-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, MN0OLlMv1NmXD5BYMfAVd11Sahey90v2DWYrBIZebjTAwp300MSaW1KwZH1exgkH +X3ThVmWDvcq0esDH8J0BA== 0000013547-00-000004.txt : 20000210 0000013547-00-000004.hdr.sgml : 20000210 ACCESSION NUMBER: 0000013547-00-000004 CONFORMED SUBMISSION TYPE: 10-K/A PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 20000209 FILER: COMPANY DATA: COMPANY CONFORMED NAME: METALCLAD CORP CENTRAL INDEX KEY: 0000013547 STANDARD INDUSTRIAL CLASSIFICATION: CONSTRUCTION SPECIAL TRADE CONTRACTORS [1700] IRS NUMBER: 952368719 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K/A SEC ACT: SEC FILE NUMBER: 000-02000 FILM NUMBER: 528630 BUSINESS ADDRESS: STREET 1: 2 CORPORATE PLAZA STREET 2: SUITE 125 CITY: NEWPORT BEACH STATE: CA ZIP: 92660 BUSINESS PHONE: 9497191234 MAIL ADDRESS: STREET 1: 2 CORPORATE PLAZA STREET 2: SUITE 125 CITY: NEWPORT BEACH STATE: CA ZIP: 92660 FORMER COMPANY: FORMER CONFORMED NAME: BOWER INDUSTRIES INC DATE OF NAME CHANGE: 19870618 FORMER COMPANY: FORMER CONFORMED NAME: PHOENIX GEMS INC DATE OF NAME CHANGE: 19730617 10-K/A 1 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: 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
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: 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
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. 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. 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".
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. 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 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 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 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
Metalclad Corporation and Subsidiaries CONSOLIDATED BALANCE SHEET 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.
Metalclad Corporation and Subsidiaries CONSOLIDATED STATEMENTS OF OPERATIONS 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.
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 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.
Metalclad Corporation and Subsidiaries CONSOLIDATED STATEMENTS OF CASH FLOWS 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) -------- --------- --------- --------- 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.
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: 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. 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: 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 ========= ========= ========= =========
The following significant assumptions were utilized to calculate the fair value information presented utilizing the Black-Scholes Multiple Option Approach: 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 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 =============== ========= ==== ======= ========= =======
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: 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 ========= ==========
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: 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. 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: 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. 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.
Metalclad Corporation and Subsidiaries SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS 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 - ------------------------------------------------------------------------------------------------------
F25 EX-27 2 ARTICLE 5 FIN. DATA SCHEDULE FOR FORM 10-K/A
5 1,000 YEAR Dec-31-1998 Jan-01-1998 Dec-31-1998 520 0 849 (20) 177 1877 710 (438) 11288 6166 2842 3057 0 0 812 11288 10004 10009 8620 11597 0 0 (187) (4778) 0 (1775) (3003) 0 0 (4778) (.16) (.16)
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