Ultra hereby tender the following warrants to MTLC
in exchange for the payment by MTLC to Ultra of $21,000:
1. Warrants owned by The Jan Chr. G. Sundt Family Trust
entitling the Trust to acquire 39,960 shares of MTLC Common Stock.
2. Warrants owned by Harald Ingebrigtsen entitling Mr.
Ingebrigtsen to acquire 30,040 shares of MTLC Common Stock.
Sundial and Ultra hereby agree to cause the Jan Chr. G. Sundt
Family Trust to exercise warrants entitling the Trust to acquire 30,00
shares of Common Stock and to pay MTLC $75,000 therefor.
Said warrants shall all be of the series expiring in October
20002, except that 40 of the warrants held by Mr. Ingebrigtsen expire in
February 2001, and shall automatically be deemed canceled or exercised, as
the case may be, without presentation of certificates, upon receipt by
MTLC of payment therefore. Upon cancellation and exercise of said
warrants and payment therefore, all obligations in respect of the warrant
exercise program set forth in the Offer shall be deemed fulfilled, the
terms of the Offer otherwise to remain in full force and effect,
including, without limitation, the provisions of the third sentence of
Section 4 of the Offer.
MTLC shall cause its transfer agent to issue not later than
August 10, 1999 30,000 unrestricted, fully registered and tradeable shares
in the name of The Jan Chr. G. Sundt Family Trust and to deliver the same
to the Agent, if the same be in certificated form, or by sending the
shares by DTC electronic transfer directly to the account of the Trust
maintained with Axiom Capital Management, Inc., Account No. 896-27266 R
20, through Axiom's clearing agent, Bear Stearns Securities Corp., One
Metrotech North, Brooklyn, New York 11201-3859.
Section 6. Definitions.
The following terms defined in the Original Purchase Agreement
are hereby modified to read as follows:
"Common Stock" shall mean the authorized Common stock of MTLC
as at July 30, 1999.
"Conversion Rate" shall mean the whole or any portion of the
New Purchase Price of any Note being converted divided by the lesser of
U.S. $2.50 or 70% of the Market Price of the Common Stock prior to the
date of receipt by MTLC of the notice of conversion.
"Conversion Shares" shall mean the shares of Common Stock of
the Company issuable upon conversion, in whole or in part as the context
may require, of the Notes.
"Discounted Present Value" with respect to any Note shall be
based on a simple interest rate of 12% per annum without compounding and
shall mean with respect to any Note an amount calculated in accordance
with the following formula:
n
----
PP+(.41069957 PP x 1249)
wherein PP equals the New Purchase Price of a Note, n equals the number of
days elapsed from and including July 30, 1999 to and including (A) the
date of payment pursuant to the exercise by any Noteholder of its right of
redemption, or (B) the date of occurrence of an Event of Default, as the
case may be, and 1249 equals the total number of days from and including
July 30, 1999 to and including the date of maturity of the Note (December
31, 2002).
"Mandatory Redemption" shall mean the exercise by any
Noteholder, at any time after March 31, 2000, of the right to require the
Company to redeem such Note at a price equal to the Discounted Present
Value at the date of payment of the redemption price, which right may be
exercised in whole or in part.
"Principal Amount" shall mean the "New Principal Amount", being
with respect to all of the Notes, U.S. $2,780,771.00, with respect to the
Sundial Note, $1,863,117.00 and with respect to the Ultra Note,
$917,654.00.
"Purchase Price" of the Notes shall mean the "New Purchase
Price" of $1,971,200.00, with respect to the Sundial Note, $1,314,134.00
and with respect to the Ultra Note, $657,066.00.
"Total Interest" in respect of the Notes shall mean the total
interest thereon from and including July 30, 1999 to the date of maturity
and shall be equal to $648.17 per day, or $809,571.00.
"Warrant Exercise Price" shall mean the lesser of 70% of
Market Price or U.S. $2.50 per share of Common Stock.
Section 7. Existing and Additional Security for Notes.
(a) It is agreed that all of the stock of MIC held by the
Agent as security for the Notes and the other obligations under the
Original Purchase Agreement, Pledge Agreement, Registration Rights
Agreement and related documents, shall be held by the Agent as security
for all such obligations as hereby amended, including, without limitation,
the obligations to repay the New Purchase Price, interest accruing
thereon, and the New Principal Amount.
(b) It is understood that MTLC and its subsidiary Eco-Metalclad,
Inc. ("ECOM") as Sellers, propose to enter into a Stock
Purchase Agreement providing for the sale to Geologic, S.A. de C.V.
("Buyers"), substantially in the form of Exhibit A annexed hereto and made
a part hereof, of all of the issued and outstanding capital stock of the
"Companies" (as defined in the Stock Purchase Agreement). Concurrently
with the execution and delivery of the Stock Purchase Agreement, which
MTLC warrants will occur not later than August 5, 1999, MTLC or ECOM will
jointly and severally assign to the Agent for the benefit of Sundial and
Ultra as additional security for MTLC's obligations to Sundial and Ultra
all of their right, title and interest in and to said Stock Purchase
Agreement, in form and substance satisfactory to sundial, Ultra and its
counsel; provided, however, that the U.S. $125,000 payment referred to in
Section 1.4(e) and the U.S. $332,000 payment referred to in Section 1.4(c)
of the Stock Purchase Agreement shall be excluded from the assignment. In
view of the fact that the Stock Purchase Agreement is governed by the laws
of Mexico, MTLC will instruct its Mexican counsel to prepare and submit to
the Agent (who shall cooperate with Mexican counsel to minimize Mexican
legal fees) all necessary documentation (with an English language
translation thereof if it is in Spanish) to effect the aforementioned
assignment, which assignment must include a notification to and acceptance
by the Buyers of such assignment. The cooperation of the Agent shall
enable the preparation of a Security Agreement of rights to payment of the
purchase price under the Stock Purchase Agreement for review by Mexican
counsel. In the event of the failure to conclude the Stock Purchase
Agreement by August 5, 1999, MTLC will forthwith instruct and cause its
Mexican counsel to effect a pledge of all the shares in the Companies to
the Agent for the benefit of Sundial and Ultra. The assignment or pledge
shall be in all respects acceptable to the Agent and shall constitute
first, prior, perfected security interests in and to the collateral
referred to therein. There shall also be filed UCC-1 Financing Statements
in appropriate U.S. jurisdictions in respect of such assignment. In the
event a definitive Stock Purchase Agreement for the sale of such stock is
entered into after August 5, 1999, the Agent will release the shares of
the Companies pledged to it upon compliance with the assignment and
notification provisions referred to above.
Section 8. Sale of MIC Stock or Assets; Substitute Security.
MTLC agrees that it will not proceed with the sale of any
stock or assets of MIC without the prior written approval of Sundial and
Ultra unless such sale will provide substitute cash or equivalent fully
perfected security in an amount not less than the New Principal Amount of
the Notes. No such sale shall effect a redemption of the Notes.
Section 9. Proceeds From Settlement or Judgment in NAFTA Case.
MTLC has heretofore agreed to pay from the settlement or
judgment proceeds of the NAFTA case, if any, the following amounts and no
others: 7% of such proceeds net of all expenses to counsel representing
MTLC and bonus to those officers of MTLC not exceeding in the aggregate 5%
of any such gross proceeds.
MTLC agrees that it shall not directly or indirectly grant any
further interests in such proceeds or agree to pay any bonus or other
compensation or payment of any kind or type based on contingent upon or
measured by the receipt or amount of such proceeds to any party without
the Noteholders prior written consent. Such consent will be granted if in
the Noteholders opinion full compensation is made to them for any dilution
of their interests that may occur by reason of any such further grant.
MTLC's undertakings in this Section 9 shall not prevent the
granting to officers, directors or employees of options to purchase shares
of MTLC at not less than the fair market value thereof at the time of the
grant of said options.
Section 10. Legal Fees and Disbursements.
Concurrently with the execution and delivery of this Agreement
MTLC will reimburse Sundial's and Ultra's attorneys $10,000 in legal fees
plus estimated disbursements ($1,000.00) incurred in connection with the
preparation o this Agreement. It is agreed that such reimbursement may be
offset against the $250,000 in additional loan proceeds to be received by
MTLC hereunder or from the net payment due MTLC in respect of the warrant
exchange program as Sundial and Ultra shall direct.
<PAGE>
Section 11. Authorization.
Concurrently with the execution and delivery hereof, MTLC
shall furnish the Agent with a certified copy of resolutions of the Board
of Directors of MTLC authorizing the execution, delivery and performance
of this Agreement.
Section 12. Original Purchase Agreement.
Except as herein expressly modified by the context of this
Agreement, the Original Purchase Agreement shall remain in full force and
effect.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed and
delivered this Agreement as of the 30th day of July, 1999.
SUNDIAL INTERNATIONAL FUND LIMITED
By: /s/Donald B. Shafto
------------------------------------
Donald B. Shafto, Assistant Secretary
ULTRA PACIFIC HOLDINGS S.A.
By: /s/Donald B. Shafto
------------------------------------
Donald B. Shafto, Assistant Secretary
METALCLAD CORPORATION
By: /s/Grant S. Kesler
------------------------------------
Grant S. Kesler, President
No.--------- $---------
METALCLAD CORPORATION
10% Convertible Subordinated Debenture Due 2002
Metalclad Corporation, a corporation duly organized and existing
under the laws of the State of Delaware (the "Company"), for value
received, hereby promises to pay to______________________________________,
________________________________________________or registered assigns, the
principal sum of ___________________________________ ($________) at the
executive office of the Company in the City of Newport Beach, California
on ______________, 2002, in such coin or currency of the United States of
America as at the time of payment shall be legal tender for the payment of
public and private debts, and to pay interest, semi-annually on June 30
and December 31 of each year, beginning on December 31, 1999, until this
debenture (the "Debenture" or "Debentures") is paid in full, on said
principal sum at said office in like coin or currency, at the rate of 10%
per annum, all as more specifically provided in this Debenture. This
Debenture is one of a duly authorized issue of Debentures of the Company
designated as its 10% Convertible Subordinated Debentures Due 2002 and
limited in aggregate principal amount to $5,000,000. The Debentures are
convertible into shares of common stock of the Company (the "Conversion
Shares") at the option of the holder at any time 15 days prior to
maturity, unless previously redeemed, at the rate of $2.50 per share. Six
months after issuance, the Debentures are convertible at 75% of the
current market price, or $2.50, whichever is lower.
ARTICLE ONE.
Definitions.
Section 1.01. Definitions. The terms defined in this Section 1.01
(except as herein otherwise expressly provided or unless the context
otherwise requires) for all purposes of this Debenture shall have the
respective meanings specified in this Section 1.01.
Board of Directors: The term "Board of Directors" shall mean the
Board of Directors of the Company or the Executive Committee of such
Board.
Business Day: The term "business day" shall mean a day which in the
City of Newport Beach, California is neither a legal holiday nor a day on
which banking institutions are authorized by law to close.
Common Stock: The term "Common Stock" shall mean all shares now or
hereafter authorized of the class of Common Stock, par value $.10 per
share, of the Company presently authorized and stock of any other class
into which such shares may hereafter have been changed.
Company: The term "Company" shall mean Metalclad Corporation, a
Delaware corporation, and, unless the context otherwise requires, shall be
deemed to mean and include Metalclad Insulation Corporation, a California
corporation, ("MIC"), Metalclad Environmental Contractors, a California
corporation, ("MEC"), and ECO-Metalclad, Inc., a Utah corporation ("EMI"),
all of which are wholly owned by Metalclad Corporation. Unless
specifically stated to the contrary herein, all references to the Company
and all representations, warranties and covenants of the Company shall be
deemed to include and apply with equal force and effect to MIC, MEC, and
EMI and, subject to the provisions of Article Eleven, shall include any
successors and assigns of either the Company, MIC, MEC, and EMI.
Debenture or Debentures; Outstanding: The terms "Debenture" or
"Debentures" shall mean any Debenture or Debentures, as the case may be,
limited in aggregate principal amount to a maximum of $5,000,000. The term
"Outstanding", when used with reference to Debentures, shall mean, as of
any particular time, all Debentures except:
(a) Debentures theretofore canceled or delivered to the Company
for cancellation;
(b) Debentures, or portions thereof, for the payment or
redemption of which moneys in the necessary amount shall have been set
aside and segregated in trust by the Company, provided that if such
Debentures are to be redeemed prior to the maturity thereof, notice of
such redemption shall have been given as in Article Three provided;
(c) Debentures in lieu of or in substitution for which other
Debentures shall have been authenticated and delivered or which shall have
been paid pursuant to the terms of Section 2.04, unless proof satisfactory
to the Company is presented that any of such Debentures are held by
persons in whose hands any of such Debentures are valid, binding, and
legal obligations of the Company; and
(d) Debentures converted into Common Stock pursuant to
Article Eleven.
Debentureholder: The terms "Debentureholder", "holder of
Debentures", or other similar terms, shall mean any person in whose name
at the time a particular Debenture is registered on the Debenture register
kept for that purpose in accordance with the terms hereof.
Event of Default: The term "Event of Default" shall mean any event
specified in Section 6.01, continued for the period of time, if any, and
after the giving of the notice, if any, therein designated.
Officers' Certificate: The term "Officers' Certificate" shall mean
a certificate signed by the Chairman of the Board, the President, or any
Vice President and by the Treasurer, any Assistant Treasurer, the
Controller, any Assistant Controller, the Secretary, or any Assistant
Secretary of the Company. Each such certificate shall include the
statements provided for in Section 6.05 if and to the extent required by
the provisions of such Section.
Record Date: The term "Record Date" as used in Section 2.02 with
respect to any regular interest payment date shall mean the last day of
the calendar month preceding such interest payment date.
Redemption Date: The term "Redemption Date", when used with respect
to any Debenture to be redeemed, shall mean the date fixed for such
redemption by or pursuant to this Debenture.
Redemption Price: The term "Redemption Price", when used with
respect to any Debenture to be redeemed, shall mean the price at which it
is to be redeemed pursuant to this Debenture.
Senior Indebtedness: The term "Senior Indebtedness" of the Company
and its Subsidiaries shall mean (i) the principal of and accrued and
unpaid interest (whether or not accruing on or after the filing of any
petition in bankruptcy or for reorganization relating to the Company) on
all indebtedness of the Company and its Subsidiaries, whether outstanding
on the date of issuance of this Debenture or thereafter created, incurred,
or assumed, for money borrowed from one or more banks, insurance
companies, financial institutions, or other persons which regularly engage
in lending money, unless such indebtedness shall, in the instrument
creating the same, be specifically designated as not being senior in right
of payment to the Debentures; and (ii) any modifications, renewals,
extensions, deferrals, and refundings of any such indebtedness,
liabilities, or obligations; provided, however, that Senior Indebtedness
shall not be deemed to include any obligation of the Company or any
Subsidiary in connection with extensions of credit by trade creditors and
suppliers.
Subsidiary: The term "Subsidiary" shall mean MIC, MEC, EMI, and any
corporation of which the Company, or the Company and one or more
Subsidiaries, or any one or more Subsidiaries, directly or indirectly own
voting securities sufficient to entitle the holders thereof to elect a
majority of the directors, either at all times or so long as there is no
default or contingency which permits the holders of any other class or
classes of securities to vote for the election of one or more directors.
ARTICLE TWO.
Issue, Description, Execution, Registration
and Exchange of Debentures.
Section 2.01. Designation, Amount, and Issue of Debentures. The
Debentures shall be designated as hereinabove set forth. Debentures
offered in the maximum aggregate principal amount of $5,000,000, may from
time to time be executed and delivered by the Company in exchange for the
payment to the Company of the aggregate principal amount thereof. Nothing
herein shall limit the amount of other debentures the Company may issue or
debt the Company may incur.
Section 2.02. Date and Denomination of Debentures; Payment of
Interest. The Debentures shall be issuable Debentures registered with the
Company without coupons in the minimum denomination of $25,000 and any
integral multiple of $1,000 in excess of the minimum investment of
$25,000, and shall be numbered, lettered, or otherwise distinguished in
such manner or in accordance with such plan as the officers of the Company
executing the same may determine. The Company may, in its sole
discretion, elect to accept less than $25,000 as the minimum denomination
of Debentures issuable.
Each Debenture shall be dated the date of its issuance and, except as
otherwise provided in this Section 2.02, shall bear interest, payable
semi-annually on June 30 and December 31 of each year, from the date of
such Debenture until payment of the principal sum of such Debenture has
been made or duly provided for. Interest shall be computed on the basis of
a 360-day year of twelve 30-day months. The first interest payment date
shall be December 31, 1999.
The person in whose name a Debenture (or any Debenture evidencing the
same debt) was registered at the close of business on any Record Date with
respect to any interest payment date shall be entitled to receive the
interest payable, accrued through the Record Date, on such interest
payment date notwithstanding the cancellation of such Debenture upon any
registration of transfer or exchange subsequent to the Record Date and
prior to such interest payment date; provided, however, that if and to the
extent the Company shall default in the payment of the interest due on
such interest payment date, such defaulted interest shall be paid to the
persons in whose names outstanding Debentures are registered at the close
of business on a subsequent Record Date established by notice given by
mail by or on behalf of the Company to the holders of Debentures not less
than 15 days preceding such subsequent Record Date, such Record Date to be
not less than ten days preceding the date of payment of such defaulted
interest.
In the case of any Debenture which is converted after any Record Date
and on or prior to the next succeeding interest payment date, interest
whose stated maturity is on such interest payment date shall be payable on
such interest payment date notwithstanding such conversion, and such
interest (whether or not punctually paid or duly provided for) shall be
paid to the person in whose name that Debenture is registered at the close
of business on such Record Date.
The Company may, in its sole discretion, elect to add accrued
interest to the principal amount of the Debenture in lieu of payment of
accrued interest in cash for interest due on any Record Date prior to
maturity. The Company may, in its sole discretion, elect to pay interest
in shares of Common Stock of the Company at a rate equal to the 30-day
average closing price of the Company's Common Stock as quoted on the
Nasdaq Small Cap Market.
Section 2.03. Exchange and Registration of Transfer of Debentures.
Debentures may be exchanged for a like aggregate principal amount of
Debentures of other authorized denominations. Debentures to be exchanged
shall be surrendered at the executive office of the Company, and the
Company shall execute, register, and deliver in exchange therefor the
Debenture or Debentures which the Debentureholder making the exchange
shall be entitled to receive.
The Company shall keep a Debenture register in which, subject to such
reasonable regulations as it may prescribe, the Company shall register
Debentures and shall register the transfer of Debentures as in this
Article Two. Such register shall be in written form or in any other form
capable of being converted into written form within a reasonable time.
Upon due presentment for registration of transfer of any Debenture, the
Company shall execute, register, and deliver in the name of the transferee
or transferees a new Debenture or Debentures for an equal aggregate
principal amount.
All Debentures presented for registration of transfer shall be duly
endorsed by, or be accompanied by a written instrument or instruments of
transfer in form satisfactory to the Company duly executed by, the holder
or his attorney duly authorized in writing.
No service charge shall be made for any exchange or registration of
transfer of Debentures, but the Company may require payment of a sum
sufficient to cover any tax or other governmental charge that may be
imposed in connection therewith.
The Company shall not be required to exchange or register a transfer
of (a) any Debentures for a period of 15 days next preceding any selection
of Debentures to be redeemed, or (b) any Debentures selected, called or
being called for redemption except, in the case of any Debentures to be
redeemed in part, the portion thereof not so to be redeemed.
Section 2.04. Mutilated, Destroyed, Lost, or Stolen Debentures. In
case any temporary or definitive Debenture shall become mutilated or be
destroyed, lost, or stolen, the Company in its discretion may execute,
register, and deliver a new Debenture, bearing a number not
contemporaneously outstanding, in exchange and substitution for the
mutilated Debenture, or in lieu of and in substitution for the Debenture
so destroyed, lost, or stolen. In every case the applicant for a
substituted Debenture shall furnish to the Company such security or
indemnity as may be required by the Company to save the Company harmless,
and, in every case of destruction, loss, or theft, the applicant shall
also furnish to the Company evidence to its satisfaction of the
destruction, loss, or theft of such Debenture and of the ownership
thereof.
Upon the issuance of any substituted Debenture, the Company may
require the payment of a sum sufficient to cover any tax or other
governmental charge that may be imposed in relation thereto and any other
expenses connected therewith. In case any Debenture which has matured or
is about to mature shall become mutilated or be destroyed, lost, or
stolen, the Company may, but only with the consent of the holder thereof
in the case of a Debenture as to which the right to convert provided in
Section 11.01 shall not have terminated, instead of issuing a substitute
Debenture, pay or authorize the payment of the same (without surrender
thereof except in the case of a mutilated Debenture) if the applicant for
such payment shall furnish to the Company such security or indemnity as
may be required by them to save the Company harmless and, in case of
destruction, loss, or theft, evidence satisfactory to the Company of the
destruction, loss, or theft of such Debenture and of the ownership
thereof.
Every substituted Debenture issued pursuant to the provisions of this
Section 2.04 by virtue of the fact that any Debenture is destroyed, lost,
or stolen shall constitute an additional contractual obligation of the
Company, whether or not the destroyed, lost, or stolen Debenture shall be
found at any time, equally and proportionately with any and all other
Debentures executed and delivered by the Company. All Debentures shall be
held and owned upon the express condition that the foregoing provisions
are exclusive with respect to the replacement or payment of mutilated,
destroyed, lost, or stolen Debentures and shall preclude any and all other
rights or remedies notwithstanding any law or statute existing or
hereafter enacted to the contrary with respect to the replacement or
payment of negotiable instruments or other securities without their
surrender.
Section 2.05. Cancellation of Debentures. All Debentures
surrendered for the purpose of payment, redemption, exchange, registration
of transfer, or conversion, shall, if surrendered to the Company, be
promptly canceled by the Company, and no Debentures shall be issued in
lieu thereof except as expressly permitted by any of the provisions of
this Debenture.
ARTICLE THREE.
Redemption of Debentures.
Section 3.01. Right of Redemption. The Debentures may be redeemed
prior to maturity without penalty at the option of the Company at any time
after the average bid and ask price of the Company's Common Stock, as
reported in the National Association of Securities Dealers Automated
Quotations System, has exceeded $3.00 per share for 20 days within any
30-day period, subject to the right of the Debentureholder to convert the
Debenture into shares of Common Stock as provided in Article Eleven, at a
price which shall be 100% of the principal amount thereof, plus in each
case interest accrued to, and not paid on or before, the date fixed for
redemption of such Debentures:
Section 3.02. Selection by Company of Debentures to Be Redeemed. In
case of any redemption at the election of the Company of less than all of
the Debentures, the Company shall, at least 30 days prior to the
Redemption Date fixed by the Company, select the particular Debentures to
be redeemed from the Outstanding Debentures not previously called for
redemption, by such method as the Company shall deem fair and appropriate
and which may provide for the selection for redemption of portions (equal
to $1,000 or any integral multiple thereof) of the principal amount of
Debentures.
If any Debenture selected for partial redemption is converted in part
before termination of the conversion right with respect to the portion of
the Debenture so selected, the converted portion of such Debenture shall
be deemed (so far as may be) to be the portion selected for redemption.
Debentures which have been converted during a selection of Debentures to
be redeemed shall be treated as Outstanding for the purpose of such
selection.
Section 3.03. Notice of Redemption. Notice of redemption shall be
given by first-class mail, postage prepaid, mailed not less than 30 nor
more than 90 days prior to the Redemption Date, to each holder of
Debentures to be redeemed, at his address appearing in the Debenture
register. All notices of redemption shall state:
(a) the Redemption Date;
(b) the Redemption Price;
(c) if less than all the Outstanding Debentures are to be
redeemed, the identification (and, in the case of partial redemption, the
principal amounts) of the particular Debentures to be redeemed;
(d) that on the Redemption Date the Redemption Price will
become due and payable upon each such Debenture to be redeemed and that
interest thereon will cease to accrue on and after said date;
(e) the Conversion Price, the date on which the right to
convert the principal of the Debentures to be redeemed will terminate
(which shall be on the 15th day prior to the Redemption Date) and the
place or places where such Debentures may be surrendered for conversion;
and
(f) the place or places where such Debentures are to be
surrendered for payment of the Redemption Price.
Notice of redemption of Debentures to be redeemed at the election of
the Company shall be given by the Company at the expense of the Company.
Section 3.04. Deposit of Redemption Price. Prior to any Redemption
Date, the Company shall deposit into a segregated account an amount of
money sufficient to pay the Redemption Price of, and (except if the
Redemption Date shall be an interest payment date) accrued interest on,
all the Debentures which are to be redeemed on that date other than any
Debentures called for redemption on that date which have been converted
prior to the date of such deposit.
If any Debenture called for redemption is converted, any money
deposited for the redemption of such Debenture shall (subject to any right
of the holder of such Debenture to receive interest as provided in the
last paragraph of Section 2.02) be discharged from such account.
Section 3.05. Debentures Payable on Redemption Date. Notice of
redemption having been given as aforesaid, the Debentures so to be
redeemed shall, on the Redemption Date, become due and payable at the
Redemption Price therein specified, and from and after such date (unless
the Company shall default in the payment of the Redemption Price and
accrued interest) such Debentures shall cease to bear interest. Upon
surrender of any such Debenture for redemption in accordance with said
notice, such Debenture shall be paid by the Company at the Redemption
Price, together with accrued interest to the Redemption Date; provided,
however, that installments of interest whose stated maturity is on or
prior to the Redemption Date shall be payable to the holders of such
Debentures, registered as such at the close of business on the relevant
record dates according to their terms and the provisions of Section 2.02.
If any Debenture called for redemption shall not be so paid upon
surrender thereof for redemption, the principal shall, until paid, bear
interest from the Redemption Date at the rate borne by the Debenture.
Section 3.06. Debentures Redeemed in Part. Any Debenture which is
to be redeemed only in part shall be surrendered at the executive office
of the Company (with, if the Company so requires, due endorsement by, or a
written instrument of transfer in form satisfactory to the Company duly
executed by, the holder thereof or his attorney duly authorized in
writing), and the Company shall execute, register, and deliver to the
holder of such Debenture without service charge, a new Debenture or
Debentures, of any authorized denomination as requested by such holder, in
aggregate principal amount equal to and in exchange for the unredeemed
portion of the principal of the Debenture so surrendered.
ARTICLE FOUR.
Particular Covenants of the Company.
Section 4.01. Payment of Principal and Interest. The Company
covenants and agrees that it will duly and punctually pay or cause to be
paid the principal of and interest on each of the Debentures at the place,
at the respective times and in the manner provided in the Debentures. The
principal of and interest on the Debentures shall be payable at the
executive office of the Company; provided, however, that interest may be
payable, at the option of the Company, by check mailed to the address of
the person entitled thereto as such address shall appear on the Debenture
register.
Section 4.02. Office for Transfer, Exchange, Conversion, Notices and
Payments, Etc. Presentation and demand may be made and notice may be
served in respect of the Debentures at the principal office of the
Company.
Section 4.03. No Interest Extension. In order to prevent any
accumulation of claims for interest after maturity thereof, the Company
will not directly or indirectly extend or consent to the extension of the
time for the payment of any claim for interest on any of the Debentures
and will not directly or indirectly be a party to or approve any such
arrangement by the purchase or funding of said claims for interest or in
any other matter. No claim for interest, the time of payment of which
shall have been so extended or which shall have been so purchased or
funded, shall be entitled in case of an Event of Default to the rights and
remedies provided hereunder except after the prior payment in full of the
principal of all the Debentures and claims for interest not so extended,
purchased or funded; provided, however, that this Section 4.03 shall not
apply in any case where an extension shall be made pursuant to a plan
proposed by the Company to the holders of all the Debentures then
outstanding.
Section 4.04. Company as Paying Agent. The Company shall act as its
own paying agent, and will, on or before each due date of the principal if
any, or interest on the Debentures, set aside, segregate and hold in trust
for the benefit of the holders of the Debentures a sum sufficient to pay
such principal or interest so becoming due and will notify each holder of
any of the Debentures of any failure to take such action and of any
failure by the Company (or by any other obligor under the Debentures) to
make any payment of the principal of or interest on the Debentures when
the same shall become due and payable. Anything in this Section 4.04 to
the contrary notwithstanding, the agreement to hold sums in trust as
provided in this Section 4.04 is subject to the provisions of Article
Twelve.
Section 4.05. Corporate Existence. Subject to Article Nine, the
Company will do or cause to be done all things necessary to preserve and
keep in full force and effect its corporate existence.
Section 4.06. Dividends and Repurchase of Shares. Without the prior
written consent of the holders of record of not less than 60% in principal
amount of the Debentures then outstanding, the Company will not directly
or indirectly, through any of its Subsidiaries or otherwise, pay or
declare any dividends (other than dividends payable in capital stock of
the Company) or apply any of its property or assets to the purchase,
redemption or other retirement of, or set apart any sum for the payment of
any dividends on, or for the purchase, redemption or retirement of, or
make any distribution by reduction of capital or otherwise in respect of,
or permit any Subsidiary or the Company to purchase any shares of, any
class of the capital stock of the Company. However, the Company shall not
be precluded from repurchasing any of its shares of Common Stock pursuant
to an obligation to repurchase such shares from the proceeds of any life
insurance policy on the life of an employee, officer or director of the
Company.
Section 4.07. Maintenance of Registration of the Common Stock under
Section 12(g) of the Exchange Act. The Company covenants and agrees that
it will take all necessary steps and use its best efforts to cause the
Common Stock to continue to be registered under Section 12(g) of the
Securities Exchange Act of 1934, as amended, and to be approved for
quotation on the Nasdaq SmallCap Market ("Nasdaq") until such time as it
may be approved for listing on a national stock exchange.
ARTICLE FIVE.
Debentureholders Lists and Reports by the Company.
Section 5.01. Debentureholders Lists. The Company covenants and
agrees that it will at all times maintain, or cause its transfer agent to
maintain, a list of the names and addresses of the holders of Debentures,
in as current a form as is reasonably practicable.
Section 5.02. Reports by the Company. The Company covenants and
agrees to mail to each registered holder of a Debenture, copies of the
annual reports and other information as are furnished to shareholders of
the Company from time to time.
ARTICLE SIX.
Remedies of the Debentureholders on Event of Default.
Section 6.01. Events of Default. In case one or more of the
following Events of Default shall have occurred and be continuing:
(a) default in the payment of any installment of interest upon
any of the Debentures as and when the same shall become due and payable,
and continuance of such default for a period of 30 days; or
(b) default in the payment of the principal of any of the
Debentures as and when the same shall become due and payable either at
maturity, upon redemption, by declaration or otherwise; or
(c) failure on the part of the Company to duly observe or
perform any other of the covenants or agreements on the part of the
Company contained in this Debenture for a period of 90 days after the date
on which written notice of such failure, stating that such failure is a
"Notice of Default" hereunder and requiring the same to be remedied, shall
have been given to the Company, by registered mail, by the holders of at
least 40% in aggregate principal amount of the Debentures at the time
outstanding; or
(d) default in the payment of principal or interest on any
Senior Indebtedness, or on any other indebtedness for borrowed money in
the aggregate principal amount $500,000 or more, in either
case if such default shall continue for a period of 30 days; or
(e) the entry of a decree or order for relief by a court having
jurisdiction in the premises with respect to the Company in an involuntary
case under any applicable bankruptcy, insolvency or other similar law now
or hereafter in effect or the appointing of a receiver, liquidator,
assignee, custodian, trustee, sequestrator (or other similar official) of
the Company or of all or substantially all of its property, or ordering
the winding up or liquidation of its affairs, and the continuance of any
such decree or order unstayed and in effect for a period of 120
consecutive days; or
(f) the institution by the Company of proceedings under Title
11 of the United States Code or to be adjudged insolvent, or the consent
by it to the institution of bankruptcy or insolvency or other similar
proceedings against it or the consent by it to the entry of an order for
relief in an involuntary case or to the appointment of or taking
possession by a receiver, liquidator, assignee, trustee, custodian,
sequestrator (or other similar official) of the Company or of all or
substantially all of its property, or the making by it of an arrangement
for the benefit of creditors, or the admission by it in writing of the
failure generally by it to pay its debts as they become due or the taking
of corporate action by the Company in furtherance of any such action; then
and in each and every such case, unless the principal of all of the
Debentures shall have already become due and payable, the holders of not
less than 25% in aggregate principal amount of the Debentures then
outstanding hereunder, by notice in writing to the Company, may declare
the principal of this Debenture and the interest accrued thereon to be due
and payable immediately, and upon any such declaration the same shall
become and shall be immediately due and payable, anything contained in
this Debenture to the contrary notwithstanding. This provision, however,
is subject to the condition that if, at any time after the principal of
the Debentures shall have been so declared due and payable, and before any
judgment or decree for the payment of the moneys due shall have been
obtained or entered as hereinafter provided, the Company shall have paid
all matured installments of interest upon all of the Debentures and the
principal of any and all Debentures which shall have become due otherwise
than by acceleration (with interest on overdue installments of interest to
the extent that payment of such interest is enforceable under applicable
law and on such principal at the rate borne by the Debentures, to the date
of such payment or deposit), and any and all defaults under this Debenture
other than the nonpayment of principal of and accrued interest on
Debentures which shall have become due by acceleration, shall have been
cured or shall have been waived in accordance with Section 6.04; then, and
in every such case, the holders of at least 60% in aggregate principal
amount of the Debentures then outstanding, by written notice to the
Company, may rescind and annul such declaration and its consequences; but
no such rescission and annulment shall extend to or shall affect any
subsequent default, or shall impair any right consequent thereon.
Section 6.02. Proceedings by Debentureholder. In case of an Event
of Default hereunder, the holder of this Debenture shall be entitled to
institute any actions or proceedings at law or in equity for the
collection of all sums due and payable on this Debenture for principal or
interest, or both, as the case may be, with interest upon the overdue
principal, and (to the extent that payment of such interest is enforceable
under applicable law) upon the overdue installments of interest at the
rate borne by the Debentures, and such further reasonable amount as shall
be sufficient to cover the costs and expenses of collection, including
attorneys' fees, and may prosecute any such action or proceeding to
judgment or final decree, and may enforce any such judgment or final
decree against the Company and collect in the manner provided by law out
of the property of the Company wherever situated the moneys adjudged or
decreed to be payable, it being understood and intended, and being
expressly covenanted by the taker and holder of every Debenture with every
other taker and holder that no one or more holders of Debentures shall
have any right in any manner whatsoever by virtue of or by availing of any
provision of the Debentures to affect, disturb or prejudice the rights of
any other holder of such Debentures, or to obtain or seek to obtain
priority over or preference to any other such holder, or to enforce any
right under this Debenture, except in the manner herein provided and for
the equal, ratable and common benefit of all holders of Debentures.
Notwithstanding any other provisions in this Debenture, the right of any
holder of any Debenture to receive payment of the principal of and
interest on such Debenture, on or after the respective due dates expressed
in such Debenture, and to convert such Debenture in accordance with the
provisions hereof or to institute suit for the enforcement of any such
payment on or after such respective dates or to compel conversion shall
not be impaired or affected without the consent of such holder.
Section 6.03. Remedies Cumulative and Continuing. Except as
provided in Section 6.02, all powers and remedies given by this Article
Six to the Debentureholders shall, to the extent permitted by law, be
deemed cumulative and not exclusive of any thereof or of any other powers
and remedies available to the holders of the Debentures, by judicial
proceedings or otherwise, to enforce the performance or observance of the
covenants and agreements contained in this Debenture, and no delay or
omission of any holder of any of the Debentures to exercise any right or
power accruing upon any default occurring and continuing as aforesaid
shall impair any such right or power, or shall be construed to be a waiver
of any such default or an acquiescence therein; and, subject to the
provisions of Section 6.02, every power and remedy given by this Article
Six or by law to the Debentureholders may be exercised from time to time,
and as often as shall be deemed expedient, by any of the Debentureholders.
Section 6.04. Waiver of Defaults by Debentureholders. The holders
of 60% in aggregate principal amount of the Debentures at the time
outstanding may on behalf of the holders of all of the Debentures waive
any past default or Event of Default hereunder and its consequences except
a default in the payment of interest on, or the principal of, the
Debentures or a default in respect of a covenant or provision hereof which
cannot be modified or amended without the consent of the holder of each
Debenture affected. Upon any such waiver the Company and the holders of
the Debentures shall be restored to their former positions and rights
hereunder, respectively; but no such waiver shall extend to any subsequent
or other default or Event of Default or impair any right consequent
thereon. Whenever any default or Event of Default hereunder shall have
been waived as permitted by this Section 6.04, said Event of Default shall
for all purposes of the Debentures be deemed to have been cured and to be
not continuing.
Section 6.05. Undertaking to Pay Costs. Each holder of any Debenture
by his acceptance thereof shall be deemed to have agreed that any court
may in its discretion require, in any suit for the enforcement of any
right or remedy under the Debentures, the filing by any party litigant in
such suit of an undertaking to pay the costs of such suit, and that such
court may in its discretion assess reasonable costs, including reasonable
attorneys' fees, against any party litigant in such suit, having due
regard to the merits and good faith of the claims or defenses made by such
party litigant; but the provisions of this Section 6.05 shall not apply to
any suit instituted by any Debentureholder, or group of Debentureholders,
holding in the aggregate more than 20% in principal amount of the
Debentures outstanding, or to any suit instituted by any Debentureholder
for the enforcement of the payment of the principal or interest on any
Debenture against the Company on or after the due date expressed in such
Debenture.
ARTICLE SEVEN.
Concerning the Debentureholders.
Section 7.01. Action by Debentureholders. Whenever in this
Debenture it is provided that the holders of a specified percentage in
aggregate principal amount of the Debentures may take any action
(including the making of any demand or request, the giving of any notice,
consent or waiver or the taking of any other action) the fact that at the
time of taking any such action the holders of such specified percentage
have joined therein may be evidenced (a) by any instrument or any number
of instruments of similar tenor executed by Debentureholders in person or
by agent or proxy appointed in writing, or (b) by the record of the
holders of Debentures voting in favor thereof at any meeting of
Debentureholders duly called and held in accordance with the provisions of
Article Eight, or (c) by a combination of such instrument or instruments
and any such record of such a meeting of Debentureholders.
Section 7.02. Proof of Execution by Debentureholders. Subject to
the provisions of Section 8.04, proof of the execution of any instrument
by a Debentureholder or his agent or proxy shall be sufficient if made in
accordance with such reasonable rules and regulations as may be prescribed
by the Company or in such manner as shall be satisfactory to the Company.
The ownership of Debentures shall be proved by the Debenture register. The
record of any Debentureholders' meeting shall be proved in the manner
provided in Section 8.05.
Section 7.03. Who Are Deemed Absolute Owners. The Company deems the
person in whose name such Debenture shall be registered upon the Debenture
register to be, and may treat him as, the absolute owner of such Debenture
(whether or not such Debenture shall be overdue and notwithstanding any
notation of ownership or other writing thereon made by anyone other than
the Company) for the purpose of receiving payment of or on account of the
principal and (subject to Section 2.02) interest on such Debenture and for
all other purposes; and the Company shall not be affected by any notice to
the contrary. All such payments so made to any holder for the time being
or upon his order shall be valid and to the extent of the sum or sums so
paid, effectual to satisfy and discharge the liability for moneys payable
upon any such Debenture.
Section 7.04. Company-Owned Debentures Disregarded. In determining
whether the holders of the requisite aggregate principal amount of
Debentures have concurred in any direction or consent under the
Debentures, Debentures which are owned by the Company or any other obligor
on the Debentures or by any person directly or indirectly controlling or
controlled by or under direct or indirect common control with the Company
or any other obligor on the Debentures shall be disregarded and deemed not
to be outstanding for the purpose of any such determination. Debentures
so owned which have been pledged in good faith may be regarded as
outstanding for the purposes of this Section 7.04 if the pledgee shall
establish to the satisfaction of the Company the pledgee's right to vote
such Debentures and that the pledgee is not a person directly or
indirectly controlling or controlled by or under direct or indirect common
control with the Company or any such other obligor. In the case of a
dispute as to such right, any decision by the Company based upon the
advice of counsel shall be full protection to the Company.
Section 7.05. Revocation of Consents; Future Holders Bound. At any
time prior to (but not after) the taking of any action by the holders of
the percentage in aggregate principal amount of the Debentures specified
herein in connection with such action, any holder of a Debenture which is
shown by the evidence to be included in the Debentures the holders of
which have consented to or are bound by consents to such action may, by
filing written notice with the Company at its principal office and upon
proof of holding as provided in Section 7.02, revoke such action so far as
concerns such Debenture. Except as aforesaid, any such action taken by
the holder of any Debenture shall be conclusive and binding upon such
holder and upon all future holders and owners of such Debenture and of any
Debenture issued in exchange or substitution therefor, irrespective of
whether or not any notation in regard thereto is made upon any such
Debenture.
Section 7.06. Waiver of Provisions of Debentures. Any and all
provisions, covenants, conditions, or restrictions relating to the
Debentures may be waived by the affirmative vote, at a meeting duly held
in accordance with Article Eight hereof, or by written consent obtained by
the Company, of the holders of 60% of the aggregate principal amount of
the Debentures registered and outstanding as of the date of such meeting
or the date on which such consent is requested in writing.
ARTICLE EIGHT.
Debentureholders' Meetings.
Section 8.01. Purposes of Meetings. A meeting of Debentureholders
may be called at any time and from time to time pursuant to the provisions
of this Article Eight to give any notice to the Company, or to give any
directions to the Company, or to consent to the waiving of any default
hereunder and its consequences, or to take any other action authorized to
be taken by Debentureholders pursuant to any of the provisions of Article
Six, and to take any other action authorized to be taken by or on behalf
of the holders of any specified aggregate principal amount of the
Debentures under any other provision of this Debenture or under applicable
law.
Section 8.02. Call of Meetings by the Company or Debentureholders.
The Company, pursuant to a resolution of its Board of Directors, or the
holders of at least 10% in aggregate principal amount of the Debentures
then outstanding, shall be entitled to call a meeting of Debentureholders,
by the giving of notice thereof in writing, setting forth the time and the
place of such meeting and in general terms the action proposed to be taken
at such meeting, which shall be mailed to holders of Debentures at their
addresses as they shall appear on the Debenture register. Such notice
shall be mailed not less than 20 nor more than 90 days prior to the date
fixed for the meeting.
Section 8.03. Qualifications for Voting. To be entitled to vote at
any meeting of Debentureholders a person shall (i) be a holder of one or
more Debentures, or (ii) be a person appointed by an instrument in writing
as proxy by a holder of one or more Debentures. The only persons who
shall be entitled to be present or to speak at any meeting of
Debentureholders shall be the persons entitled to vote at such meeting and
their counsel and any representatives of the Company and its counsel.
Section 8.04. Regulations. Notwithstanding any other provisions of
this Debenture, the Company may make such reasonable regulations as it may
deem advisable for any meeting of Debentureholders, in regard to proof of
the holding of Debentures and of the appointment of proxies, and in regard
to the appointment and duties of inspectors of votes, the submission and
examination of proxies, certificates and other evidence of the right to
vote, and such other matters concerning the conduct of the meeting as it
shall think fit.
The Company or the Debentureholders calling the meeting, as the case
may be, shall appoint a temporary chairman for the meeting. A permanent
chairman and a secretary of the meeting shall be elected by majority vote
of the meeting.
At any meeting each Debentureholder or proxy shall be entitled to one
vote for each $1,000 principal amount of Debentures held or represented by
him; provided, however, that no vote shall be cast or counted at any
meeting in respect of any Debenture challenged as not outstanding and
ruled by the chairman of the meeting to be not outstanding. The chairman
of the meeting shall have no right to vote other than by virtue of
Debentures held by him or instruments in writing as aforesaid duly
designating him as the person to vote on behalf of other Debentureholders.
Any meeting of Debentureholders duly called pursuant to the provisions of
Section 8.02 may be adjourned from time to time by a majority vote of the
meeting, whether or not constituting a quorum, and the meeting may be held
as so adjourned without further notice.
Section 8.05. Voting. The vote upon any resolution submitted to any
meeting of Debentureholders shall be by written ballots on which shall be
subscribed the signatures of the holders of Debentures or of their
representatives by proxy and the principal amount of the Debentures voted.
The permanent chairman of the meeting shall appoint two inspectors of
votes who shall count all votes cast at the meeting for or against any
resolution and who shall make and file with the secretary of the meeting
their verified written reports in duplicate of all votes cast at the
meeting. A record in duplicate of the proceedings of each meeting of
Debentureholders shall be prepared by the secretary of the meeting and
there shall be attached to said record the original reports of the
inspectors of votes on any vote by ballot taken thereat and affidavits by
one or more persons having knowledge of the facts setting forth a copy of
the notice of the meeting and showing that said notice was mailed as
provided in Section 8.02.
The record shall be signed and verified by the affidavits of the
permanent chairman and secretary of the meeting and one of the duplicates
shall be delivered to the Company to be preserved by the Company. Any
record so signed and verified shall be conclusive evidence of the matters
therein stated.
Section 8.06. No Delay of Rights by Meeting. Nothing in this
Article Eight contained shall be deemed or construed to authorize or
permit, by reason of any call of a meeting of Debentureholders or any
rights expressly or impliedly conferred hereunder to make such call, any
hindrance or delay in the exercise of any right or rights conferred upon
or reserved to the Debentureholders under any of the provisions of the
Debentures.
ARTICLE NINE.
Consolidation, Merger, Sale, Conveyance and Lease.
Section 9.01. Company May Consolidate, etc., on Certain Terms.
Nothing contained in any of the Debentures shall prevent (i) any
consolidation or merger of the Company with or into any other corporation
or corporations (whether or not affiliated with the Company), or
successive consolidations or mergers in which the Company or its successor
or successors shall be a party or parties, provided that the corporation
or successive acquiring corporations shall have a class of equity
securities registered under Section 12(g) of the Securities Exchange Act
of 1934, as amended, and that the Debentures shall thereafter be
convertible into such class of equity securities, or (ii) any sale, or
conveyance of assets not exceeding 10% of the consolidated net tangible
assets of the Company, the assumption of otherwise prohibited liens or
sale and leaseback of assets owned by the Company as of the date of this
Debenture, or, provided that the aggregate amount of the otherwise
prohibited liens and the present value of the sale and leaseback
transactions does not exceed 25% of the consolidated net tangible assets
of the Company, to any other corporation (whether or not affiliated with
the Company) authorized to acquire and operate the same; provided,
however, that in the event of a sale or conveyance of assets the Company
hereby covenants and agrees that upon any such sale or conveyance, and
upon any such merger or consolidation in which the Company is not the
surviving corporation, the due and punctual payment of the principal and
interest on all of the Debentures, according to their tenor, and the due
and punctual performance and observance of all of the covenants and
conditions of the Debentures to be performed by the Company, shall be
expressly assumed by the corporation (if other than the Company) formed by
such consolidation, or into which the Company shall have been merged, or
by the corporation which shall have acquired such property, and
immediately after such consolidation, merger, or acquisition, the Company,
its Subsidiaries, or such successor corporation, as the case may be, shall
not be or become in violation of any of the terms, covenants or conditions
of the Debentures. In case of any such consolidation, merger, sale, or
conveyance, changes in phraseology and form (but not in substance) may be
made in the Debentures thereafter to be issued as may be appropriate.
ARTICLE TEN.
Immunity of Incorporators, Shareholders, Officers and Directors.
Section 10.01. Debentures Solely Corporate Obligations. No recourse
for the payment of the principal of or interest on any Debenture, or for
any claim based thereon or otherwise in respect thereof, and no recourse
under or upon any obligation, covenant or agreement of the Company in any
Debenture, or because of the creation of any indebtedness represented
thereby, shall be had against any incorporator, shareholder, officer or
director, as such, past, present or future, of the Company or of any
successor corporation, either directly or through the Company or any
successor corporation, whether by virtue of any constitution, statute or
rule of law, or by the enforcement of any assessment or penalty or
otherwise; it being expressly understood that all such liability is hereby
expressly waived and released as a condition of, and as a consideration
for, the issue of the Debentures.
ARTICLE ELEVEN.
Conversion of Debentures.
Section 11.01. Conversion Privilege. Subject to and upon compliance
with the provisions of this Article Eleven, at the option of the holder
thereof, any Debenture or any portion of the principal amount thereof
which is $1,000 or an integral multiple of $1,000 may, at any time on or
prior to the close of business on the 15th day preceding the maturity
date, or in case such Debenture or portion thereof shall have been called
for redemption prior to such date, then in respect of such Debenture or
portion thereof until and including, but (unless the Company shall default
in payment due upon the redemption thereof) not after, the close of
business on the 15th day prior to such Redemption Date, be converted into
duly authorized, validly issued, fully paid and non-assessable shares of
Common Stock of the Company. The number of shares of Common Stock issuable
upon conversion shall be equal to the principal amount of such Debenture,
or such portion thereof, divided by the Conversion Price (determined as
hereinafter provided) in effect at the time of conversion and rounded to
the nearest one-hundredth of a share. The price at which shares of Common
Stock shall be delivered upon conversion (herein called the "Conversion
Price") shall be $2.50 per share of Common Stock. After March 1, 2000,
the Debentures are convertible at 75% of the current market or $2.50,
whichever is lower. The Company may at any time reduce the Conversion
Price by any amount.
Section 11.02. Manner of Exercise of Conversion Privilege. In order
to exercise the conversion privilege, the holder of any Debenture to be
converted shall surrender such Debenture during regular business hours to
the executive office of the Company in accordance with Section 4.02,
accompanied by written notice to the Company at said office that the
holder elects to convert such Debenture or, if less than the entire
principal amount of the Debenture is to be converted, the portion thereof
to be converted. Such notice shall also state the name or names (with
address and tax identification number) in which the certificate or
certificates for shares of Common Stock issuable upon such conversion
shall be issued. Debentures surrendered for conversion shall be
accompanied by proper assignments thereof to the Company or in blank for
transfer. As promptly as practicable after the receipt of such notice and
the surrender of such Debenture as aforesaid, but subject to Section
11.03, the Company shall deliver or cause to be delivered at said office
or agency to such holder, or on his written order, a certificate or
certificates for the number of full shares of Common Stock issuable upon
the conversion of such Debenture (or specified portion thereof) and
provision shall be made in respect of any fractional interest as provided
in Section 11.03. Such conversion shall be deemed to have been effected
immediately prior to the close of business on the date on which such
notice shall have been received by the Company and such Debenture shall
have been surrendered as aforesaid, and at such time the rights of the
holder of such Debenture as such holder shall cease and the person or
persons in whose name or names any certificate or certificates for shares
of Common Stock shall be issuable upon such conversion shall be deemed to
have become the holder or holders of record of the shares represented
thereby.
Subject to the requirement for a payment provided in Section 2.02 in
the event of conversion after the close of business on the record date
preceding an interest payment date, no payment or adjustment shall be made
upon any conversion on account of any interest accrued on the Debentures
delivered for conversion or on account of any dividends on the shares of
Common Stock issued upon such conversion.
In case any Debenture is converted in part only, upon such conversion
the Company shall execute, register and deliver to the holder thereof, at
the expense of the Company, a new Debenture or Debentures of authorized
denominations in principal amount equal to the unconverted portion of such
Debenture.
Section 11.03. Cash Adjustment Upon Conversion. No fractional
shares of Common Stock shall be issued upon conversions of Debentures. If
more than one Debenture shall be surrendered for conversion at one time by
the same holder, the number of full shares which shall be issuable upon
conversion thereof shall be computed on the basis of the aggregate
principal amount of the Debentures (or specified portions thereof to the
extent permitted hereby) so surrendered. Instead of any fractional share
of Common Stock which would otherwise be issuable upon conversion of any
Debenture or Debentures or specified portions thereof, the Company shall
pay a cash adjustment in respect of such fraction in an amount equal to
the same fraction of the closing bid price of the Common Stock as reported
by Nasdaq, or the last sale price if the Common Stock is then traded on a
national securities exchange, at the close of business on the business day
which next precedes the day of conversion.
Section 11.04. Adjustment of Conversion Price. The Conversion Price
in effect at any time shall be subject to adjustment as follows:
(a) In case the Company shall (i) declare a dividend on its
Common Stock in shares of its capital stock, (ii) subdivide its
outstanding shares of Common Stock, (iii) combine its outstanding shares
of Common Stock into a smaller number of shares, or (iv) issue by
reclassification of its Common Stock (including any such reclassification
in connection with a consolidation or merger in which the Company is the
continuing corporation) any shares of its capital stock, the Conversion
Price in effect at the time of the record date for such dividend or of the
effective date of such subdivision, combination or reclassification shall
be proportionately adjusted so that the holder of any Debenture
surrendered for conversion after such time shall be entitled to receive
the kind and number of shares which he would have owned or have been
entitled to receive had such Debenture been converted immediately prior to
such time. Such adjustment shall be made successively whenever any event
listed above shall occur.
(b) In case the Company shall distribute to all holders of its
Common Stock (including any such distribution made in connection with a
consolidation or merger in which the Company is the continuing
corporation) evidences of its indebtedness or assets (excluding dividends
or other distributions paid out of earned surplus) or subscription rights
or warrants, the Conversion Price shall be adjusted so that the same shall
equal the price determined by multiplying the Conversion Price in effect
immediately prior to the close of business on the date fixed for the
determination of stockholders entitled to receive such distribution by a
fraction of which the numerator shall be the current Conversion Price on
the date fixed for such determination less the then fair market value (as
determined by the Board of Directors, whose determination shall be
conclusive) of the portion of the assets or evidences of indebtedness so
distributed applicable to one share of Common Stock and the denominator
shall be such current Conversion Price, such adjustment to become
effective immediately prior to the opening of business on the day
following the date fixed for the determination of stockholders entitled to
receive such distribution.
(c) For the purpose of any computation under subsection (b)
immediately, the current Conversion Price on any date shall be deemed to
be the Conversion Price as in effect immediately prior to the transaction
giving rise to such computation, after taking into account all previous
adjustments of the Conversion Price in accordance with the provisions of
this Article Eleven.
(d) All calculations under this Article Eleven shall be made to
the nearest cent or to the nearest one-hundredth of a share, as the case
may be.
(e) In case of any consolidation or merger of the Company with
or into any other corporation (other than a consolidation or merger in
which the Company is the continuing corporation), or in case of any sale
or transfer of all or substantially all the assets of the Company, the
holder of each Debenture shall after such consolidation, merger, sale or
transfer have the right to convert such Debenture into the kind and number
of shares of stock and other securities and property which such holder
would have been entitled to receive upon such consolidation, merger, sale
or transfer if he had held the Common Stock issuable upon the conversion
of such Debenture immediately prior to such consolidation, merger, sale or
transfer.
(f) In the event that at any time, as a result of an adjustment
made pursuant to subsection (a) above, the holder of any Debenture
thereafter surrendered for conversion shall become entitled to receive any
securities other than shares of Common Stock, thereafter the amount of
such other securities so receivable upon conversion of any Debenture shall
be subject to adjustment from time to time in a manner and on terms as
nearly equivalent as practicable to the provisions with respect to the
Common Stock contained in subsection (a) through (e), inclusive, above,
and the provisions of this Article Eleven with respect to the Common Stock
shall apply on like terms to any such other securities.
(g) No adjustment in the Conversion Price shall be required
unless such adjustment would require a change of at least 1% in such
price; provided, however, that any adjustments which by reason of this
subsection (g) are not required to be made shall be carried forward and
taken into account in any subsequent adjustment.
Section 11.05. Company to Give Notice of Adjustment. Whenever the
Conversion Price is adjusted as herein provided:
(a) the Company shall obtain a certificate of a firm of
independent public accountants selected by the Board of Directors (who may
be the regular accountants employed by the Company) setting forth the
adjusted Conversion Price and showing in reasonable detail the facts upon
which such adjustment is based, and such certificate shall forthwith be
filed at the office or agency maintained for the purpose of conversion of
Debentures pursuant to Section 4.02, and
(b) a notice stating that the Conversion Price has been
adjusted and setting forth the adjusted Conversion Price shall forthwith
be required, and as soon as practicable after it is required, such notice
shall be mailed by the Company to the holders of the Debentures at their
last address as they shall appear upon the Debenture register provided for
in Section 5.01, provided, however, that if within ten days after the
mailing of such a notice, an additional notice is required, such
additional notice shall be deemed to be required pursuant to this clause
(b) as of the opening of business on the tenth day after such mailing and
shall set forth the Conversion Price as adjusted at such opening of
business, and upon the mailing of such additional notice no other notice
need be given of any adjustment in the Conversion Price occurring at or
prior to such opening of business and after the time that the next
preceding notice given by mailing became required.
Section 11.06. Company to Give Notice of Certain Events. In case:
(a) the Company shall authorize the distribution to all holders
of its Common Stock of evidence of its indebtedness or assets (other than
dividends or other distributions paid out of earned surplus); or
(b) the Company shall authorize the granting to the holders of
its Common Stock of rights to subscribe for or purchase any shares of
capital stock of any class or of any other rights; or
(c) of any reclassification of the Common Stock of the Company
(other than a subdivision or combination of its outstanding shares of
Common Stock), or of any consolidation or merger to which the Company is a
party and for which approval of any stockholders of the Company is
required, or of the sale or transfer of all or substantially all the
assets of the Company; or
(d) of the voluntary or involuntary dissolution, liquidation or
winding up of the Company; then the Company shall cause to be filed at
the office or agency maintained for the purpose of conversion of
Debentures pursuant to Section 4.02, and shall cause to be mailed, first
class postage prepaid, to the holders of Debentures at their last
addresses as they shall appear upon the Debenture register provided for in
Section 5.01, at least 20 days (or 10 days in any case specified in clause
(a) or (b) above) prior to the applicable record date hereinafter
specified, a notice stating (i) the date on which a record is to be taken
for the purpose of such distribution or rights, or, if a record is not to
be taken, the date as of which the holders of Common Stock of record to be
entitled to such distribution or rights are to be determined, or (ii) the
date on which such reclassification, consolidation, merger, sale,
transfer, dissolution, liquidation or winding up is expected to become
effective, and the date as of which it is expected that holders of Common
Stock of record shall be entitled to exchange their Common Stock for
securities or other property deliverable upon such reclassification,
consolidation, merger, sale, transfer, dissolution, liquidation or winding
up.
Section 11.07. Reservation of Common Stock. The Company shall at
all times reserve and keep available, free from preemptive rights, out of
its authorized but unissued Common Stock, for the purpose of effecting the
conversion of Debentures, the full number of shares of Common Stock then
issuable upon the conversion of all Outstanding Debentures. For the
purpose of this Section 11.07, the full number of shares of Common Stock
issuable upon the conversion of all Outstanding Debentures shall be
computed as if at the time of computation of such number of shares of
Common Stock all Outstanding Debentures were held by a single holder. The
Company covenants and agrees that, if any shares of Common Stock required
to be reserved for issuance upon conversion of Debentures hereunder
require registration with or approval of any governmental authority under
any Federal or State law, before such shares may be issued upon such
conversions, the Company will in good faith and as expeditiously as
possible endeavor to cause such shares to be so registered or approved.
Section 11.08. Taxes on Conversions. The Company will pay any and
all documentary or transfer taxes that may be payable in respect of the
issue or delivery of shares of Common Stock on conversion of Debentures
pursuant hereto. The Company shall not, however, be required to pay any
such tax which may be payable in respect of any transfer involved in the
issue or transfer and delivery of shares of Common Stock in a name other
than that of the holder of the Debenture or Debentures to be converted,
and no such issue or delivery shall be made unless and until the person
requesting such issue has paid to the Company the amount of any such tax
or has established to the satisfaction of the Company that such tax has
been paid.
Section 11.09. Absence of Preemptive Rights. The Company covenants
that all authorized but unissued shares of Common Stock which may at any
time be reserved pursuant to Section 11.07 for issuance upon conversions
of Debentures will be free from preemptive rights and duly and validly
authorized for issuance upon such conversions; and that all shares of
Common Stock which may at any time be issued upon conversions of
Debentures in accordance with the terms of this Debenture will upon such
issuance be free from preemptive rights, duly and validly authorized and
issued, fully paid and non-assessable.
Section 11.10. Debentures Converted. All Debentures delivered for
conversion shall be delivered to the Company to be canceled by or at the
direction of the Company, who shall dispose of the same as provided in
Section 2.05.
Section 11.11. Effect of Consolidation, Merger or Sale. In case of
any consolidation or merger of the Company with or into any other
corporation (other than a consolidation or merger in which the Company is
the continuing corporation), or in case of any sale or transfer of all or
substantially all the assets of the Company, the corporation formed by
such consolidation or the corporation into which the Company shall have
been merged or the corporation which shall have acquired such assets, as
the case may be, shall execute and deliver to each Debentureholder a
written undertaking providing that the holder of each Debenture then
outstanding shall have the right thereafter to convert such Debenture as
provided in Paragraph (f) of Section 11.04, and that such corporation
shall assume all of the other rights and obligations of the Debenture.
The provisions of this Section 11.11 shall similarly apply to successive
consolidations, mergers, sales or transfers.
ARTICLE TWELVE.
Subordination of Debentures.
Section 12.01. Agreement to Subordinate. The Company covenants and
agrees, and each holder of Debentures, by his acceptance thereof, likewise
covenants and agrees, that the indebtedness evidenced by the Debentures
and the payment of the principal thereof and interest thereon shall be
subordinate and subject in right of payment, to the extent and in the
manner hereinafter set forth, to the prior payment in full of all Senior
Indebtedness.
Section 12.02. No Payment on Debentures in Event of Default on
Senior Indebtedness. The Company shall not make any payment on account of
the principal of or interest on the Debentures if, at the time thereof or
immediately after giving effect thereto, there exists (and has not been
waived) any default in the payment of principal of or interest on any
Senior Indebtedness or any event of default with respect to any Senior
Indebtedness as defined therein (after giving effect to any grace period
provided for therein) or in any agreement pursuant to which any Senior
Indebtedness is issued and the default is the subject of a judicial
proceeding or the Company receives notice of the default as provided in
this Debenture or from any holder of Senior Indebtedness or any trustee
therefor; provided, however, that, in the event the Debentures have been
declared due and payable pursuant to Section 6.01, the provisions of the
next succeeding paragraph of this Section 12.02 shall be applicable.
In the event that any Event of Default as defined in Section 6.01
shall occur (under such circumstances that the provisions of Section 12.03
are not applicable) and as a result the Debentures then Outstanding are
declared due and payable pursuant to Section 6.01, and such declaration
shall not have been rescinded or annulled, the Company shall not make any
payment on account of the principal of or interest on any Debentures,
unless at least 90 days shall have elapsed after said declaration and
unless all principal of and interest on Senior Indebtedness due at the
time of such payment (whether by acceleration of the maturity thereof or
otherwise) shall first be paid in full.
Section 12.03. Distribution on Dissolution, Liquidation and
Reorganization. In the event of any payment or distribution of assets or
securities of the Company of any kind or character, whether in cash,
property or securities, to creditors upon any dissolution or winding up or
total or partial liquidation or reorganization of the Company, whether
voluntary or involuntary and whether in bankruptcy, insolvency or
receivership proceedings, or upon an assignment for the benefit of
creditors or any other marshaling of the assets and liabilities of the
Company, or upon other proceedings:
(a) all principal, and interest due on all Senior Indebtedness
shall first be paid in full, or due provision made for such payment, in
accordance with the terms of such Senior Indebtedness, before any payment
is made on account of the principal of or interest on the indebtedness
evidenced by the Debentures, or before the holders of the Debentures shall
be entitled to retain any assets so paid or distributed in respect
thereof; and
(b) any payment or distribution of assets or securities of the
Company of any kind or character, whether in cash, property or securities
(other than securities of the Company as reorganized or readjusted or
securities of the Company or any other corporation provided for by a plan
of reorganization or readjustment, which are in any such case subordinated
to Senior Indebtedness to the same extent as the Debentures), to which the
holders of the Debentures would be entitled except for the provisions of
this Section 12.03, shall be paid or delivered by the Company or any
receiver, trustee in bankruptcy, liquidating trustee, agent or other
person making such payment or distribution directly to the holders of
Senior Indebtedness (pro rata to each such holder on the basis of the
respective amount of Senior Indebtedness held by such holder) or their
representative or representatives or the trustee or trustees under any
indenture pursuant to which any instruments evidencing any Senior
Indebtedness may have been issued, as their respective interests may
appear, for application to the payment of all Senior Indebtedness
remaining unpaid to the extent necessary to pay all Senior Indebtedness in
full in accordance with the terms of such Senior Indebtedness, after
giving effect to any concurrent payment or distribution to or for the
holders of Senior Indebtedness, before any payment or distribution is made
to the holders of the Debentures.
The Company shall give prompt written notice to the Debentureholders
of any dissolution, winding up, liquidation or reorganization of the
Company within the meaning of Section 12.03.
Section 12.04. Payment to Holders of Senior Indebtedness. Subject
to the provisions of Section 12.06, in the event that, notwithstanding the
provisions of Section 12.02 or Section 12.03, any payment or distribution
of assets or securities of the Company of any kind or character, whether
in cash, property or securities shall be received by the holders of the
Debentures (i) from the Company in violation of such provisions, or (ii)
from any other person under such circumstances that such payment would, if
made directly by the Company, be in violation of such provisions, such
payment or distribution shall immediately be paid over by such holders to
the holders of Senior Indebtedness or their representative or
representatives, or to the trustee or trustees under any indenture under
which any instrument evidencing any of such Senior Indebtedness may have
been issued, ratably according to the aggregate amounts then due on
account of the principal of and interest on such Senior Indebtedness
(after giving effect to any concurrent payment or distribution to the
holders of such Senior Indebtedness), to the extent necessary to pay in
full all such amounts then due.
Upon any payment or distribution of assets or securities of the
Company referred to in Sections 12.02 and 12.03, the holders of the
Debentures shall be entitled to rely upon any order or decree of a court
of competent jurisdiction, or upon any certificate of any liquidating
trustee or agent or other person making any payment or distribution to the
holders of the Debentures, for the purpose of ascertaining the persons
entitled to participate in such payment or distribution, the holders of
the Senior Indebtedness, the amount thereof or payment thereon, the amount
or amounts paid or distributed thereon and all other facts pertinent
thereto or to this Article Twelve.
Section 12.05. Subrogation. Subject to the payment in full of all
amounts then due (whether by acceleration of the maturity thereof or
otherwise) on account of the principal of and interest on all Senior
Indebtedness at the time outstanding, the holders of the Debentures shall
be subrogated to the rights of each holder of Senior Indebtedness (to the
extent of the payments or distributions made to such holder pursuant to
the provisions of Sections 12.02, 12.03, and 12.04) to receive payments or
distributions of assets or securities of the Company applicable to the
Senior Indebtedness until the Debentures shall be paid in full, and each
holder of Senior Indebtedness by the act of accepting such payments or
distributions pursuant to the provisions of Sections 12.02, 12.03 and
12.04 shall be deemed to have agreed to the subrogation aforesaid. No
payments or distributions of assets or securities of the Company
applicable to Senior Indebtedness which the holders of the Debentures
receive by reason of their being subrogated to the rights of the holders
of such Senior Indebtedness pursuant to the provisions of Sections 12.02,
12.03 and 12.04 shall, as between the Company, its creditors other than
the holders of Senior Indebtedness, and the holders of the Debentures, be
deemed to be a payment by the Company on account of the Debentures, it
being understood that the provisions of this Article Twelve are intended
solely for the purpose of defining the relative rights of the holders of
the Debentures, on the one hand, and the holders of the Senior
Indebtedness on the other hand, and nothing contained in this Article
Twelve or elsewhere in the Debentures, is intended to or shall impair, as
between the Company, its creditors other than the holders of Senior
Indebtedness, and the holders of the Debentures, the obligation of the
Company, which is absolute and unconditional, to pay to the holders of the
Debentures the principal of and interest on the Debentures, as and when
the same shall become due and payable in accordance with their terms, or
is intended to or shall affect the relative rights of the holders of the
Debentures and creditors of the Company other than the holders of Senior
Indebtedness, nor shall anything herein or therein prevent the holder of
any Debentures from exercising all remedies otherwise permitted by
applicable law upon default under this Debenture, subject to the rights,
if any, under this Article Twelve of the holders of Senior Indebtedness in
respect of cash, property or securities of the Company received upon the
exercise of any such remedy.
Section 12.06. Payments on Debentures Permitted. Nothing contained
in this Article Twelve or elsewhere in any of the Debentures, shall
prevent the Company from making payment of the principal of or interest on
the Debentures at any time, except under the conditions described in
Section 12.02 and except during the pendency of any dissolution, winding
up, liquidation or reorganization of the Company within the meaning of
Section 12.03. Nothing contained in this Article Twelve or elsewhere in
any of the Debentures, shall prevent the application by the Company of any
moneys held hereunder for the purpose of payment of or on account of the
principal of or interest on the Debentures, unless, prior to the business
day next preceding the date upon which such principal shall have become
payable, or, in the case of any payment on account of interest unless,
prior to two business days before the date upon which such interest shall
have become payable, the Company shall have received written notice,
directed to it at its principal office, from any holder of Senior
Indebtedness or any trustee therefor of the existence of any of the
conditions described in Section 12.02 or of any dissolution, winding up,
liquidation or reorganization of the Company within the meaning of Section
12.03.
Section 12.07. Authorization of Holders to Company to Effect
Subordination. Each holder of Debentures by his acceptance thereof
authorizes and directs the Company in his behalf to take such action as
may be necessary or appropriate to effectuate, as between the holders of
the Debentures and the holders of Senior Indebtedness, the subordination
provided in this Article Twelve and appoints the Company his
attorney-in-fact for any and all such purposes.
ARTICLE THIRTEEN.
Registration Rights.
Section 13.01. Incidental Registration.
(a) If, at any time prior to the maturity of the Debentures,
the Company shall determine to register under the Securities Act any
shares of its Common Stock to be offered for cash by it or others,
pursuant to a registration statement on Form S-1 (or its equivalent if
such form is not in effect or on an alternative form if such alternative
form is then authorized for the sale to the general public of the
Company's securities), the Company will (i) promptly give written notice
of its intention to file such registration statement to the holders of the
Debentures and each holder of Common Stock, if any, which has been issued
upon conversion of any of the Debentures (collectively, the "Holders"),
and (ii) subject to the provisions of subsections (b) and (c), below,
include among the shares covered by the registration statement such
portion of the shares of Common Stock issued or issuable upon the
conversion of any of the Debentures (the "Shares") as shall be specified
in a written request given to the Company by the Holders within 30 days
after the date on which the Company gave such written notice.
(b) Upon receipt of any written request described in Section
13.01(a) above, but subject to the provisions hereof and of Section
13.01(c) below, the Company shall:
(i) use its best efforts within reason to effect the
registration, qualification or compliance under the Securities Act and
under other applicable federal law and any applicable securities or "blue
sky" laws of jurisdictions within the United States of the Shares
specified in the request (the Holders and any other holders of the
Company's Common Stock who are entitled hereunder or otherwise to request
registration of any shares of the Company's Common Stock are in this
Section 13.01 individually called a "Selling Shareholder" and
collectively, the "Selling Shareholders"); provided, however, that in no
event shall the Company be obligated to qualify to do business in any
jurisdiction where it is not so qualified or to take any action that would
subject it to tax or the service of process (other than process in
connection with such registration) in any jurisdiction where it is not
subject thereto, nor shall the Company be required to include the Shares
among the securities covered by the registration statement if (A) less
than 50% of the Holders have joined in such request and the requests of
the Holders cover shares of the Company's Common Stock issued or issuable
upon conversion of the Debentures having an aggregate value of less than
$1,000,000, based upon the average closing bid price of the Company's
Common Stock as reported on Nasdaq, or the closing sale price of the
Common Stock on any national stock exchange on which it may then be
traded, for the ten consecutive days immediately preceding the date on
which the notice specified by Section 13(a)(i) above is given; or (B) the
Board of Directors of the Company determines in good faith that including
shares of Common Stock held by any Selling Shareholder among the
securities covered by the registration statement would have a materially
detrimental effect on the proposed offering and would therefore not be in
the best interests of the Company;
(ii) furnish each Selling Shareholder such number of
copies of the prospectus contained in the registration statement filed
under the Securities Act (including each preliminary prospectus) in
conformity with the requirements of the Securities Act, and such other
documents as the Selling Shareholders may reasonably request in order to
facilitate the disposition of the Common Stock held by them which is
covered by the registration statement; and
(iii) notify each Selling Shareholder, at any time when a
prospectus relating to such Common Stock is required to be delivered under
the Securities Act, of the happening of any event as a result of which the
prospectus in the registration statement, as then in effect, includes an
untrue statement of a material fact or omit to state any material fact
required to be stated therein or necessary to make the statements therein
not misleading, and at the request of the Selling Shareholders prepare and
furnish to them any reasonable number of copies of any supplement to or
amendment of such prospectus as may be necessary so that, as thereafter
delivered, such prospectus shall not include an untrue statement of a
material fact or omit to state a material fact required to be stated
therein or necessary to make the statements therein not misleading.
(c) The Company alone shall determine and control all decisions
concerning any registration of the Company's securities which might give
rise to the registration rights granted hereunder, including any
registration in which Shares of any Selling Shareholder are to be
included. The Corporation's exclusive right to make decisions shall
include, without limitation, the decision as to whether to use
underwriters, the selection of underwriters and arrangements therewith,
the size, timing and other terms of any offering, the provisions of the
registration statements and prospectuses and all supplements and
amendments thereto, the selection of accountants and attorneys for the
Company, and the states in which the sale of shares shall occur and be
registered or qualified for sale.
If the offering registered by the Company is to be underwritten, each
Selling Shareholder shall sell all shares of Common Stock included in the
registration statement to or through the underwriter or underwriters
selected by the Company on the same terms and conditions provided in any
underwriting agreement entered into therewith by the Company, and shall
complete and execute all questionnaires, powers of attorney, indemnities,
underwriting agreements and other documents required under the terms of
such underwriting arrangements. Notwithstanding anything to the contrary
hereunder, if the underwriter or underwriters selected by the Company
reasonably determine that all or any portion of the shares of Common Stock
held by the Selling Shareholders should not be included in the
registration statement, the determination of the underwriter or
underwriters shall be conclusive; provided, however, that if such
underwriter or underwriters determine that some but not all of the shares
of Common Stock of the Selling Shareholders shall be included in the
registration statement, the number of shares owned by each Selling
Shareholder to be included in the registration statement will be
proportionately reduced in accordance with their respective aggregate
holdings of Common Stock. In no event shall the Company be required to
reduce or limit the number of newly to be issued shares of its Common
Stock to be covered by any registration statement for the purpose of
permitting the Shares of any Selling Shareholder to be included in the
registration.
(d) The Company shall not be obligated to give notice of or
include Shares held by any subscriber hereunder in more than two
registration statements to be filed by the Company, exclusive of (i) any
registration statement as to which a request for inclusion has been
rejected in full under subsection 13.01(b) or as to Shares requested to be
registered under subsection 13.01(c) hereof, (ii) registration statements
filed on Form S-3 if such Form is then available to the Company for the
registration of Common Stock to be offered to the public for cash, and
(iii) a registration effected as provided in Section 13.02 below.
(e) Upon conversion by a Debenture holder of the aggregate
principal amount of the Debentures, the Company will undertake to file a
registration statement on Form S-3, if such form is then available to the
Company within six (6) months of conversion of such amount of debentures,
for the registration of Common Stock to be offered to the public for cash.
Section 13.02. Indemnification.
(a) In connection with any registration in which a Selling
Shareholder is participating, each such Selling Shareholder shall furnish
to the Company such information in writing regarding the Selling
Shareholder as the Company reasonably requests for inclusion in the
registration statement, prospectus, offering circular and other documents
filed in connection therewith, and shall state that such information is
provided specifically for use in the registration statement, prospectus,
offering circular or other documents. Each such Selling Shareholder shall
also furnish to the Company an undertaking satisfactory to the Company and
each underwriter of the offering, if any, agreeing to indemnify and hold
harmless, to the extent permitted by law, the Company, and its directors
and officers, and each such underwriter, and each person who controls the
Company or each such underwriter (within the meaning of the Securities
Act), against any actions, losses, claims, damages, liabilities, and
expenses (including legal and other expenses reasonably incurred in the
investigation and defense thereof) resulting from any untrue or alleged
untrue statement of a material fact or any omission or alleged omission of
a material fact required to be stated in any such documents or any
supplement or amendment thereto, or necessary to make the statements
therein not misleading, but only to the extent that such untrue statement
or omission is made in reliance on and in conformity with the written
information furnished to the Company by such Selling Shareholder
specifically for use in such documents.
(b) The Company shall indemnify and hold harmless, to the
extent permitted by law, each Selling Shareholder against any actions,
losses, claims, damages, liabilities and expenses (including legal fees
and other expenses reasonably incurred in the investigation and defense
thereof) resulting from any untrue or alleged untrue statement of a
material fact or any omission or alleged omission of a material fact in
any registration statement, prospectus, offering circular or other
document filed in connection with any registration or qualification,
unless and to the extent that any such actions, claims, losses, damages,
liabilities or expenses arise out of the written information specifically
provided by the Selling Shareholder for use in such registration
statement, prospectus, offering circular or other document pursuant to
subsection (a) of this Section 13.03.
Section 13.03. Expenses of Registration. The Company shall bear all
costs and expenses relating to or incurred by it in connection with any
registration in which any Selling Shareholder participates pursuant
hereto, including without limitation all registration and filing fees,
printing expense, fees and disbursements of counsel and independent
accountants for the Company and fees and expenses incident to compliance
with state securities or "blue sky" laws, but specifically excluding any
fees and disbursements of counsel, accountants or other professionals
engaged by any Selling Shareholder. Each Selling Shareholder shall be
responsible for and bear any underwriters' discounts and commissions
properly allocable to shares of Common Stock included in a registration
statement at the request of a Selling Shareholder hereunder.
ARTICLE FOURTEEN.
Miscellaneous Provisions.
Section 14.01. Provisions Binding on Company's Successors. All the
covenants, stipulations, promises and agreements in this Debenture
contained by the Company shall bind its successors and assigns whether so
expressed or not.
Section 14.02. Debentures for Sole Benefit of Company and
Debentureholders. Nothing in the Debentures, expressed or implied, shall
give or be construed to give to any person, firm or corporation, other
than the parties hereto and the holders of the Debentures, any legal or
equitable right, remedy or claim under or in respect of this Debenture, or
under any covenant, condition or provision herein contained; all such
covenants, conditions and provisions being for the sole benefit of the
parties hereto and the holders of the Debentures.
Section 14.03. Addresses for Notices, Etc. Any notice or demand
which by any provision of the Debentures is required or permitted to be
given or served by the holders of Debentures on the Company may be given
or served by being deposited postage prepaid by registered or certified
mail in a post office letter box addressed (until notified of another
address by the Company) to Metalclad Corporation, 2 Corporate Plaza, Suite
125, Newport Beach, California 92660, Attention: Secretary. Any notice,
report or other instrument required by any of the provisions of the
Debentures to be given by the Company to the Debentureholders shall be
deemed to have been sufficiently given for all purposes if mailed by first
class mail to the Debentureholder at the last address for such holder
appearing in the Debenture register.
Section 14.04. California Contract. This Debenture and each other
Debenture executed and delivered by the Company shall be deemed to be a
contract made under the laws of the State of California and for all
purposes shall be construed in accordance with the laws of said State.
Section 14.05. Legal Holidays. In any case where the date of
maturity of interest on or principal of or interest on the Debentures or
the date fixed for redemption of any Debenture will not be a business day,
then payment of such interest on or principal of the Debentures need not
be made on such date but may be made on the next succeeding business day
with the same force and effect as if made on such date of maturity or the
date fixed for redemption and no interest shall accrue for the period from
and after such prior date.
Section 14.06. No Security Interest Created. Nothing in the
Debentures, expressed or implied, shall be construed to constitute a
security interest under the Uniform Commercial Code or similar
legislation, as now or hereafter enacted and in effect, in any
jurisdiction where property of the Company or its Subsidiaries is located.
Section 14.07. Table of Contents, Headings, Etc. The table of
contents and the titles and headings of the articles and sections of the
Debentures have been inserted for convenience of reference only, are not
to be considered a part hereof, and shall in no way modify or restrict any
of the terms or provisions hereof.
IN WITNESS WHEREOF, Metalclad Corporation has caused this Debenture
to be signed and acknowledged by its President, or a Vice President, and
its corporate seal to be affixed hereunto, and the same to be attested by
its Secretary or an Assistant Secretary, as of the day and year first
written above.
METALCLAD CORPORATION
a Delaware corporation
By:
----------------------------------
Grant S. Kesler, President
Attest:
----------------------------
Bruce H. Haglund, Secretary
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