SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------------
FORM 10-K/A
(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, 1998
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, 1999 was approximately $9,544,900, 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, 1999 was 33,727,522.
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 1999
Annual Meeting of Stockholders are incorporated by reference into Part III
hereof.
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 profitably dispose
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.
This Form 10-K Amendment No. 1 to Form 10-K which amends the 1998
Annual Report includes the following primary changes: the Company has
included all Mexican operations, including the unopened landfill in San Luis
Potosi, in discontinued operations. Previously, the Company included the
landfill and the costs of its ongoing NAFTA arbitration, in continued
operations, pending resolution of the claim. Consequently, this amendment
includes the landfill and all associated costs of its NAFTA claim, in
discontinued operations, since the Company believes it will not open the
landfill and the NAFTA claim will determine the landfill's disposition.
ITEM 1. BUSINESS
(a) General Development of Business
Mexican Industrial Waste Treatment and Disposal Business. Since
November 1991, the Company has been actively involved in the development and
operation of integrated industrial waste treatment and disposal facilities
in various states in the Republic of Mexico. The business is comprised of
three major components: industrial waste services, treatment and disposal,
and development.
Industrial waste services are conducted by Administracion de Residuos
Industriales, S.A. de C.V. ("ARI"). ARI's business is comprised of waste
collection, placement and servicing of parts-washing machines, recycling,
fuels blending and transportation. ARI currently operates through a network
of branch offices, strategically located in Mexico City, Guadalajara,
Puebla, Tampico, Monterrey, Guanajuato, San Luis Potosi, Veracruz and
Coatzacoalcos. In addition, it operates a fuel blending and recycling
facility in Tenango. ARI's headquarters are in Mexico City.
Treatment and disposal operations have not progressed beyond the
development stage. The Company's completed landfill and treatment facility,
known as "El Confin", located in the State of San Luis Potosi has not been
allowed by the Mexican government to open and now is the subject of the
Company's claim under the North American Free Trade Agreement ("NAFTA"). See
"Item 3 - Legal Proceedings" and Note C of the Financial Statements.
Since 1997, the Company has been developing another waste treatment and
disposal facility in the State of Aguascalientes. Construction began in
February 1998 but was interrupted in September 1998 by protestors and
remained inactive through year-end. The state government of Aguascalientes
has been alternately willing and unwilling to enforce their laws and protect
the Company's investment. On October 1, 1998 the Company announced that it
would suspend further investment in Mexico and it would stop further
attempts to develop and construct the Aguascalientes project until the
settlement of the Company's NAFTA claim and until the state government of
Aguascalientes demonstrated a willingness to enforce their laws and protect
the Company's investment. The project as of this writing is approximately
90% complete.
Another expression of the opposition of the Mexican Federal Government
to the Company and its projects is demonstrated by the unwillingness of the
federal development bank, Banco Nacional De Obras Y Servicios Publicos,
S.N.C. (BANOBRAS), to approve financing for the Company's project in
Aguascalientes. The Company received conceptual approval for financing in
August 1997 and had expected final approval on February 25, 1998. Because
of a request made by a senior Mexican official the bank has indicated it
would have to "review" our loan application. During the remainder of the
1998 the Company had no further word from BANOBRAS, and has concluded that
the bank has no serious interest in ever giving final approval to the
Company's request for financing.
Because of these most recent experiences in Aguascalientes, and because
the Mexican Government has not shown any serious willingness to settle the
Company's NAFTA claim short of final arbitration, on October 1, 1998 the
management of the Company committed to a plan to discontinue its Mexican
operations and to seek to identify potential buyers for its Mexican
business. The Company's Mexican operations are now being classified as
discontinued operations, held for sale. The Company believes it will be
able to complete a sale of its Mexican business during the next twelve
months. The Company is also considering the filing of a second NAFTA claim
concerning the Aguascalientes project, but has not yet determined a final
course of action.
Development activities in the past have been conducted by Ecosistemas
Nacionales, S.A. de C.V. ("ECONSA"). ECONSA's primary business is the
development and permitting of industrial waste treatment and landfill
facilities in strategic locations in Mexico. The Company believes ECONSA's
development activities have value to another company willing to complete the
projects identified by ECONSA.
Insulation and Asbestos Abatement Contracting. Metalclad Insulation
Corporation provides insulation and asbestos abatement services to a largely
industrial clientele, primarily on the West Coast. The Company provides
labor and material supply services to a wide range of industrial and
commercial clients. Insulation services include the installation of high-
and low-temperature insulation on pipe, ducts, furnaces, boilers, and other
types of industrial equipment and commercial applications. Asbestos
abatement services include removal and disposal of asbestos-containing
products in similar applications. The Company fabricates specialty items
for the insulation industry and sells insulation material and accessories
incident to its services business to its customers as well as to other
contractors. A diverse list of clientele includes refineries, utilities,
chemical/petrochemical plants, manufacturing facilities, commercial/
manufacturing installations and buildings, and various government
facilities.
Corporate Structure. The Company, incorporated originally in 1947 as
an Arizona corporation, was reincorporated in Delaware on November 24, 1993.
The Company's wholly owned United States subsidiaries include Eco-Metalclad,
Inc. ("ECO-MTLC"), a Utah corporation, Metalclad Insulation Corporation
("MIC"), a California corporation, and Metalclad Environmental Contractors
("MEC"), a California corporation.
The Company's Mexican subsidiaries include Ecosistemas Nacionales, S.A.
de C.V. (ECONSA), Ecosistemas del Potosi, S.A. de C.V., formerly known as
Eco Administracion, S.A. de C.V. ("ECOPSA"), Quimica Omega, S.A. de C.V.
("QUIMICA OMEGA"), Consultoria Ambiental Total, S.A. de C.V. ("CATSA"),
Confinamiento Tecnico de Residues Industriales, S.A. de C.V. ("COTERIN"),
Administracion de Residuos Industriales, S.A. de C.V. (ARI) and Ecosistemas
El Llano, S.A. de C.V. ("El Llano"). Each of the Mexican subsidiaries is
a corporation of variable capital (sociedad anonima de capital variable).
Unless otherwise indicated, the term "Company" refers to Metalclad
Corporation, its United States and Mexican subsidiaries, and its
predecessors.
The Company's principal executive offices are located at 2 Corporate
Plaza, Suite 125, Newport Beach, California 92660, United States, and its
telephone number is (949) 719-1234. MIC and MEC serve their insulation
contracting customers from their headquarters in Anaheim, California.
ECO-MTLC's offices are in Newport Beach, California, and the Company's Mexican
subsidiaries' offices are located in Mexico City, the City of San Luis
Potosi and the City of Aguascalientes.
(b) Subsequent Events
1. Since the Company's decision to sell its businesses in Mexico, made
in the fourth quarter of 1998, the Company has pursued several opportunities
and is currently negotiating with parties interested in the Company's
businesses in Mexico. The Company believes that it will be successful in
concluding its activities in Mexico in such a way as to obtain return of its
investment and still not diminish the potential claim the Company may have
against Mexico for its interference in the Company's businesses there.
However, no assurances can be given that these efforts will be successful.
2. On October 13, 1997, the Company filed its detailed "Memorial" with
the NAFTA Tribunal hearing the Company's claim related to its "El Confin"
facility. On February 17, 1998, the United Mexican States ("Mexico")
responded to the Company's claim to the Tribunal by filing a
"Counter-Memorial". The Company filed a "Reply" brief on August 21, 1998.
Mexico must now file its final brief known as a "Rejoinder" by April 19, 1999.
The Company was notified on March 5, 1999 that a pre-hearing conference has now
been scheduled in Washington, D.C. for July 6, 1999 with the final hearing
on the case scheduled to take place on August 30, 1999. A final decision
by the tribunal is expected to follow shortly after the final hearing.
3. In March 1999 the Company accepted the resignations of three
Directors of the Company, Messrs. Guerra, Morales, and Akle. There were no
disputes with any of the resigning Directors but each felt unable to make
further contributions to the Company given the decision to discontinue any
further investments in Mexico. Mr. Guerra will retain his position as the
Director General of all Mexican operations.
4. Three new Directors were appointed to the Board, effective March
22, 1999, and all three, plus the two remaining directors, Messrs. Kesler
and Dabbene, have agreed to stand for election at the next annual meeting
tentatively scheduled for June 2, 1999. The three new directors are:
Raymond J. Pacini, President and CEO of California Coastal
Committee.
J. Thomas Talbot, owner of the Talbot Company.
Bruce H. Haglund has previously served as a Director the Company
and also serves as the Company's Secretary and General Counsel.
5. In December 1998, the Company made an offer to all holders of its
warrants containing anti-dilution provisions, including the provision for
adjustment of the number of underlying shares in the event of a reduction
in the exercise price of its warrants. The offer made was to freeze the
number of underlying shares per warrant, calculated on the basis of an
exercise price of $1.25, which was the then current exercise price.
Additionally, the Company offered to reduce the exercise price of the
resultant number of underlying shares to $.35. Lastly, for those holders
of warrants who chose to exercise their warrants by January 31, 1999, the
Company would reduce the exercise price to $.25 and issue additional
warrants equal to the number of shares acquired by exercise. In exchange,
the anti-dilution provisions of the warrants were eliminated related to both
price and quantity of the underlying shares going forward. The Company has
received acceptances from over 95% of the warrant holders to date. The
results of this transaction are reflected in Note J to the accompanying
financial statements.
(c) Financial Information About Industry Segments
The Company, through MIC and MEC, is engaged in insulation services,
asbestos abatement services, and insulation material sales, such activities
constituting one industry segment. The development and operation of the
industrial waste treatment business, commenced in November 1991 through
ECO-MTLC and now conducted by the Company's Mexican subsidiaries, had
previously been reported as a separate industry segment for 1995, 1996 and
1997 and is now being reported as discontinued operations.
(d) Narrative Description of Business
Introduction
Business in Mexico. Since November 1991, the Company has been actively
involved in doing business in Mexico. The Company's initial focus was the
development of facilities for the treatment, storage and disposal of
industrial hazardous waste.
During the fourth quarter of 1998, the Company determined that its
efforts at building its business in Mexico would not be allowed to succeed.
The Company's investment in El Confin has resulted in an arbitration under
the NAFTA treaty, its investment in Aguascalientes has been blocked just
prior to the project's completion, and its other business has been impacted
due to the loss of these projects and the synergy they would have provided.
Consequently, the Company has determined that its Mexican businesses must
be sold to minimize future losses and that any further investment in Mexico
should be halted.
Business in the United States. Metalclad Insulation Corporation
specializes in insulation and asbestos abatement services primarily on the
West Coast. The Company provides labor and material supply services to a
wide range of industrial and commercial clients. Insulation services
include the installation of high- and low-temperature insulation on pipe,
ducts, furnaces, boilers, and other types of industrial equipment and
commercial applications. Asbestos abatement services include removal and
disposal of asbestos-containing products in similar applications. The
Company fabricates specialty items for the insulation industry and sells
insulation material and accessories incident to its services business to its
customers as well as to other contractors. A diverse list of clientele
includes refineries, utilities, chemical/petrochemical plants, manufacturing
facilities, commercial/manufacturing installations and buildings, and
various government facilities.
Mexican Business
Due to the Company's decision to discontinue its Mexican businesses,
the Company has no ongoing business in Mexico other than the business
currently being conducted by ARI.
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. Six of the Company's full-time
employees and 43 hourly employees have been trained and certified as
"competent individuals" under EPA regulations relating to the training of
asbestos abatement workers. All employees are issued detailed training
materials and the Company typically conducts a job safety analysis in the
job bidding stage.
The Company requires the use of protective equipment and sponsors
periodic medical examination of all field employees. During removal
procedures, ACM is generally wetted to minimize fiber release and filtration
devices are used to reduce contamination levels. Air monitoring to
determine asbestos fiber contamination levels is conducted on all abatement
projects involving the removal of friable asbestos. The Company has a
comprehensive policy and procedure manual 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 1999 will
continue to be from work performed for Southern California Edison, ARCO, and
Texaco.
Competition. Competition in the insulation contracting services
business is intense and is expected to remain intense in the foreseeable
future. Competition includes a few national and regional companies 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 always 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. Since the Company has not yet
exhausted more than 50% of the available coverage the Company believes that
there is adequate coverage and the Company 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,
1998, and December 31, 1997 was $7,200,000 and $5,500,000, 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, 1998 will be completed during the next twelve
months. The majority of the Company's present business is on cost-plus
contracts for which backlog is estimated. The Company fulfills product and
supply orders promptly, and there is no backlog in the material sales
business.
Employees. As of December 31, 1998, the Company had a full-time staff
of 14 salaried employees, including one executive officer, project
managers/estimators, purchasing, accounting, and office staff.
As of December 31, 1998, the Company employed approximately 104 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 47 1996 Chief Financial Officer, Director
David Duclett 48 1989 President - MIC/MEC
Bruce H. Haglund 47 1983 Secretary, General Counsel, Director
Grant S. Kesler 55 1991 President, Chief Executive Officer, Director
Raymond J. Pacini 43 1999 Director
J. Thomas Talbot 63 1999 Director
Javier Guerra Cisneros 52 1994 Director General, Mexican Companies
</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.
David Duclett has been employed by the Company since 1977 and has been
Vice President of Marketing and Sales of Metalclad Insulation and Metalclad
Environmental since 1989. He was appointed President in May 1998. Mr.
Duclett's main responsibility is to lead the Company and further the
objectives of the Board while establishing and building long-term client
relationships. He has negotiated and managed contracts for both industrial
and commercial work, with concentration on refinery and utility maintenance
work and hi-rise commercial buildings.
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 & Johnson 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., Santa Barbara Restaurant Group, 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.
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 currently serves on the
boards of directors of The Hallwood Group, Inc., Fidelity National
Financial, Inc., California Coastal Communities, Inc., and The Pacific Club.
Javier Guerra Cisneros, a former Director of the Company, has been the
Director General of QUIMICA OMEGA since its formation in 1981. He also
founded and was the President of the Institute on Industrial Hazardous
Waste, a non-profit organization that promotes public awareness of the
Mexican environmental regulations through its publication DIP. Since 1990,
Mr. Guerra, through QUIMICA OMEGA, has been one of the pioneers in the
implementation in Mexico of the program to use hazardous wastes as
supplemental fuel in cement kilns. He has more than 10 years of experience
on environmental regulations and handling of hazardous wastes in Mexico and
the United States as well as in the compliance of Mexican environmental
legislation. He has participated in multiple conferences on ecological
matters, including seminars sponsored by the EPA and SEDESOL.
ITEM 2. PROPERTIES
The Company leases space for its offices and warehouse facilities under
leases of varying terms at rentals aggregating approximately $14,650 per
month. The Company's executive offices are located in Newport Beach,
California, which consists of approximately 3,000 square feet leased at a
current rate of $5,850 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 $9,212 per month.
The Anaheim lease expires in April and is currently in negotiations for
renewal.
The Company owns approximately 145 acres of unimproved land located in
Tulare County, California which is not related to the business of the
Company and is being held for sale.
ECOPSA owns an approximately 92-hectare parcel (approximately 227
acres) of land in Santa Maria del Rio near San Luis Potosi, Mexico.
COTERIN owns approximately 2,200 acres of land near La Pedrera in the
Mexican State of San Luis Potosi on which El Confin is located.
ITEM 3. LEGAL PROCEEDINGS
Given the Company's long history in the insulation business and in the
sale of insulation materials, it is subject to various claims related to
prior asbestos related business as well as its current business. The number
of these claims is over 300, the Company believes it has adequate insurance
in place and had adequate insurance in prior years and is vigorously
defending all claims. The Company does not believe that these claims,
individually or in the aggregate, will have a material adverse effect on its
financial condition. (See Note M.)
In May 1997, a jury found Texaco oil refinery, a client of the Company,
55% liable for injuries and damages sustained by a Metalclad Insulation
employee while working at the Wilmington, California refinery. The jury
determined that Texaco's portion of the damages amounted to $5.5 million.
Under terms of the Company's contract with Texaco, certain indemnities may
be applied. The Company had project specific, as well as other insurance
policies in effect at the time of the injury. This award has been appealed
and the ultimate outcome cannot be predicted; however, the Company
maintained separate, project-specific insurance coverage, which it believes
is adequate to address any potential exposure.
On October 2, 1996, having completed a long period of negotiation with
the Mexican government on the opening of its hazardous waste landfill in San
Luis Potosi, Mexico, the Company filed a Notice of Claim under the provision
of the North American Free Trade Agreement. The notice was filed with the
International Center for the Settlement of Investment Disputes (ICSID) in
Washington, D.C. pursuant to the provisions of the NAFTA. On January 2,
1997, the Company filed its actual claim with the Tribunal, after which a
three-member Tribunal was impaneled which includes one arbitrator from
Mexico, one from the United States and a third, chosen jointly by the
parties, from Great Britain. The first hearing was held in Washington, D.C.
on July 15, 1997 and a number of matters were agreed upon by the parties and
a significant amount of direction was given by the Tribunal to the
proceedings that would move forward.
Pursuant to those understandings, the Company, on October 13, 1997,
filed its Memorial, which included the Claim and all of the evidence
supporting the Claim, including expert witness studies and the like. The
basis of the Company's claim against Mexico is one likened to expropriation.
The Company's position is since it is not being allowed to operate a legally
authorized project, it has in essence been taken by the Mexican government
and they should, therefore, be responsible for paying fair compensation
under the provision of the NAFTA. A fair market valuation was done on
behalf of the Company by an expert company, which indicated the fair market
value of this business was $90,000,000.
On October 13, 1997, the Company filed its detailed memorial with the
NAFTA Tribunal, hearing the Company's claim related to its "El Confin"
facility. On February 17, 1998, the United Mexican States ("Mexico")
responded to the Company's claim to the Tribunal. On August 21, 1998 the
Company filed its Reply to Mexico and on April 19, 1999 Mexico is due to
file its rejoinder. A pre-hearing conference has been scheduled for July
6, 1999 with a final hearing date set for August 30, 1999. A decision is
expected shortly after the final hearing.
If a favorable decision were received by the Company, any damages
awarded to the Company would be payable by the United Mexican States and
would be 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 to 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). Management does not believe that a
loss of its arbitration case would cause the Company to become insolvent or
prevent it from conducting its domestic business, or in making acquisitions
or mergers with others in similar businesses seeking a public market.
ITEM 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 Stock Market under the
symbol "MTLC." The following table sets forth, for the fiscal periods
indicated, the high and low sales prices for the Common Stock as reported
by Nasdaq:
<TABLE>
<S> <C> <C>
Sales Price
High Low
---- ---
Fiscal Year Ended May 31, 1996
- ------------------------------
1st Fiscal Quarter Ended August 31, 1995 3 5/16 2 15/16
2nd Fiscal Quarter Ended November 30, 1995 3 13/16 3 1/8
3rd Fiscal Quarter Ended February 29, 1996 5 5/85 5 1/4
4th Fiscal Quarter Ended May 31, 1996 3 1/4 3 1/32
Seven Months Ended December 31, 1996
1st Fiscal Quarter Ended August 31, 1996 3 3/8 2 5/8
2nd Fiscal Quarter Ended November 30, 1996 3 1/4 1 1/2
3rd Fiscal Quarter Ended December 31, 1996 1 15/16 1 3/8
Fiscal Year Ended December 31, 1997
1st Fiscal Quarter Ended March 31, 1997 1 5/8 1 3/32
2nd Fiscal Quarter Ended June 30, 1997 2 1 3/32
3rd Fiscal Quarter Ended September 30, 1997 1 17/32 1 3/16
4th Fiscal Quarter Ended December 31, 1997 1 9/32 15/16
Fiscal Year Ended December 31, 1998
1st Fiscal Quarter Ended March 31, 1998 1 3/16 1 1/8
2nd Fiscal Quarter Ended June 30, 1998 1 1/16 1 1/32
3rd Fiscal Quarter Ended September 30, 1998 11/16 5/8
4th Fiscal Quarter Ended December 31, 1998 13/32 3/8
</TABLE>
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, 1999, the approximate number of record holders of the Company's
Common Stock was 1,731.
<PAGE>
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.
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Year Year 7 Months Year Year Year
Ended Ended Ended Ended Ended Ended
Dec 31, Dec 31, Dec 31, May 31, May 31, May 31,
-------- ------- ------- ------- ------- -------
(in thousands, except per share amounts)
Statement of Operations Data (1)
Revenues from
continuing operations $10,009 $8,971 $5,519 $11,445 $15,724 $16,249
Loss from continuing operations (1,775) (2,000) (1,706) (5,630) (6,287) (1,449)
Loss from discontinued operations (2) (3,003) (2,610) (1,574) (1,150) (9,112) (3,443)
Net loss (4,778) (4,610) (3,280) (6,780) (15,399) (4,892)
Earnings per share:
Net loss per common share, continued
operations - basic and diluted $(0.06) $(0.07) $(0.06) $(0.25) $(0.46) $(0.16)
Net loss per common share,
discontinued operations basic
and diluted $(0.10) $(0.09) $(0.05) $(0.05) $(0.67) $(0.40)
Balance Sheet Data
Total assets $11,288 $11,533 $14,106 $16,554 $10,710 $18,311
Convertible notes 1,640 1,500 - - 2,050 2,662
Convertible debentures (3) 1,202 20 229 239 8,636 8,755
- ------------------------
(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. See Item 7, "Management's Discussion and Analysis of Financial Conditions and Results of Operations"
(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. See Item 7, "Management's Discussion and Analysis of Financial Conditions and Results of Operations".
</TABLE>
No dividends were paid or declared during the years ended December 31,
1998 or 1997, the seven months ended December 31, 1996, or the fiscal years
ended May 31, 1996, 1995 or 1994.
ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This discussion and analysis contains forward-looking statements within
the meaning of Section 27A of the Securities Act and Section 21E of the
Exchange Act, which are subject to the "safe harbor" created by those
sections. The Company's actual future results could differ materially from
those projected in the forward-looking statements. The Company assumes no
obligation to update the forward-looking statements or such factors.
Presentation of Financial Statements
The financial statements of the Company reflect the Company's on going
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, 1998, the value of the peso was 9.85 to the U.S. dollar. As
of December 31, 1998, the Company has a foreign currency translation
adjustment of $(2,140,110) 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, the
Company committed to a plan to discontinue its operations in Mexico and to
seek a buyer. While no assurances can be made, it is anticipated that a
sale will be completed in fiscal 1999. The loss from discontinued operations
during fiscal 1998 includes a provision for anticipated closing costs and
operating losses until disposal of $450,000. Based on information currently
available, the Company does not anticipate that it will incur a loss on the
sale of the reported net assets of the discontinued operations. However,
upon completion of a sale, the Company will be required to record a one-time
charge of approximately $2,140,000 related to accumulated foreign currency
translation losses that are currently recorded as a component of
stockholder's equity.
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 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 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
year ended December 31, 1998 was $3,003,000 compared to a loss of
$2,610,000 for 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 in 1998 as
compared to $2,171,000 for 1997, a decline of 9%. The decline was achieved
by reductions in staffing and costs.
Interest Expense. Interest expense was $187,000 in 1998 compared to
interest income of $62,000 for 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.
Twelve Months Ended December 31, 1997
Compared to Twelve Months Ended December 31, 1996
Insulation Business. Total revenues for the year ended December 31,
1997 were $8,971,000 compared to $10,144,000 for the same period in 1996,
a decline of 12%. This decrease can be attributed to lower volumes of work
performed under the Company's various maintenance agreements and under
subcontracts with Curtom-Metalclad for work at various Edison plants. In
addition, demand for asbestos abatement services has also declined.
Contract and material costs and expenses were $7,686,000 compared to
$9,463,000 for the same period in 1996, a decline of 19%. This decrease is
directly associated with the decline in revenues. Additionally, 1996
contained costs associated with overruns on two fixed price projects.
Selling, general and administrative expenses were $1,177,000 compared
to $1,600,000 for the same period in 1996, a decrease of 26%. This decline
in expenses is the direct result of steps taken by the Company to reduce its
cost structure, including the elimination of certain staff positions.
Discontinued Operations. Loss from discontinued operations was
$2,610,000 in 1997 versus $2,019,000 in 1996. The increase in loss was due
to the expenses associated with the Company's efforts in developing new
projects, the write off of goodwill of approximately $71,000, the cost of
pursuing the Company's NAFTA claim and the expansion of ARI.
Corporate Expense. Corporate expense for the year ended December 31,
1997 was $2,171,000 compared to $3,727,000 for the same period in 1996, a
decrease of 42%. The decrease was due to a reduction in development
activities, as well as reductions in corporate costs.
Interest Expense. Interest income from continuing operations was
$62,000 as compared to interest expense of $163,000 for the same period in
1996.
Consolidated Results. The net loss for the year ended December 31,
1997 was $4,610,000 as compared to $6,783,000 for the same period in 1996,
a decrease of 32%. This improved performance can be attributed to an
overall reduction in the Company's cost structure as well as improved
performance in the insulation business.
Seven Months Ended December 31, 1996
Compared to Seven Months Ended December 31, 1995
Insulation Business. Total revenues for the seven months ended
December 31, 1996 was $5,519,000 compared to $6,910,000 for the same period
in 1995, a decrease of 20%. This decrease is attributable to a decline in
the overall volume of work performed under the Company's various maintenance
agreements as well as a decline in the demand for asbestos abatement
services. Income from the Curtom-Metalclad joint venture was $45,000
compared to $0.00 for the same period in 1995 due to the increase in Edison
work contracted through the joint venture.
Operating costs and expenses were $4,816,000 compared to $5,685,000 for
the same period in 1995, a decrease of 15% associated with the decline in
revenues. Selling, general and administrative expenses were $769,000
compared to $1,226,000 representing a decrease of 37% attributed to the
Company's efforts to control overhead costs.
Discontinued Operations. Loss from discontinued operations was
$1,574,000 as compared to income of $76,000 in 1995. This increase in loss
was due in large part to the Company's commencement of the expansion of ARI,
which was a joint venture with BFI in 1996, as well as the costs associated
with the Company's project development activities.
Corporate Expense. Corporate expense for the seven months ended
December 31, 1996 was $1,839,000 as compared to $1,789,000, an increase of
3%.
Interest Expense. Interest income from continuing operations was
$154,000 for the seven months ended December 31, 1996 compared to interest
expense of $834,000 for the same period in fiscal 1996. This reduction is
due to the conversions of both the Company's debt and convertible
subordinated debentures to shares of common stock.
Other Expense. Other expense was $0 as compared to $729,000 for the
same period in fiscal 1995. In 1995, other expense represented the discount
given to debenture holders to induce conversion into common stock of the
Company.
Consolidated Results. The net loss for the seven months ended December
31, 1996 was $3,280,000 as compared to $3,277,000, representing no change.
This comparable performance was achieved despite the start-up costs of
BFI-OMEGA, NAFTA litigation costs and litigation reserves included in the
current seven months' net loss, while the seven months ended December 31,
1995 contained a one-time gain of $317,000 for donated equipment.
Liquidity and Capital Resources
In November 1991, the Company completed the acquisition of Eco-Metalclad,
Inc. ("ECO-MTLC"), commenced the development of the hazardous
waste treatment business in Mexico and began advancing cash to its Mexican
subsidiaries for use in the Mexican business. Funding the development of
the Company's Mexican business has required substantial capital. To obtain
capital for the development of the business of the Company in Mexico, the
Company has made private placements of its common stock and convertible
subordinated debentures and has obtained loans from financial institutions.
In August 1997, the Company initiated a warrant exchange program,
wherein investors who exercised their existing warrants were granted
additional replacement warrants. Between August 1997 and October 1997,
910,626 warrants were exercised at $1.50, netting the Company $1,365,939.
In December 1997, the Company issued $2,200,000 Five Year Zero Coupon
Secured Notes, netting the Company $1,500,000. These notes are convertible
into shares of common stock of the Company and the holder was also issued
warrants to purchase common stock of the Company (see Note G). These notes
are secured by 100% of the stock of Metalclad Insulation Corporation.
In July 1998, the Company issued $1,000,000 in 7% Convertible
Debentures due in July 2001, netting the Company $875,000 (see Note H).
In August 1998, the Company issued $350,000 in 10% Convertible
Subordinated Debentures due in August 2001, netting the Company $308,000
(see Note H).
The Company had a negative working capital at December 31, 1998 of
$4,289,000 compared to working capital of $1,703,000 at December 31, 1997.
The Company had cash and cash equivalents at December 31, 1998 of $520,000
and $1,511,000 at December 31, 1997. Cash used in continuing operations for
the twelve months ended December 31, 1998 was $662,000 compared to
$1,479,000 for 1997. Cash used by discontinued operations for the twelve
months ended December 31, 1998 was $1,567,000 compared to $1,922,000 for
1997. Cash used in operating activities for the twelve months ended
December 31, 1998 was funded primarily by cash and cash equivalents on hand
at the beginning of the year as well as debt financings completed during
1998; however, no assurances can be given that such funds will be available
to the Company as required.
The Company believes that the insulation business will generate
adequate cash flows from operations to meet its future obligations and
expenses relating to such operations. For the year ended December 31, 1998
the insulation business generated cash flow from operations of $832,000,
which was offset by $1,494,000 in cash flow used in corporate activities.
Corporate activities during 1998 primarily relate to senior management's
salaries and general corporate overhead expenses. The Company will require
substantial additional financing to continue pursuit of its NAFTA claim, and
complete the sale of its Mexican operations, along with general and
administrative expenses without revenues to offset such expenses. The
Company is aware of its on going cash needs and continues to work with its
warrant holders, investment bankers and other sources to meet its on going
needs through December 31, 1999. Given the Company's decision to
discontinue operations in Mexico, and sell its businesses, the cash
requirements in Mexico greatly diminish. The Company believes it will
obtain the necessary funds to continue its planned operations throughout
1999; however, no assurances can be given that such funds will be available
to the Company as required.
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.
Year 2000 Issues
Certain computer programs written with two digits rather than four to
define the applicable year may experience problems handling dates beyond the
year 1999. This may cause computer applications to fail or create erroneous
results unless corrective measures are taken. The Year 2000 ("Y2K") problem
can arise at any point in the Company's supply and customer chains. The
Company acknowledges that its failure to resolve a material Y2K issue could
result in the interruption in, or failure of, certain normal business
activities or operations. Such failures could materially and adversely
affect the Company's results of operations. In addition, the Company could
be materially impacted by the widespread economic or financial market
disruption by Y2K computer system failures at suppliers, customers and other
third parties. Possible risks of Y2K failure could include, among other
things, delays or errors with respect to payments and third party delivery
of materials.
Due to the simplicity of the Company's operating systems, the Company
believes that its exposure to Y2K related issues is extremely low.
Nevertheless, during fiscal 1998, the Company initiated a plan to assess its
Y2K exposure. The Company's Y2K project is expected to significantly reduce
the Company's level of uncertainty and exposure to the Y2K issue. In
connection with this assessment, the Company initiated a plan to acquire and
implement new business systems that will address its Y2K issues. To date,
the Company has not identified any operating systems, either of its own or
of a material third party relationship, that present a material risk of not
being Y2K ready or for which a suitable alternative cannot be implemented.
The Company believes that it will have all of its own systems Y2K compliant
by December 1, 1999.
As part of the Company's assessment of the risk of the Y2K problem, the
Company's relationships with significant suppliers, customers, and other
third parties are being examined to determine the status of these third
parties' efforts to comply with the Y2K requirements. There is no assurance
that such third parties will not suffer a Y2K business disruption. However,
while it is conceivable that such failures could have a material adverse
effect on the Company's liquidity, financial condition and results of its
operations, management believes that the risk is low.
The following outlines the various phases of the Company's Y2K project,
as well as the expected completion date of the phase:
Expected
Description of Task Completion Date
- ------------------------------------------------------- ---------------
Address Compliance of IT Systems with Year 2000 issues:
Address the Company's Business Information IT System Completed
Address the Company's Operations IT System Completed
Assessment of third-Party Risk (vendor and customer)
regarding Y2K issues 10/15/1999
Assessment of Non-IT Systems 06/30/1999
Update of IT Systems to meet Year 2000 requirements 10/15/1999
Development of contingency plan for non-compliance of
systems to Y2K requirements 10/31/1999
The Company's ability to complete the Y2K modifications in the time line
outlined above is dependent upon numerous factors, including the ability of
third party software and hardware suppliers to make necessary modifications
to current versions of their products, the availability of resources to
install and test the modified systems and other factors. Accordingly, there
can be no assurance that these modifications will be successful. If the
Company is not successful in the above implementation, management will
consider the necessity of implementing a contingency plan to mitigate any
adverse effects associated with the Y2K issue. At this time, management
does not have such a plan.
To date, the Company's effort to modify its accounting and information
systems to comply to the Y2K requirements has been focused on its core
business applications (i.e. systems used for the Company's day-to-day
operations). As of December 31, 1998, the Company has spent approximately
$40,000 to modify its computer systems (including software) to process dates
beyond 12/31/99. The Company does not estimate that its future costs
related to its Y2K initiatives will be material. The Company currently
anticipates that all of its operating systems will be Y2K compliant well
before January 1, 2000, and that the Y2K issue will not have a material
adverse effect upon the Company's liquidity, financial position or results
of operations.
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
On January 25, 1999, the Board of Directors approved the dismissal of
its principal accountants, Arthur Andersen LLP and approved the engagement
of Moss Adams LLP as its new principal accountants. During the Company's
past two fiscal years, there were no disagreements between the Company and
Arthur Andersen LLP. For the fiscal year ended December 31, 1997, Arthur
Andersen's report on the financial statements of the Company was qualified
relative to the Company's ability to continue as a going concern given its
recurring losses and large accumulated deficit.
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 1999 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 1999 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 1999 Annual Meeting Proxy Statement which will be filed with
the Securities and Exchange Commission not later than 120 days after
December 31, 1998. The Company's 1999 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 1999 Annual Meeting Proxy Statement which will be filed with
the Securities and Exchange Commission not later than 120 days after
December 31, 1998. The Company's 1998 Annual Meeting Proxy Statement,
exclusive of the information set forth under the captions "Report of the
Compensation Committee" and "Company Performance," are incorporated herein
by this reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In October 1994, in consideration of extraordinary contributions to the
Company, including but not limited to the pledge of 755,000 shares of common
stock of the Company owned by them to facilitate necessary financings for
the Company, the board of Directors approved a loan of $370,000 to each of
Mr. Kesler and Mr. Neveau. Such borrowings are due 30 days after demand and
bear annual interest at the prime rate of interest plus 7%. The borrowings
are secured by a pledge of 300,000 shares of common stock from each
borrower. In February 1996 Messrs. Kesler and Neveau each repaid $150,000
to the Company. In March 1996, the notes were 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 December 31, 1999.
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, 1998 was $67,200.
During the twelve months ended December 31, 1998, the Company accrued
legal fees of $74,000 from the law firm of Gibson, Haglund & Johnson, of
which Bruce H. Haglund, general counsel, Director, and Secretary of the
Company, is a principal; however, none of such fees have been paid.
During December, 1996, the Company loaned $150,000 to Mr. Javier Guerra
Cisneros, a Director and Vice President of Mexico operations. This loan is
evidenced by a promissory note bearing interest at 10% and secured by a
pledge of future salary and 300,000 shares of common stock in the Company.
In February 1997, Mr. Guerra repaid $120,000 of this loan. Repayment of
this note has been extended to the earlier of the completion of the sale of
the Mexican operations or December 31, 1999.
<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 1993 Omnibus Stock Option and Incentive Plan (4)
- ----------------------
(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 herein by this 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 ad incorporated herein by this reference.
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)
10.5 Employment Agreement between the Company and Javier
Guerra Cisneros dated January 1, 1998(5)
10.6 Purchase Agreement between the Company and Sundial
International Fund Limited and Ultra Pacific Holdings S.A. dated December
31, 1997(5)
10.7 Form of Common Stock Purchase Warrant between the Company
and Sundial International Fund Limited and Ultra Pacific Holdings S.A.
dated December 1, 1997(5)
10.8 Zero Coupon Secured Note between the Company and Sundial
International Fund Limited dated December 31, 1997(5)
10.9 Pledge Agreement between the Company and Gilmartin,
Poster & Shafto dated December 31, 1997(5)
10.10 Registration Rights Agreement between the Company and
Sundial International Fund Limited and Ultra Pacific Holdings S.A. dated
December 31, 1997(5)
10.11 Purchase Agreement between the Company and Ultra Pacific
Holdings S.A. dated June 18, 1998(5)
10.12 Registration Rights Agreement between the Company and
Sundial International Fund Limited and Ultra Pacific Holdings S.A. dated
December 31, 1997(5)
10.13 Pledge Agreement between the Company and Gilmartin,
Poster & Shafto dated June 18, 1998(5)
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 was filed on February 1, 1999,
reporting the change in the Company's accountants. See Item 9, "Changes
in and Disagreements with Accountants on Accounting and financial
Disclosure".
- ----------------------
(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.
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:February 9, 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 February 9, 2000
- ----------------------- Director
Grant S. Kesler (Principal Executive Officer)
/s/Anthony C. Dabbene Chief Financial Officer and February 9, 2000
- ----------------------- Director
Anthony C. Dabbene (Principal Financial and
Accounting Officer)
/s/Bruce H. Haglund Secretary and Director February 9, 2000
- ----------------------
Bruce H. Haglund
/s/J. Thomas Talbot Director February 9, 2000
- ----------------------
J. Thomas Talbot
/s/Raymond J. Pacini Director February 9, 2000
- ----------------------
Raymond J. Pacini
<PAGE>
ITEM 14(A)(1) and (2)
METALCLAD CORPORATION AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
The following Consolidated Financial Statements of Metalclad Corporation
and subsidiaries are included in Item 8:
Reports of Independent Public Accountants on Consolidated Financial
Statements:
Report of Moss Adams LLP...................................... F-1
Report of Arthur Andersen LLP................................. F-2
Financial Statements:
Consolidated Balance Sheets - December 31, 1998 and 1997...... F-3
Consolidated Statements of Operations - the Years Ended
December 31, 1998 and 1997, Seven Months Ended December 31,
1996 and the Year Ended May 31, 1996.......................... F-4
Consolidated Statements of Shareholders' Equity - the Years
Ended December 31, 1998 and 1997, Seven Months Ended
December 31, 1996 and the Year Ended May 31, 1996............. F-5
Consolidated Statements of Cash Flows - the Years Ended
December 31, 1998 and 1997, Seven Months Ended December 31,
1996 and the Year Ended May 31, 1996..................... .... F-6-7
Notes to Consolidated Financial Statements.................... F-8
Supplementary Financial Statement Schedules:
Schedule II - Valuation and Qualifying Accounts............... F-25
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
The Board of Directors and Shareholders of Metalclad Corporation:
We have audited the accompanying consolidated balance sheet of Metalclad
Corporation (a Delaware Corporation) and subsidiaries as of December 31,
1998, and the related consolidated statements of operations, shareholders'
equity and cash flows for the year ended December 31, 1998. 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 generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Metalclad Corporation
and subsidiaries as of December 31, 1998, and the results of their
operations and their cash flows for the year ended December 31, 1998 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 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, 1998 has
been subjected to the auditing procedures applied in the audit 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.
/s/MOSS ADAMS LLP
Costa Mesa, California
March 24, 1999
<PAGE>
<TABLE><S><C>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
The Board of Directors and Shareholders of
Metalclad Corporation:
We have audited the accompanying consolidated balance sheet of Metalclad Corporation (a Delaware Corporation) and
subsidiaries as of December 31, 1997, and the related consolidated statements of operations, shareholders' equity and
cash flows for the year ended December 31, 1997, the seven months ended December 31, 1996 and the year ended May 31,
1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide
a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial
position of Metalclad Corporation and subsidiaries as of December 31, 1997, and the results of their operations and
their cash flows for the year ended December 31, 1997, the seven months ended December 31, 1996 and the year ended May
31, 1996 in conformity with generally accepted accounting principles.
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 year ended December
31, 1997, the seven months ended December 31, 1996 and the year ended May 31, 1996 has been subjected to the auditing
procedures applied in the audits 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.
/s/ARTHUR ANDERSEN LLP
Orange County, California
April 15, 1998
</TABLE>
<PAGE>
Metalclad Corporation and Subsidiaries
CONSOLIDATED BALANCE SHEET
<TABLE><S> <C> <C>
December 31,
1998 1997
------------- -------------
ASSETS
Current assets:
Cash and cash equivalents $ 519,940 $ 1,510,667
Accounts receivable, less allowance for doubtful accounts of $20,000 at
December 1998, and $28,907 at December 1997 828,686 1,414,984
Costs and estimated earnings in excess of billings on uncompleted contracts 143,672 232,073
Inventories 176,697 161,241
Prepaid expenses and other current assets 58,492 141,325
Receivables from related parties 151,765 96,466
---------- ----------
Total current assets 1,877,252 3,556,756
Property, plant and equipment, net 271,592 87,458
Net assets of discontinued operations 9,096,300 7,846,000
Other assets 43,162 43,262
---------- ----------
$11,288,306 $11,533,476
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 636,096 $ 860,330
Current liabilities, net--discontinued operations 2,886,067 500,316
Accrued expenses 913,772 453,144
Billings in excess of costs and estimated earnings on uncompleted contracts 71,280 20,727
Current portion of convertible subordinated debentures - 19,533
Current portion of long-term debt 18,585 -
Convertible zero coupon notes 1,640,000 -
---------- ----------
Total current liabilities 6,165,800 1,854,050
Long-term debt, less current portion 51,949 -
Convertible long-term notes - 1,500,000
Convertible subordinated debentures 1,201,547 -
---------- ----------
Total liabilities 7,419,296 3,354,050
---------- ----------
Shareholders' equity :
Preferred stock, par value $10; 1,500,000 shares authorized; none issued - -
Common stock, par value $.10; 80,000,000 shares authorized; 30,569,122, and
30,063,870 issued and outstanding at December 1998 and 1997, respectively 3,056,912 3,006,387
Additional paid-in capital 57,404,880 56,962,689
Accumulated deficit (53,907,766) (49,129,377)
Officers' receivable collateralized by stock (544,906) (520,163)
Accumulated other comprehensive income (2,140,110) (2,140,110)
---------- ----------
3,869,010 8,179,426
---------- ----------
$11,288,306 $11,533,476
========== ==========
The accompanying notes are an integral part of these consolidated balance sheets.
</TABLE> Metalclad Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE><S> <C> <C> <C> <C>
Seven
Year Ended Year Ended Months Ended Year Ended
December 31, December 31, December 31, May 31,
------------ ----------- ----------- ----------
1998 1997 1996 1996
---- ---- ---- ----
Revenues-Insulation
Contract revenues $9,912,194 $8,533,425 $ 5,380,297 $11,208,360
Material sales 92,227 201,976 138,309 230,336
Other 4,250 235,702 - 6,390
--------- --------- ---------- ----------
10,008,671 8,971,103 5,518,606 11,445,086
--------- --------- ---------- ----------
Operating costs and expenses - Insulation
Contract costs and expenses 8,548,872 7,525,047 4,703,458 10,160,868
Cost of material sales 71,316 161,297 112,299 173,911
Selling, general and administrative 993,369 1,177,047 768,631 2,055,043
--------- --------- ---------- ----------
9,613,557 8,863,391 5,584,388 12,389,822
--------- --------- ---------- ----------
Equity in earnings of unconsolidated affiliate - - 44,915 90,817
Corporate expense (1,983,578) (2,170,683) (1,839,047) (3,676,907)
--------- --------- ---------- ----------
Operating loss (1,588,464) (2,062,971) (1,859,914) (4,530,826)
Interest income (expense) (187,011) 62,460 154,364 (370,556)
Other expense - - - 728,644
--------- --------- ---------- ----------
Loss from continuing operations (1,775,475) (2,000,511) (1,705,550) (5,630,026)
Loss from discontinued operations (3,002,914) (2,609,622) (1,574,265) (1,149,745)
--------- --------- ---------- ----------
Net loss $(4,778,389) $(4,610,133) $(3,279,815) $(6,779,771)
========== ========== ========== ==========
Weighted average number of common shares 30,362,765 29,438,062 28,910,449 22,770,516
========== ========== ========== ==========
Loss per share of common stock, continuing
operations basic and diluted $(.06) $(.07) $(.06) $(.25)
Loss per share of common stock, discontinued
operations basic and diluted $(.10) $(.09) $(.05) $(.05)
Loss per share of common stock - basic and
diluted $(.16) $(.16) $(.11) $(.30)
==== ==== ==== ====
The accompanying notes are an integral part of these consolidated statements.
</TABLE>
<PAGE>
Metalclad Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
The Years Ended December 31, 1998 and 1997,
the Seven Months Ended December 31, 1996, and
the Year Ended May 31, 1996
<TABLE><S> <C> <C> <C> <C> <C> <C> <C>
Total
Accumulated Share-
Additional Other holders'
Common Stock Paid-in Accumulated Officers' Comprehensive Equity
Shares Amounts Capital Deficit Receivable Income (Deficit)
---------- ---------- ---------- ----------- ----------- ---------- ----------
Balance at May 31, 1995 15,885,628 $1,588,563 $29,044,185 $(34,583,992) $(740,000) $(1,482,080) $(6,173,324)
Issuance of common stock 4,044,986 404,498 9,297,372 - - - 9,701,870
Common stock issued under stock
option plans and warrants 3,951,836 395,184 6,448,386 - - - 6,843,570
Conversion of debentures to
common stock 3,525,581 352,558 8,270,869 - - - 8,623,427
Officers' loans; interest &
repayments - - - - 180,808 - 180,808
Debt conversions 1,325,198 132,520 1,974,545 - - - 2,107,065
Donated capital - - (44,405) - - - (44,405)
foreign currency translation
adjustment - - - - - (393,450) (393,450)
Net loss - - - (6,779,771) - - (6,779,771)
---------- --------- ---------- ----------- ---------- ---------- ----------
Balance at May 31, 1996 28,733,229 2,873,323 54,990,952 (41,363,763) (559,192) (1,875,530) 14,065,790
Issuance of common stock 15,010 1,501 52,874 - - - 54,375
Common stock issued under stock
option plans and warrants 371,000 37,100 528,637 - - - 565,737
Conversion of debentures to
common stock 4,000 400 9,600 - - - 10,000
Officers' loans; interest &
repayments - - - - (17,448) - (17,448)
Foreign currency translation
adjustment - - - - - (283,386) (283,386)
Net loss - - - (3,279,815) - - (3,279,815)
---------- --------- ---------- ----------- ---------- ---------- ----------
Balance at December 31, 1996 29,123,239 $ 2,912,324 $55,582,063 $(44,643,578) $ (576,640) $(2,158,916) $11,115,253
Issuance of common stock 5 - - - - - -
Common stock issued under stock
option and warrants 910,626 91,063 1,274,876 - - - 1.365,939
Officers' loans; interest &
repayments - - - - 56,477 - 56,477
Stock issued under bonus plans 30,000 3,000 105,750 - - - 108,750
Other - - - 124,334 - - 124,334
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 &
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
========== ========= ========== =========== ========= ========= =========
The accompanying notes are an integral part of these consolidated statements.
</TABLE>
<PAGE>
Metalclad Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE><S> <C> <C> <C> <C>
Seven
Year Ended Year Ended Months Ended Year Ended
December 31, December 31, December 31, May 31,
------------ ----------- ----------- ------------
1998 1997 1996 1996
---- ---- ---- ----
Cash flows from operating activities:
Net loss $(4,778,389) $(4,610,133) $(3,279,815) $(6,779,771)
Adjustments to reconcile net loss to net
cash used in operating activities:
Loss from discontinued operations 3,002,914 2,609,622 1,574,265 1,149,745
Depreciation and amortization 128,921 235,045 132,026 154,555
Provision for losses on accounts receivable (8,907) - (4,572) (6,522)
(Equity) from unconsolidated affiliates - - (44,915) -
Issuance of stock for services and interest 8,441 108,750 - 399,608
Issuance of debenture for services and interest - - - 39,323
Debenture conversion expense - - - 728,644
Write down of real estate held for sale - - - 130,415
Changes in operating assets & liabilities:
Decrease (increase) in accounts receivable 595,205 690,149 (409,140) 124,400
Decrease (increase) in unbilled receivables 88,401 (57,305) (118,396) 287,033
Decrease (increase) in inventories (15,456) 152,916 7,725 42,730
Decrease (increase) in prepaid expenses and
other assets 84,833 789,093 (902,600) 657,043
Distributions from Curtom-Metalclad - 12,588 88,530 27,412
Decrease (increase) in receivables from
related parties (55,299) 16,375 25,672 97,914
Increase (decrease) in accounts payable and
accrued expenses 236,394 (1,402,629) 537,626 (539,972)
Increase (decrease) in billings over cost 50,553 (24,741) (24,289) (44,060)
Other - 1,164 - (276,095)
-------- --------- --------- ---------
Net cash used in continuing operations (662,389) (1,479,106) (2,417,883) (3,807,598)
Net cash used in discontinued operations (1,566,810) (1,922,081) (964,321) (2,348,502)
-------- --------- --------- ---------
Net cash used in operating activities (2,229,199) (3,401,187) (3,382,204) (6,156,100)
-------- --------- --------- ---------
Cash flows from investing activities:
Capital expenditures continuing operations (274,104) - (31,028) -
Capital expenditures discontinued operations (388,940) (705,240) (1,205,078) (2,089,752)
-------- --------- --------- ---------
Net cash used in investing activities (663,044) (705,240) (1,236,106) (2,089,752)
-------- --------- --------- ---------
<PAGE>
Metalclad Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(continued)
Seven
Year Ended Year Ended Months Ended Year Ended
December 31, December 31, December 31, May 31,
------------ ----------- ----------- ------------
1998 1997 1996 1996
---- ---- ---- ----
Financing activities:
Proceeds from long-term borrowings 1,392,548 1,500,000 - -
Payments on long-term borrowings
continued operations - (210,000) - (684,831)
(Borrowings) repayments by officers,
secured by stock (net) (24,743) 56,477 - 180,808
Proceeds from issuance of common stock - - 13,512 8,864,862
Proceeds from issuance of common stock
under stock option plans 111,527 - 222,250 6,843,570
Proceeds from exercise of warrants 372,750 1,365,939 384,350 -
-------- --------- --------- ---------
Net cash provided (used) continuing operations 1,852,082 2,712,416 620,112 15,204,409
Net cash provided (used) in discontinued
operations 120,391 - - (210,471)
-------- --------- --------- ---------
Net cash provided by financing activities 1,972,473 2,712,416 620,112 14,993,938
Effects of exchange rates on cash 139,969 (22,672) (83,088) (118,443)
Loss on foreign currency translations (210,926) (2,413) - -
-------- --------- --------- ---------
Increase (decrease) in cash and cash
equivalents (990,727) (1,419,096) (4,081,286) 6,629,643
Cash and cash equivalents at beginning of period 1,510,667 2,929,763 7,011,049 381,406
-------- --------- --------- ---------
Cash and cash equivalents at end of period $ 519,940 $1,510,667 $2,929,763 $7,011,049
========= ========== ========== ==========
Supplemental disclosures of cash flow information:
Cash paid for interest $ 1,603 $ 114,820 $ 211,537 $ 951,968
========= ========== ========== ==========
Supplemental schedule of noncash investing and financing activities:
During fiscal year ended May 31, 1996, 125,000 shares of common stock were issued at $3.50 per share as additional
consideration for the acquisition of COTERIN (see Note C).
During fiscal year ended May 31, 1996, approximately $8.6 million in convertible subordinated debentures converted
into common stock of the Company at the induced conversion rate of $2.50 per share. Debenture conversion rate at the time
of the offer by the Company was $2.82 per share.
During fiscal year ended May 31, 1996, approximately $2.1 million in debt converted into common stock of the Company
at the conversation rate of $1.59 per share.
The accompanying notes are an integral part of these consolidated statements.
</TABLE>
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").
On October 13, 1997, the Company filed a claim for arbitration against
Mexico under provisions of the North American Free Trade Agreement ("NAFTA").
The claim alleges the Company has been denied the right to operate its
permitted and fully constructed landfill facility in the State of San Luis
Potosi, thereby causing the facility to be, as a practical matter,
expropriated. The Company believes it is entitled to the fair market value
of the facility as damages. A final hearing on the Company's claim has been
scheduled to commence on August 30, 1999, with a decision anticipated
shortly thereafter. The decision in the NAFTA arbitration will be material
to the Company, however, no assurances can be given of the Company being
successful.
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
is discontinuing any further investment in Mexico and is seeking to sell its
remaining businesses in Mexico. (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 pursue its NAFTA claim, the sale of its
Mexican businesses and 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 has halted any further funding
for development in Mexico. 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.
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.
Contracts in Process
- --------------------
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.
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.)
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.
Loss Per Share
- --------------
The Company computes loss per share in accordance with 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 stockholders 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 anti-dilutive, there is no
difference between the loss per share amounts computed for basic and diluted
purposes.
Stock-Based Compensation
- ------------------------
Effective June 1, 1996, the Company adopted the disclosure provisions of
SFAS No. 123, "Accounting for Stock-Based Compensation". SFAS No. 123
requires the Company to disclose pro forma net income and earnings per share
as if the fair value based accounting method of SFAS No. 123 had been used
to account for stock based compensation. These disclosures are included in
Note J.
Income Taxes
- ------------
The Company accounts for income taxes using the liability method as
prescribed by Financial Accounting Standards No. 109, "Accounting for 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. The value of the Mexican
Peso relative to the U.S. Dollar declined from approximately 3.4 Mexican
Pesos in June 1994 to approximately 9.85 Mexican Pesos to the U.S. Dollar
at December 31, 1998. The resulting translation adjustments were recorded
as a separate component of shareholders' equity.
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 is discontinuing 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
During the year ended May 31, 1994, the Company formed a Mexican holding
company, Ecosistemas Nacionales, S.A. de C.V. (ECONSA), to ultimately hold
the common stock of Ecosistemas del Potosi, S.A. de C.V. (ECOPSA),
Confinamiento Tecnico de Residuos Industriales, S.A. de C.V. (COTERIN),
Consultoria Ambiental Total, S.A. de C.V. (CATSA), Quimica Omega, S.A. de
C.V. (QUIMICA OMEGA), Administracion de Residuos Industriales, S.A. de C.V.
("ARI") and Ecosistemas El Llano, S.A. de C.V. ("El Llano").
During the fourth quarter of 1998, management committed to a plan to sell
its Mexican operations to a third party. Consequently, this segment of the
Company's business is now being reported as discontinued operations.
Although the exact timing is difficult to predict, the Company expects to
dispose of its interests in its Mexican businesses during fiscal year 1999.
The loss from discontinued operations during fiscal 1998 includes a
provision for anticipated closing costs and operating losses until disposal
of $450,000. Based on information currently available, the Company does not
anticipate that it will incur a loss on the sale of the reported net assets
of the discontinued operations. However, upon completion of a sale of all
of the discontinued operations, the Company will be required to record a
total charge of approximately $2,140,000 related to accumulated foreign
currency translation losses that are currently recorded as a component of
stockholders' equity. This expense will be recorded on a pro rata basis as
each portion of the discontinued operations' assets are sold.
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:
<PAGE>
Year Ended Year Ended Seven Months Year Ended
December 31, December 31, December 31, May 31,
1998 1997 1996 1996
------------ ------------ ------------ ----------
Net Sales $5,232,554 $2,913,720 $631,884 $3,456,680
Operating loss (2,587,300) (2,517,467) (1,382,847) (560,082)
Interest expense (415,614) (92,155) (191,418) (589,663)
--------- --------- --------- ---------
Loss from discontinued
operations $(3,002,914) $(2,609,622) $(1,574,265) $(1,149,745)
========= ========= ========= =========
The net assets of discontinued operations are as follows:
December 31, 1998 December 31, 1997
----------------- -----------------
Current assets $ 1,068,803 $ 1,682,097
Current liabilities (3,954,870) (2,182,413)
---------- ----------
Net current liabilities (2,886,067) (500,316)
---------- ----------
Property, plant and equipment, net 7,676,774 6,263,408
Other assets 1,419,526 1,582,592
---------- ----------
Net non-current assets (3,954,870) (2,182,413)
---------- ----------
Net assets of discontinued
operations $6,210,233 $7,345,684
========= =========
Included in property, plant and equipment of discontinued operations, net
at December 31, 1998, is approximately $4,323,000 representing the Company's
investment in its completed hazardous waste treatment facility in the State
of San Luis Potosi, Mexico, known as "El Confin". Additionally, the Company
has unamortized goodwill of approximately $507,000 associated with this
facility. The Company has been granted all necessary federal governmental
authorizations to open and operate the facility but, as yet, has not
received the support of the state and local governments. Consequently, on
October 2, 1996, the Company filed a Notice of Intent to File Claim Under
the North American Free Trade Agreement ("NAFTA"). The Claim was filed with
the International Centre for Settlement of Investment Disputes ("ICSID") in
Washington, D.C. On January 13, 1997, the Secretary General of ICSID
registered the Company's claim and notified both the United States and
Mexican governments of the registration. On October 13, 1997, the Company
filed its detailed memorial, or claim, and on February 17, 1998, Mexico
filed its counter-memorial, or response. The Company filed a reply brief
on August 21, 1998 and Mexico is scheduled to file its response on April 19,
1999. A final hearing on the issues is scheduled for August 30, 1999. 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 $4,830,000 may be impaired and could potentially
result in a write off should the Company be unable to sell or otherwise
recover its investment.
NOTE C - REALIZATION OF ASSETS
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
Curtom-Metalclad
- ----------------
In 1989, the Company entered into a joint venture with a minority service
firm ("Curtom-Metalclad") to perform industrial insulation and industrial
asbestos abatement services similar to those performed by the Company. When
contracts are obtained by the joint venture, the Company performs the work
specified in the contract as a subcontractor to the joint venture.
Curtom-Metalclad's operations and financial position are not material to the
Company taken as a whole.
NOTE E - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following:
December 31, 1998 December 31, 1997
----------------- -----------------
Machinery & equipment $ 525,766 $ 490,893
Automotive equipment 183,087 -
Leasehold improvements 1,039 1,039
--------- ---------
709,892 491,932
Less accumulated depreciation
and amortization (438,300) (404,474)
--------- ---------
$ 271,592 $ 87,458
========= =========
NOTE F ACCRUED EXPENSES
Accrued expenses consist of the following:
December 31, 1998 December 31, 1997
----------------- -----------------
Wages, bonuses and taxes $ 467,873 $125,521
Union dues 97,933 105,325
Accounting fees 112,700 120,000
Other 235,266 102,298
--------- -------
$ 913,772 $453,144
========= =======
NOTE G 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 April 15, 1999. These notes are secured by 100% of
the stock of Metalclad Insulation Corporation, the carrying value of
Insulation is $1,343,000 as of December 31, 1998. In February 1998, the
conditions triggering the convertibility of the notes and the issuance of
warrants were met.
In June 1998, the Company registered 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 on going 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 $1.50 per share, and are now
convertible into shares of the Company's common stock at $.25 per share.
NOTE H - CONVERTIBLE SUBORDINATED DEBENTURES
In November 1993, the Company issued $3,840,000 of convertible subordinated
debentures due in 60 months, bearing interest at 9% and convertible into
shares of common stock at the rate of $5.50 per share subject to certain
adjustments. During the year ended May 31, 1994, the Company also issued
an additional $732,359 principal amount of convertible subordinated
debentures due in 60 months, bearing interest at 8%, and convertible into
shares of common stock at the rates of $4.00 and $5.00 per share subject to
certain adjustments.
In August 1995, the Company offered to convert all outstanding debentures
into shares of common stock at a conversion price below the stated price on
the debentures. As of May 31, 1996, approximately $8,600,000 of these
debentures converted at the rate of $2.50 per share and the Company
recognized a charge of $729,000 due to the lower conversion price offer.
All of these debentures have now either converted or have been retired.
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
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.
In August 1998, the Company issued $350,000 in 10% Convertible Subordinated
Debentures due in August 2001. 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. The debentures are also redeemable at the
option of the company when the average closing bid and ask prices of the
Company's common stock closes at prices higher than $3.00 per share for 20
days in any 30-day period.
<PAGE>
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:
December 31, 1998 December 31, 1997
----------------- -----------------
Assets:
Allowances established against
realization of certain assets $ 10,000 $ 12,000
Net operating loss carryforwards 8,878,800 8,144,416
Accrued liabilities and other 206,165 139,200
--------- ---------
9,094,965 8,295,616
Valuation allowance (9,094,965) (8,295,616)
--------- ---------
$ - $ -
========= =========
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, 1998, the Company has available for U.S. Federal and
California income tax purposes net operating loss carryforwards of
approximately $19,000,000 and $7,000,000, respectively. These carryforward
amounts expire in the years 2000 through 2018 and 1999 through 2003,
respectfully. At December 31, 1998, the Company has available investment
credits of approximately $32,300 to offset future U.S. Federal income tax
liability. The ultimate utilization of the net operating loss and investment
credit carryforwards may be restricted in the future due to changes in the
ownership of the Company. The Company also has Mexican net operating loss
carryforwards of approximately $6,000,000 which may be utilized to offset
future taxable income. The Mexican losses are subject to a ten-year tax
carryforward period and expire in the years 2002 through 2008.
The Company has recorded a valuation allowance for that portion of the
deferred tax asset that the Company does not believe to be realizable.
NOTE J - SHAREHOLDERS' EQUITY
Stock Options
- -------------
On August 18, 1992, the Company adopted an omnibus stock option plan (the
"1992 Plan") which authorized the issuance of 1,600,000 options to acquire
the Company's common stock. At December 31, 1998, there were options
outstanding under the 1992 Plan for 770,000 shares, and none available for
grant. These options will expire 10 years from the date of grant.
On March 24, 1993, the Company adopted an omnibus stock option plan (the
"1993 Plan") which authorized the issuance of 1,000,000 options to acquire
the Company's common stock. The terms of the 1993 Plan are the same as the
1992 Plan. At December 31, 1998, there were options outstanding under the
1993 Plan for 674,500 shares, and 500 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 6,000,000 options to acquire the
Company's common stock. At December 31, 1998 there were no options
outstanding under this plan.
During the year ended December 31, 1998, 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 2,463,000
shares of common stock. The options were granted at exercise prices equal
to or exceeding the fair market value of the Company's common stock on the
measurement date, expire 10 years from the date of grant and have various
vesting schedules.
The following is a summary of options granted:
<TABLE><S> <C> <C> <C> <C> <C> <C> <C> <C>
Year Ended Year Ended Seven Months Ended Year Ended
December 31, 1998 December 31, 1997 December 31, 1996 May 31, 1996
----------------- ----------------- ------------------ -------------------
Weighted Weighted Weighted Weighted
Average Average Average Average
Exercise Exercise Exercise Exercise
Shares Price Shares Price Shares Price Shares Price
----------- ----- ----------- ----- ----------- ----- ----------- -----
Options outstanding at
beginning of the year 3,923,000 $2.23 4,848,250 $2.75 7,904,250 $3.07 4,487,500 $2.17
Granted 2,463,000 1.38 890,000 1.47 300,000 3.00 5,040,000 3.56
Exercised (178,500) .75 - - (161,000) 1.38 (1,547,000) 2.10
Canceled (131,000) 2.09 (1,815,250) 3.25 (3,195,000) 3.63 (76,250) 2.25
--------- ---- --------- ---- --------- ---- --------- ----
Options outstanding at
end of the year 6,076,500 $1.93 3,923,000 $2.23 4,848,250 $2.75 7,904,250 $3.07
========= ==== ========= ==== ========= ==== ========= ====
Options Exercisable 5,721,000 3,699,000 2,982,000 2,855,750
========= ========= ========= =========
</TABLE>
The following significant assumptions were utilized to calculate the fair
value information presented utilizing the Black-Scholes Multiple Option
Approach:
<PAGE>
December December December
1998 1997 1996
-------- -------- --------
Risk Free interest rate 6.00% 6.00% 6.10%
Expected life 1.5 years 1.31 years 1.2 years
Expected volatility 1.07 .9877 1.05
Expected dividends - - -
Weighted average fair value of
options granted .608 .615 3.36
<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 exercise exercisable
exercise
exercise prices as of 12/31/98 life in years price as of 12/31/98 price
- --------------- --------------- -------------- --------- -------------- --------
$0.560 - $1.438 613,000 8.84 $1.0911 559,000 $1.0682
$1.500 - $1.500 2,036,500 9.01 $1.5000 1,835,000 $1.5000
$1.625 - $1.625 500,000 8.01 $1.6250 500,000 $1.6250
$2.250 - $2.250 2,207,000 5.56 $2.2500 2,107,000 $2.2500
$2.500 - $3.000 580,000 7.53 $2.8276 580,000 $2.8276
$3.625 - $3.625 50,000 7.01 $3.6250 50,000 $3.6250
$4.500 - $4.500 90,000 7.01 $4.5000 90,000 $4.5000
- --------------- --------- ---- ------- --------- -------
$0.560 - $4.500 6,076,500 7.47 $1.9301 5,721,000 $1.9453
=============== ========= ==== ======= ========= =======
</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 Year Seven Months Year
Ended Ended Ended Ended
Dec. 31, Dec. 31, Dec. 31, May 31,
1998 1997 1996 1996
---- ---- ---- ----
Net loss $(4,778,000) $(4,610,000) $(3,280,000) $(6,780,000)
Pro forma
compensation
expense (1,497,000) (547,000) (355,000) (1,023,000)
--------- --------- --------- ---------
Pro forma net
loss $(6,275,000) $(5,157,000) $(3,635,000) $(7,803,000)
========== ========== ========== ==========
Pro forma loss
per share $(.21) $(.17) $(.13) $(.34)
==== ==== ==== ====
The effects of applying FASB 123 in this pro forma disclosure are not
indicative of future amounts.
Stock Purchase Warrants
- -----------------------
In connection with various debt offerings, stock placements and services
provided, the Company has issued various stock purchase warrants. All such
warrants were issued at prices which approximated or exceeded fair market
value of the Company's common stock at the date of grant and are exercisable
at dates varying from one to five years.
Summarized information for stock purchase warrants is as follows:
<TABLE><S> <C> <C>
Number Price
of Warrants Per Share
----------- ---------
Warrants outstanding at May 31, 1996 7,365,385 $1.59-5.00
Issued - -
Exercised (210,000) 1.51-2.00
--------- ---------
Warrants outstanding at December 31, 1996 7,155,385 1.51-5.00
Issued 1,110,626 1.50
Exercised (910,626) 1.50
Expired (693,500) 2.00-2.25
--------- ---------
Warrants outstanding at December 31, 1997 6,661,885 1.50
Issued 2,568,400 1.25-1.50
Exercised (320,000) 1.25
Expired (221,000) 1.50-5.00
--------- ---------
Warrants outstanding at December 31, 1998 8,689,285 $1.25-$2.25
========= ==========
</TABLE>
As a result of the implementation of the ratchet clause contained in most
of the warrants issued by the Company, the shares underlying the Company's
warrants were increased significantly in 1999.. As a further result of the
Company's negotiations with its warrant holders, the ratchet effects have
been frozen and are reflected in the following table as of March 15, 1999:
<PAGE>
Underlying Exercise Price
Shares Per Share
------ ---------
Shares underlying the warrants at
December 31, 1998 27,259,273 $.25-$2.25
Shares issued from exercises (2,773,400) .25
Shares underlying new warrants issued 1,773,400 .35
---------- ---------
Total underlying shares of warrants
outstanding 26,259,273 $.25-$2.25
========== =========
Common Stock
- ------------
During the year ended December 31, 1997, the Company issued a total of
940,600 shares, with 910,600 being the result of warrant exercises and
30,000 issued as stock bonuses previously accrued in 1996. The Company
realized net proceeds of $1,366,000 from these transactions.
During the year ended December 31, 1998, the Company issued 505,252 shares,
with 320,000 being the result of warrant exercises, 178,500 being from the
exercise of warrants and 6,752 being for services. The Company realized net
proceeds of $484,000 from these transactions.
NOTE K - EMPLOYEE BENEFIT PLANS
Effective January 1, 1990, the Company established a contributory profit
sharing and thrift plan for all salaried employees. Discretionary matching
contributions are made by the Company based upon participant contributions,
within limits provided for in the plan. No contributions were made in the
years ended December 31, 1998 and 1997, the seven months ended December 31,
1996 or the year ended May 31, 1996, respectively.
Additionally, the Company participates in several multi-employer plans,
which provide defined benefits to union employees of its participating
companies. The Company makes contributions determined in accordance with
the provisions of negotiated labor contracts. The contributions were
$222,443, $257,000, $127,000 and $296,000 for the years ended December 31,
1998 and 1997, the seven months ended December 31, 1996 and for the fiscal
year ended May 31, 1996, respectively.
NOTE L - SIGNIFICANT CUSTOMERS
Sales for the twelve months 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 $151,000, ARCO of $110,000, Edison of $177,000 and Equilon of $118,000.
Sales for the twelve months ended December 31, 1997 to Curtom-Metalclad were
approximately $3,573,000, including $3,533,000 performed at Edison plants
under the strategic alliance program. The Company had trade accounts
receivable of $355,000 from Curtom-Metalclad as of December 31, 1997.
Additionally, the Company had sales of $1,455,000 and $1,557,000 to Texaco
and Arco, respectively, during 1997. Accounts receivable from these two
customers were $128,000 and $489,000, respectively, as of December 31, 1997.
Sales for the seven months ended December 31, 1996 to Curtom-Metalclad were
approximately $3,445,000, including $3,345,000 performed at Edison plants.
The Company had trade accounts receivable of $1,602,000 from Curtom-Metalclad
as of December 31, 1996.
Sales to Southern California Edison and Curtom-Metalclad were approximately
$2,417,000 and $1,267,000, respectively, in the year ended May 31, 1996.
<PAGE>
NOTE M - COMMITMENTS AND CONTINGENT LIABILITIES
The Company has employment agreements with its executive officers. These
agreements continue until terminated by the executive or the Company and
provide for minimum salary levels, as adjusted for cost of living changes.
These agreements include incentive bonuses based upon specified management
goals, and a covenant against competition with the Company extending for a
period of time after termination.
The Company leases its facilities under non-cancelable operating lease
agreements which expire at various dates through 2002. Total rent expense
under operating leases was $178,245, $307,839, $168,722, and $404,647 for
the years ended December 31, 1998 and 1997, seven months ended December 31,
1996 and for the years ended May 31, 1996, respectively. Future minimum
non-cancelable lease commitments (assuming renewal of the Anaheim lease) are
as follows:
Year ending December 31, 1999 $211,788
2000 237,660
2001 149,878
2002 60,957
-------
$660,283
=======
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 coverages with financially
sound carriers responding to these claims and does not foresee any financial
exposure resulting from these claims. The litigation involving the Company
at the Texaco oil refinery is outside of this coverage and is covered by a
separate project-specific policy. Any decision in this case will not affect
coverage available for the 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.
NOTE N - RELATED PARTY TRANSACTIONS
Receivables from related parties are comprised of the following:
<PAGE>
December 31, December 31,
1998 1997
----------- -----------
Parc-Metalclad $ - $ 12,644
Loans to executive officers,
directors and employees 61,570 83,822
Other 90,195 -
------- -------
$151,765 $ 96,466
======= =======
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 $0, $47,000, $54,000, and
$283,000 for the years ended December 31, 1998 and 1997, the seven months
ended December 31, 1996 and the year ended May 31, 1996, respectively.
During fiscal 1995 the Company loaned $370,000 each to Grant S. Kesler and
T. Daniel Neveau, officers of the Company. The loans are collateralized by
180,000 shares of common stock of the Company. The loans accrued interest
at 7% over prime which was 9% at May 31, 1995. In February 1996, Messrs.
Kesler and Neveau each repaid $150,000 to the Company. In March 1996, the
notes were amended to modify the loan principal between Messrs. Kesler and
Neveau as well as to adjust the interest rates, effective March 1, to a
variable rate based upon the Company's quarterly investment rate. The
amendment also stipulated that the notes be re-paid by May 31, 1997. The
repayment of these notes has been extended until December 31, 1999.
In December 1996, the Company loaned $150,000 to Mr. Javier Guerra Cisneros,
a Director and Vice President of Mexico Operations. The loan is
collateralized by 300,000 shares of stock of the Company and is represented
by a promissory note bearing interest at 10%. In February 1997, Mr. Guerra
repaid $120,000 of this note. The repayment of this note has been extended
until the earlier of the Company's sale of its Mexican operations or
December 31, 1999.
NOTE O - UNAUDITED INTERIM INFORMATION
The following condensed financial information for the twelve month and seven
month periods ended December 31, 1997 and December 31, 1996 is unaudited and
is being presented for comparative purposes.
<PAGE>
<TABLE><S> <C> <C> <C> <C>
Twelve Months Ended Seven Months Ended
December 31, December 31,
--------------------------- ---------------------------
1997 1996 1996 1995
---- ---- ---- ----
Revenues - Insulation Business $8,971,103 $10,144,474 $5,518,606 $6,910,000
Revenues - Waste Management(1) 2,913,720 2,320,398 631,884 1,450,860
Operating Income (Loss) - Insulation Business 107,712 (873,517) (20,867) (1,269)
Operating Loss - Waste Management(1) (2,609,622) (2,019,015) (1,574,265) 76,086
Corporate Expense 2,170,683 3,726,947 1,839,047 1,789,007
Interest (Income) Expense (62,460) 163,123 (154,365) 834,149
Other Expense - - - 728,644
--------- --------- --------- ---------
Net Loss $(4,610,133) $(6,782,602) $(3,279,815) $(3,276,983)
========== ========== ========== ==========
Net Loss Per Share - Basic and Diluted $(.16) $(.24) $(.11) $(.17)
==== ==== ==== ====
(1) The waste management business was discontinued in 1998. See Note B.
</TABLE>
Metalclad Corporation and Subsidiaries
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, 1998:
Deducted from asset accounts:
Allowance for doubtful accounts $28,907 $ 0 $ 0 $ 8,907 $ 20,000
Allowance for excess and
obsolete inventory 16,009 0 0 11,009 5,000
- ------------------------------------------------------------------------------------------------------
Year ended December 31, 1997:
Deducted from asset accounts:
Allowance for doubtful accounts $28,907 $ 0 $ 0 $ 0 $ 28,907
Allowance for excess and
obsolete inventory 25,289 0 0 9,280 16,009
- ------------------------------------------------------------------------------------------------------
Year ended December 31, 1996:
Deducted from asset accounts:
Allowance for doubtful accounts $33,479 $ 0 $ 0 $ 4,572 $28,907
Allowance for excess and
obsolete inventory 25,000 289 0 0 25,289
- ------------------------------------------------------------------------------------------------------
Year ended May 31, 1996:
Deducted from asset accounts:
Allowance for doubtful accounts $40,001 $ 0 $ 0 $ 6,522 $33,479
Allowance for excess and
obsolete inventory 25,000 0 0 0 25,000
- ------------------------------------------------------------------------------------------------------
</TABLE>
F25
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> Dec-31-1998
<PERIOD-START> Jan-01-1998
<PERIOD-END> Dec-31-1998
<CASH> 520
<SECURITIES> 0
<RECEIVABLES> 849
<ALLOWANCES> (20)
<INVENTORY> 177
<CURRENT-ASSETS> 1877
<PP&E> 710
<DEPRECIATION> (438)
<TOTAL-ASSETS> 11288
<CURRENT-LIABILITIES> 6166
<BONDS> 2842
<COMMON> 3057
0
0
<OTHER-SE> 812
<TOTAL-LIABILITY-AND-EQUITY> 11288
<SALES> 10004
<TOTAL-REVENUES> 10009
<CGS> 8620
<TOTAL-COSTS> 11597
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (187)
<INCOME-PRETAX> (4778)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1775)
<DISCONTINUED> (3003)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4778)
<EPS-BASIC> (.16)
<EPS-DILUTED> (.16)
</TABLE>
