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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------------
FORM 10-K
(Mark One)
( X ) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED]
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the year ended December 31, 1999
Commission File Number 0-2000
METALCLAD CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 95-2368719
(State or other jurisdiction of (I.R.S. Employer ID No.)
incorporation or organization)
2 Corporate Plaza, Suite 125
Newport Beach, California 92660
(Address of Principal Executive Office) (Zip Code)
Registrant's telephone number, including area code (949) 719-1234
--------------------------------
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
- ------------------- ---------------------
None None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock -- $.10 Par Value
(Title of Class)
-----------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes ( X ) No ( )
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. ( X )
The aggregate market value of the Common Stock held by non-affiliates
of the registrant on March 15, 2000 was approximately $17,000,000, based
upon the average of the bid and asked prices of the Common Stock, as
reported on The Nasdaq Stock Market .
The number of shares of the Common Stock of the registrant
outstanding as of March 15, 2000 was 5,150,498.
Documents incorporated by reference:
Portions of the Company's Proxy Statement to be filed with the
Securities and Exchange Commission in connection with the Company's 2000
Annual Meeting of Stockholders are incorporated by reference into Part III
hereof.
PART I
All statements, other than statements of historical fact, included in
this Form 10-K, including without limitation the statements under
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business", are, or may be deemed to be, "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933,
as amended (the "Securities Act"), and Section 21E of the Securities Exchange
Act of 1934 (the "Exchange Act"). Such forward-looking statements involve
assumptions, known and unknown risks, uncertainties, and other factors which
may cause the actual results, performance or achievements of Metalclad
Corporation (the "Company") to be materially different from any future
results, performance or achievements expressed or implied by such forward-
looking statements contained in this Form 10-K. Such potential risks and
uncertainties include, without limitation, the ability to recover the
consideration for the sale of the Company's businesses in Mexico, the
outcome of the Company's NAFTA claim for damages against Mexico, competitive
pricing and other pressures from other businesses in the Company's markets,
economic conditions generally and in the Company's primary markets,
availability of capital, cost of labor, and other risk factors detailed
herein and in other of the Company's filings with the Securities and
Exchange Commission. The forward-looking statements are made as of the date
of this Form 10-K and the Company assumes no obligation to update the
forward-looking statements or to update the reasons actual results could
differ from those projected in such forward-looking statements. Therefore,
readers are cautioned not to place undue reliance on these forward-looking
statements.
ITEM 1. BUSINESS
(a) General Development of Business
Corporate Structure. The Company, incorporated originally in 1947 as
an Arizona corporation, was reincorporated in Delaware on November 24, 1993.
The Company has wholly owned subsidiaries in both the United States and
Mexico. The Company's United States subsidiaries include Eco-Metalclad
("Eco-MTLC"), a Utah corporation, Metalclad Insulation Corporation ("MIC"),
a California corporation and Metalclad Environmental Contractors ("MEC"), a
California corporation. The Company's Mexican subsidiaries include Eco
Administracion, S.A. de C.V. ("ECOPSA"), Consultoria Ambiental Total, S.A.
de CV. ("CATSA") and Confinamiento Tecnico de Residues Industriales, S.A. de
C.V. ("COTERIN"). Each of the Mexican subsidiaries is a corporation of
variable capital.
Unless otherwise indicated, the term "Company" refers to Metalclad
Corporation and its United States and Mexican subsidiaries.
The Company's principal executive offices are located at 2 Corporate
Plaza Drive, Suite 125, Newport Beach, California 92660 and its telephone
number is (949) 719-1234. MIC and MEC serve their clients from their
headquarters in Anaheim, California. Eco-MTLC maintains its offices in
Newport Beach, California and the Company's Mexican subsidiaries' offices
are located in the city of San Luis Potosi, Mexico.
Business in the United States. For over 30 years, the Company has been
providing insulation and asbestos abatement services, primarily on the West
Coast. Through MIC and MEC, the Company provides these services to a wide
range of industrial, commercial and public agency clients. Insulation
services include the installation of high- and low-temperature insulation on
pipe, ducts, furnaces, boilers, and other types of industrial equipment and
commercial applications. Asbestos abatement services include removal and
disposal of asbestos-containing products in similar applications. The
Company fabricates specialty items for the insulation industry and sells
insulation material and accessories incident to its services business to its
customers as well as to other contractors. A diverse list of clientele
includes refineries, utilities, chemical/petrochemical plants, manufacturing
facilities, commercial properties, office buildings, and various
governmental facilities.
Business in Mexico. In 1991, the Company embarked on a strategy to
develop an integrated industrial waste management business in Mexico.
Through acquisitions and development of projects, it was the Company's
intent to provide a full-service network of locations, including treatment
and disposal facilities, to provide professional, environmentally safe,
handling and disposal of industrial waste streams.
After eight years of developing this business, the Company determined
that its efforts would not be successful due to political opposition in
Mexico. In 1997, the Company filed a $90 million claim under the North
American Free Trade Agreement ("NAFTA") to recover the value of its
investment in a completed, but unopened, treatment, storage and disposal
("TSD") facility in San Luis Potosi. This facility is held by ECOPSA and
COTERIN. See Item 3 Legal Proceedings and Note B of the Financial
Statements. Because of political interference with a second project that
was under construction and approximately 90 percent complete in
Aguascalientes, the Company is considering the filing of a second NAFTA
claim. In 1999, the Company sold its operating and project development
subsidiaries in Mexico and withdrew from the Mexican market. See Note B of
the Financial Statements.
(b) Financial Information About Industry Segments
The Company, through MIC and MEC, is engaged in insulation services,
asbestos abatement services, and insulation material sales, such activities
constituting one industry segment. The development and operation of the
industrial waste treatment business, commenced in November 1991 through
ECO-MTLC and now conducted by the Company's Mexican subsidiaries, had previously
been reported as a separate industry segment for 1995, 1996 and 1997 and is
now being reported as discontinued operations.
(c) Narrative Description of Business
Introduction
Industrial Waste Management Business. Since the Company has sold its
operations and withdrawn from Mexico and this market segment, its only
activity in this segment is the ongoing NAFTA arbitration.
Insulation Contracting Services
Background. The Company's insulation contracting services include the
installation of high- and low-temperature insulation on pipe, ducts,
furnaces, boilers, and various other types of equipment. Insulation
services are provided for new construction and maintenance of existing
facilities. The Company is a licensed general contractor and typically
provides project management, labor, tools, equipment and materials necessary
to complete the installation.
The Company usually performs substantially all of the work required to
complete its contracts, generally subcontracting to others the scaffolding
and painting. In a typical insulation contract, the Company obtains plans
and specifications prepared by the owner of a facility or its agent. In
projects where the customer is the owner of the facility, the Company acts
as the general contractor. The Company also works as a subcontractor for
other general contractors. Insulation contracts for new construction may
require one or more years to complete. Maintenance contracts typically
extend over a period of one or more years.
The Company's insulation contracting business has historically
included, among other things, maintenance, removal, repair, and
re-installation of insulation on existing facilities and equipment. These
activities included asbestos removal services in most cases in which the
insulation at such facilities has included asbestos-containing material
("ACM").
The Company removes all forms of ACM after first treating the asbestos
with water and a wetting agent to minimize fiber release. Dry removal is
conducted in special cases where wetting is not feasible, provided
Environmental Protection Agency ("EPA") approval is obtained. The Company's
workers also remove pipe insulation by cutting the wrapping into sections in
an enclosed containment area or utilizing special "glovebags" which provide
containment around the section of pipe insulation being removed. In some
instances, the Company performs asbestos removal and provides related
re-insulation contracting services, including insulation material sales; in
other cases, the Company performs only asbestos removal services. The
Company believes that the removal of ACM provides the best and most
cost-effective solution for most asbestos abatement projects.
Insulation Contracts. The Company obtains contracts, which ordinarily
fall within one of the types set forth below, on the basis of either
competitive bids or direct negotiations:
Cost-plus. These contracts, sometimes referred to as "time and
materials" contracts, generally provide for reimbursement of costs incurred
by the Company and the payment of a fee equal to a percentage of the cost of
construction. They generally provide for monthly payments covering both
reimbursement for costs incurred to date and a portion of the fee based upon
the amount of work performed and are customarily not subject to retention of
fees or costs.
Fixed-price. These contracts generally require the Company to perform
all work for an agreed upon price, often by a specified date. Such
contracts usually provide for increases in the contract price if the
Company's construction costs increase due to changes in or delays of the
project initiated or caused by the customer or owner or by escalating
project labor rates. However, absent causes resulting in increases in
contract prices, the Company takes certain risks associated with its fixed
prices. Under these types of contracts the Company receives periodic
payments based on the work performed to date, less certain retentions. The
amounts retained are held by the customer pending either satisfactory
completion of the Company's work or in some cases, satisfactory completion
of the entire project.
In accordance with industry practice, most of the Company's contracts
are subject to termination or modification by the customer, with provision
for the recovery of costs incurred and the payment to the Company of a
proportionate part of its fees, in the case of a cost-plus contract, and
overhead and profit, in the case of a fixed price contract. At various
times, contracts that the Company has with its customers have been
terminated or modified. However, such termination or modification occurs in
the regular course of the Company's business due to changes in the work to
be performed as determined by the customer. No single termination or
modification has had or is expected to have a material adverse impact on the
Company's business.
Operations and Employee Safety. All contract work is performed by
trained Company personnel and supervised by project managers trained and
experienced in construction and asbestos abatement. Each employee involved
in asbestos abatement must complete a general training and safety program
conducted by the Company. Training topics include approved work procedures,
instruction on protective equipment and personal safety, dangers of
asbestos, methods for controlling friable asbestos and asbestos
transportation and handling procedures. In addition, all full-time
employees engaged in asbestos abatement activities are required to attend a
minimum four-day course approved by EPA and the Occupational Safety and
Health Administration ("OSHA") and all supervisors of abatement projects are
required to attend a nine-hour first aid/CPR/safety course and an eight-hour
EPA/AHERA refresher course annually. Two of the Company's full-time
employees and 54 hourly employees have been trained and certified as
"competent individuals" under EPA regulations relating to the training of
asbestos abatement workers. All employees are issued detailed training
materials and the Company typically conducts a job safety analysis in the
job bidding stage.
The Company requires the use of protective equipment and sponsors
periodic medical examination of all field employees. During removal
procedures, ACM is generally wetted to minimize fiber release and filtration
devices are used to reduce contamination levels. Air monitoring to
determine asbestos fiber contamination levels is conducted on all abatement
projects involving the removal of friable asbestos. The Company has a
comprehensive policy and procedure manual that covers all activities of an
asbestos abatement project and the specific responsibilities and
implementation of Company procedures and policies to be followed on each
project. The manual is reviewed periodically by management and updated to
insure compliance with federal, state, and local regulations, to include
information from in-house project reviews findings, and to include updated
information regarding industry practices. To separate its responsibilities
and to limit liability, the Company utilizes third party, unaffiliated
laboratories for asbestos sampling analysis and licensed independent waste
haulers for the transportation and disposal of asbestos waste from its
projects.
Materials and Supplies. The Company purchases its insulating and
asbestos abatement materials and supplies from a number of national
manufacturers and the Company is not dependent on any one source for these
materials and accessories used in its insulation services and asbestos
abatement business.
Marketing and Sales
Insulation Contracting Services. The Company currently obtains most of
its insulation contracting business from existing customers and referrals by
customers, engineers, architects, and construction firms. Additional
business is obtained by referrals obtained through labor, industry, and
trade association affiliations.
Projects are also awarded through competitive bidding although major
companies frequently rely on selected bidders chosen by them based on a
variety of criteria such as adequate capitalization, bonding capability,
insurance carried, and experience. The Company is frequently invited in
this manner to bid on projects and obtains a significant amount of its
contracts through the competitive bidding process. The Company believes
that its bids are competitively priced and anticipates that in the future
its bids will continue to be competitively priced with bids submitted by
others.
The Company's marketing and sales effort emphasizes its experience,
reputation for timely performance, and knowledge of the insulation and
asbestos abatement industry. The Company is a member of the Western
Insulation Contractors Association, the National Insulation Contractors
Association, and various local business associations.
Curtom-Metalclad Joint Venture. In 1989, the Company entered into a
joint venture with a minority service firm, which qualifies for preferential
contract bidding because of minority status, with the Company owning a 49%
interest in the joint venture. The joint venture, known as "Curtom-Metalclad,"
submits bids for insulation and asbestos abatement services.
When contracts are obtained by the joint venture, the Company performs the
work specified in the contract as a subcontractor to the joint venture. The
Company also receives an interest in 49% of the profits or losses of the
joint venture.
Insulation Material Sales. The current emphasis in this area is to
primarily warehouse and supply material for projects where other Company
services are provided. The warehoused material is based on economics of
bulk purchases of the most commonly used products or projected needs on
future known projects, to handle emergencies, and to supply material sales
direct to other users as available and when solicited.
Customers. The Company's insulation customers are categorized as
Industrial or Commercial. The industrial customers are predominately public
utilities (power, natural gas and water/water treatment), major oil
companies for oil refineries and petrochemical plants, chemical and food
processors, other heavy manufacturers, and engineering/construction
companies. The Commercial customers are primarily government installations,
schools, hospitals, institutions, an array of manufacturing/commercial
facilities, and the general or mechanical construction contractors. The
Company anticipates that a significant portion of its revenues in 2000 will
continue to be from work performed for Southern California Edison, ARCO, and
Equilon.
Competition. Competition in the insulation contracting services
business is intense and is expected to remain intense in the foreseeable
future. Competition includes a few national and regional companies that
provide integrated services and many regional and local companies that
provide insulation and asbestos abatement specialty contracting services.
Most of the national and regional competitors providing integrated services
are well established and have substantially greater marketing, financial,
and technological resources than the Company. The regional and local
specialty contracting companies which compete with the Company either
provide one service or they provide integrated services by subcontracting
part of their services to other companies. The Company believes that the
primary competitive factors in these areas are price, technical performance,
and reliability. The Company obtains a significant number of its insulation
service contracts through the competitive bidding process. The Company
believes that its bids are competitively priced and anticipates that in the
future its bids will continue to be competitively priced with bids submitted
by others.
Insurance and Bonding. The Company's general liability insurance
policy provides base coverage of $1,000,000 per occurrence and excess
liability coverage of $10,000,000. Additionally, the Company maintains
separate policies for contractor pollution coverage in the amount of
$10,000,000. The Company's current insulation and asbestos abatement
services customers do not generally require performance bonds. The Company
believes, however, that its current bonding arrangements are adequate for
the Company's anticipated future needs. The Company has historically
carried insurance for liability associated with the sale of asbestos bearing
materials. Because of the age of the Company there have been several
different insurance carriers. As claims are made for liability associated
with asbestos those claims are managed by counsel for the Company and
submitted to the appropriate insurance carrier for defense depending upon
the date the claim originated. It has been more than 25 years since the
Company sold any asbestos bearing material. The Company believes that there
is adequate insurance coverage remaining and believes it has no material
exposure to any future claims.
Government Regulation
Insulation Services and Material Sales Regulation. The Company, as a
general contractor and insulation specialty contractor, is subject to
regulation requiring it to obtain licenses from several state and municipal
agencies. Other than licensing, the Company's industrial insulation
services and material sales business is not subject to material or
significant regulation.
Asbestos Abatement Regulation. Asbestos abatement operations are
subject to regulation by federal, state, and local governmental authorities,
including OSHA and the EPA. In general, OSHA regulations set maximum
asbestos fiber exposure levels applicable to employees and the EPA
regulations provide asbestos fiber emission control standards. The EPA
requires use of accredited persons for both inspection and abatement. In
addition, a number of states have promulgated regulations setting forth such
requirements as registration or licensing of asbestos abatement contractors,
training courses for workers, notification of intent to undertake abatement
projects and various types of approvals from designated entities.
Transportation and disposal activities are also regulated. The Company
believes that similar legislation may be adopted in other states and in
local building codes.
OSHA has promulgated regulations specifying airborne asbestos fiber
exposure standards for asbestos workers, engineering and administrative
controls, workplace practices, and medical surveillance and worker
protection requirements. OSHA's construction standards require companies
removing asbestos on construction sites to utilize specified control methods
to limit employee exposure to airborne asbestos fibers, to conduct air
monitoring, to provide decontamination units and to appropriately supervise
operations. EPA regulations restrict the use of spray applied ACM and
asbestos insulation, establish procedures for handling ACM during demolition
and renovations, and prohibit visible emissions during removal,
transportation and disposal of ACM.
The Company believes that it is substantially in compliance with all
regulations relating to its asbestos abatement operations, and currently has
all material government permits, licenses, qualifications and approvals
required for its operations.
Backlog. The Company's backlog for insulation services at December 31,
1999, and December 31, 1998 was $21,700,000 and $7,200,000, respectively.
Backlog is calculated in terms of estimated revenues on fixed-price and
cost-plus projects in progress or for which contracts have been executed.
The Company believes that backlog as of any date is not necessarily
indicative of future revenues. The Company estimates that its entire
backlog as of December 31, 1999 will be completed during the next eighteen
months. The majority of the Company's present business is on cost-plus
contracts for which backlog is estimated. The Company fulfills product and
supply orders promptly, and there is no backlog in the material sales
business.
Employees. As of December 31, 1999, the Company had 5 full-time
employees in its executive offices and 12 full-time employees in its
insulation business for a total of 17 employees. These include three
executive officers, project managers/estimators, purchasing, accounting, and
office staff.
As of December 31, 1999, the Company employed approximately 110 hourly
employees for insulation contracting services, nearly all of whom are
members of the International Association of Heat and Frost Insulators and
Asbestos Workers ("AFL-CIO"). The Company is a party to agreements with
various local chapters of various trade unions. The number of hourly
employees employed by the Company fluctuates depending upon the number and
size of projects that the Company has under construction at any particular
time. It has been the Company's experience that hourly employees are
generally available for its projects, and the Company has continuously
employed a number of them on various projects over an extended period of
time. The Company considers its relations with its hourly employees and the
unions representing them to be good and has experienced no recent work
stoppages due to strikes by such employees. Additionally, the trade union
agreements the Company is a party to include no strike, no work stoppage
provisions.
Directors and Executive Officers of the Company
The names, ages, and positions of the Company's directors and executive
officers (including certain significant executive officers of the Company's
principal subsidiaries) are listed below:
Director
or Officer
Name Age Since Current Position with the Company
- ------------------ --- ---------- --------------------------------------------
Anthony C. Dabbene 48 1996 Chief Financial Officer, Director
Bruce H. Haglund 48 1983 Secretary, General Counsel, Director
Grant S. Kesler 56 1991 President, Chief Executive Officer, Director
Raymond J. Pacini 44 1999 Director
Robert D. Rizzo 54 1999 President MIC/MEC
J. Thomas Talbot 64 1999 Director
Anthony C. Dabbene has been the Chief Financial Officer for the Company
since January 1996 and a Director since May 1997. Prior to his employment
with the Company, Mr. Dabbene was employed by LG & E Energy Corp. for 10
years, including service as Vice President and Controller to the Energy
Services Group. From 1973 to 1985, he was employed by EBASCO Services
Incorporated, where he was Manager-Finance and Administration for the
Western region from 1981 to 1985.
Bruce H. Haglund has served as Secretary-General Counsel of the Company
since 1983 and served as a Director of the Company from 1983 to July 1991
and again in 1999. Mr. Haglund is a principal in the law firm of Gibson,
Haglund & Paulsen in Orange County, California where he has been engaged in
the private practice of law since 1980. He is also a member of the Boards
of Directors of Aviation Distributors, Inc., HydroMaid International, Inc.,
Renaissance Golf Products, Inc., and VitriSeal, Inc.
Grant S. Kesler has served as a Director of the Company since February
1991 and has been Chief Executive Officer since May 1991. From 1982 to May
1991, he was employed by Paradigm Securities, Inc., a company he formed in
1982. In 1975, he was General Counsel to Development Associates, a real
estate development firm. Earlier, he was engaged in the private practice of
law, served as an assistant attorney general for the State of Utah, and
served as an intern to the chief justice of the Utah Supreme Court.
Raymond J. Pacini is the President, Chief Executive Officer, and a
Director of California Coastal Communities, Inc. (formerly Koll Real Estate
Group, Inc.), where he has been since 1990. Prior to 1998, he was the
Executive Vice President and Chief Financial Officer of Koll Real Estate
Group, Inc.
Robert D. Rizzo joined the Company as President of Metalclad Insulation
in November 1999. Prior to joining Metalclad, Mr. Rizzo was project manager
for major projects at PDG Environmental, Inc. He has over 25 years
experience in finance, engineering and construction. Mr. Rizzo has a B.S.
in Civil Engineering and an MBA.
J. Thomas Talbot is the owner of The Talbot company, an investment and
asset management company. Mr. Talbot has been the Chief Executive Officer
of HAL, Inc., the parent company of Hawaiian Airlines and was a founder or
co-founder of Jet American Airlines (sold to Alaska Airlines), Air
California, and Southwest Airlines. He currently serves on the boards of
directors of The Hallwood Group, Inc., Fidelity National Financial, Inc.,
California Coastal Communities, Inc., Competisys LLC and The Pacific Club.
Mr. Talbot holds a B.A. in Economics from Stanford University and a J.D.
from Hastings College of Law, University of California, Berkeley.
ITEM 2. PROPERTIES
The Company leases space for its offices and warehouse facilities under
leases of varying terms at rentals aggregating approximately $19,619 per
month. The Company's executive offices are located in Newport Beach,
California, which consists of approximately 3,000 square feet leased at a
current rate of $6,143 per month. The Newport Beach lease expires in
September 2002. Facilities in Anaheim, California house the Southern
California industrial insulation services and the insulation material sales
operations. The Anaheim facility consists of 26,000 square feet of office
and warehouse space that is leased at the current rate of $13,476 per month.
The Anaheim lease expires in April 2002.
ECOPSA owns an approximately 92-hectare parcel (approximately 227
acres) of land in Santa Maria del Rio near San Luis Potosi, Mexico.
COTERIN owns approximately 2,200 acres of land near La Pedrera in the
Mexican State of San Luis Potosi on which El Confin is located.
ITEM 3. LEGAL PROCEEDINGS
Given the Company's long history in the insulation business and in the
sale of insulation materials, it is subject to various claims related to
prior asbestos-related business as well as its current business. While the
number of these claims is over 300, the Company believes it has adequate
insurance in place, had adequate insurance in prior years and is rigorously
defending all claims. The Company does not believe that these claims,
individually or in the aggregate, will have a material adverse effect on its
financial condition.
On May 14, 1999, two shareholders, as individuals, filed almost
identical litigations in both state and federal courts in Los Angeles
against the Company, its officers, directors and certain advisors. Their
claims include violations of the California Corporations Code, intentional
misrepresentation, negligent misrepresentation, constructive fraud, breach
of fiduciary duty, and negligence. No specific amount of damages is
claimed. The federal cases have been consolidated and 10 of the 11
individual defendants have been dismissed with prejudice. In state court
there is pending an Order to Show Cause as to why the cases should not be
either consolidated with the federal cases or dismissed. The Company
believes these cases have no merit and that an adverse decision would not be
material to the Company. The Company intends to defend the cases rigorously
and seek recovery of its costs and fees from the plaintiffs.
On July 7, 1999, Morton Associates, a Virgin Islands Corporation, filed
suit in federal court in Los Angeles against the Company requesting a
declaratory judgment interpreting certain anti-dilution provisions of a
warrant agreement owned by Morton. The Company has defended the case on the
ground that there was no consideration for the provision in the warrant
agreement, upon which Morton relies. Other holders of similar warrant
agreements have reached a settlement with the Company. The Company cannot
predict the outcome, but believes that an adverse ruling would not be
material to its operations.
No assurances can be given that the Company will be successful in its
defense of these litigations. The Company maintains directors and officers
liability insurance, which has been noticed on these claims, and believes
its insurance coverages to be adequate to cover any potential damages, if
awarded.
On October 2, 1996, following a long period of unsuccessful negotiation
with the Mexican government in an effort to open its hazardous waste TSD
facility in San Luis Potosi, Mexico, the Company filed a Notice of Claim
under the provisions of the North American Free Trade Agreement ("NAFTA").
The notice was filed with the International Center for the Settlement of
Investment Disputes (ICSID) in Washington, D.C. pursuant to the provisions
of the NAFTA. On January 2, 1997, the Company filed its actual claim with
ICSID, after which a three-member tribunal was impaneled which includes one
arbitrator from Mexico, one from the United States and a third, chosen
jointly by the parties, from Great Britain. The first hearing was held in
Washington, D.C. on July 15, 1997 and a number of matters were agreed upon
by the parties and a significant amount of direction was given by the
tribunal to the proceedings that would move forward.
Pursuant to those understandings, the Company, on October 13, 1997,
filed its Memorial, which included the claim and all of the evidence
supporting the claim, including expert witness studies and the like. The
basis of the Company's claim against Mexico is one like unto expropriation.
The Company's position is since it is not being allowed to operate a legally
authorized project, it has in essence been taken by the Mexican government
and they should, therefore, be responsible for paying fair compensation
under the provision of the NAFTA. A fair market valuation was done on
behalf of the Company by an expert company, which indicated the fair market
value of this business was $90,000,000.
On February 17, 1998, the United Mexican States ("Mexico") responded to
the Company's claim to the Tribunal by filing a "counter-memorial". On
August 21, 1998 the Company filed its "reply" to Mexico's counter-memorial
and on April 19, 1999 Mexico filed its "rejoinder". A pre-hearing conference
took place July 6, 1999 and the final hearing took place in Washington, D.C.
from August 30 to September 9, 1999. Post-hearing briefs were filed by
Metalclad, Mexico and the United States government on November 8, 1999. The
Company has been advised by the NAFTA tribunal that a final decision will be
unlikely before late April 2000; however, there can be no assurance, if an
award is made, that the Company will not encounter collection difficulties.
If a favorable decision were received by the Company, any damages
awarded to the Company would be payable by the United Mexican States as an
obligation of the government of Mexico. Both NAFTA and other international
treaties provide mechanisms for ensuring collection and it is anticipated
that any damages would be collected in the year 2000.
The Company has devoted substantial resources in the pursuit of its
claim before the NAFTA Tribunal. It has given counsel broad authority in
the employment of experts and others it feels necessary to properly pursue
the Company's claim. The officers of the Company have also spent
substantial amounts of time and resources in assisting the Company's NAFTA
counsel and will continue to do so until completion. There is no assurance,
however, that the Company will be successful. If it is not, the impact will
be material and adverse (see Note C to the financial statements).
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's Common Stock is traded on The Nasdaq Small Cap Stock
Market under the symbol "MTLC." Effective July 2, 1999 the Company
implemented a 1 for 10 reverse stock split. The following table sets forth,
for the fiscal periods indicated, the high and low sales prices for the
Common Stock, adjusted for the stock split, as reported by Nasdaq:
Sales Price
----------------------
High Low
-------- --------
Fiscal Year Ended December 31, 1997
1st Fiscal Quarter Ended March 31, 1997 16 1/4 10 15/16
2nd Fiscal Quarter Ended June 30, 1997 20 10 15/16
3rd Fiscal Quarter Ended September 30, 1997 15 5/16 11 7/8
4th Fiscal Quarter Ended December 31, 1997 12 13/16 9 3/8
Fiscal Year Ended December 31, 1998
1st Fiscal Quarter Ended March 31, 1998 11 7/8 11 1/4
2nd Fiscal Quarter Ended June 30, 1998 10 5/8 13 1/3
3rd Fiscal Quarter Ended September 30, 1998 6 7/8 6 1/4
4th Fiscal Quarter Ended December 31, 1998 4 1/16 3 3/4
Fiscal Year Ended December 31, 1999
1st Fiscal Quarter Ended March 31, 1999 6 5/8 2 3/16
2nd Fiscal Quarter Ended June 30, 1999 4 11/16 1 1/4
3rd Fiscal Quarter Ended September 30, 1999 4 15/16 1 9/16
4th Fiscal Quarter Ended December 31, 1999 6 5/8 3 15/16
The Company has not paid any cash dividends on its Common Stock since
its incorporation and anticipates that, for the foreseeable future,
earnings, if any, will continue to be retained for use in its business. As
of March 15, 2000, the approximate number of record holders of the Company's
Common Stock was 1,362.
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data is derived from the consolidated
financial statements of the Company and should be read in conjunction with
the consolidated financial statements, related notes and other financial
information included herein.
7 Months
Year Ended December 31, Ended Dec 31,(5) Year Ended May 31,
------------------------------- ------------ ------------------
1999 1998 1997 1996 1996 1995
-------- ------- ------- ------- ------- -------
(in thousands, except per share amounts)
Statement of Operations Data (1)
Revenues from
continuing operations $13.422 $10,009 $8,971 $5,519 $11,445 $15,724
Loss from continuing operations (1,971) (1,775) (2,000) (1,706) (5,630) (6,287)
Loss from discontinued operations (2) (2,228) (3,003) (2,610) (1,574) (1,150) (9,112)
Net loss (4,199) (4,778) (4,610) (3,280) (6,780) (15,399)
Earnings per share:(4)
Net loss per common share, continuing
operations - basic and diluted $(0.50) $(0.58) $(0.68) $(0.60) $(2.50 $(4.60)
Net loss per common share,
discontinued operations basic
and diluted $(0.57) $(0.99) $(0.89) $(0.50) $(0.50) $(6.70)
----- ----- ----- ----- ----- -----
Net loss per common share - basic
and diluted $(1.07) $(1.57) $(1.57) $(1.10) $(3.00) $(11.30)
===== ===== ===== ===== ===== ======
Balance Sheet Data
Total assets $8,903 $11,288 $11,533 $14,106 $16,554 $10,710
Convertible notes 2,071 1,640 1,500 - - 2,050
Convertible debentures (3) 360 1,202 20 229 239 8,636
Shareholders' equity (deficit) (3) 4,586 3,869 8,179 11,115 14,066 (6,173)
- ------------------------
(1) In the fourth quarter of 1998, the Company committed to a plan to discontinue its operations in Mexico
and to seek a buyer. Consequently, the Statement of Operations Data has been restated to reflect this
decision.
(2) Includes $6,378,000 write off in May 1995 of the goodwill associated with the May 1994 purchase of
QUIMICA OMEGA.
(3) During the year ended May 31, 1996 a substantial portion of the convertible subordinated debentures
were converted into shares of common stock. Additionally, $2,100,000 of the Company's long term debt was
converted into equity.
(4) Effective July 2, 1999, the Company implemented a 1 for 10 reverse stock split.
(5) Effective June 1, 1996, the Company changed is fiscal year end to December 31.
No dividends were paid or declared during the years ended December 31,
1999, 1998, 1997 or the seven months ended December 31, 1996, or the fiscal
years ended May 31, 1996, or 1995.
ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This discussion and analysis contains forward-looking statements within
the meaning of Section 27A of the Securities Act and Section 21E of the
Exchange Act, which are subject to the "safe harbor" created by those
sections. The Company's actual future results could differ materially from
those projected in the forward-looking statements. The Company assumes no
obligation to update the forward-looking statements or such factors.
Presentation of Financial Statements
The financial statements of the Company reflect the Company's ongoing
business in the insulation contracting segment and the discontinuance of its
waste management segment in Mexico. The net assets of the Company's
business in Mexico are now classified as discontinued operations. Financial
statements of prior periods have been restated to reflect the Company's
decision to discontinue operations in Mexico.
With the Company having significant financial transactions in Mexico,
it has been affected by the continued decline of the Mexico peso. In
November 1994, the value of the peso was 3.4 to the U.S. dollar. As of
December 31, 1999, the value of the peso was 9.49 to the U.S. dollar. As of
December 31, 1999, the Company has a foreign currency translation adjustment
of $(1,555,423) in the equity section of its balance sheet.
Results of Operations
General. Historically, the Company's revenues were generated primarily
by (i) revenues in the United States from insulation services and sales of
insulation products and related materials; and (ii) revenues in Mexico from
the collection of waste oils and solvents for recycling, rental of parts
washing machines, brokering the disposal of waste and remediation services.
As discussed in Note B to the consolidated financial statements, during
the fourth quarter of 1998 the Company committed to a plan to discontinue
its Mexican operations and to seek to identify potential buyers for its
Mexican business. Consequently, the Company's Mexican operations are
classified as discontinued operations. In October 1999, the Company
completed the sale of its ownership interests in certain Mexican assets
previously classified as discontinued operations. The sale specifically
excluded those Mexican assets involved in the NAFTA claim. The terms of
this sale stipulate payment of the purchase price in stages as various
benchmarks are achieved in the operation of the business, as well as the
buyer's assumption of all liabilities. The Company received an initial cash
payment of $125,000 and recorded a receivable of $779,402; however, no gain
or loss will be recorded on the payments until 100% of the Company's net
investment is recovered.
Under the terms of the sale, the Company can receive up to $5,000,000
in payments as certain specific milestones are met. The most significant
milestone payments are associated with the buyer's ability to complete and
open the Aguascalientes landfill project. If the buyer can obtain all
necessary authorizations, complete construction and open the facility,
payments totaling $1,125,000 would be due the Company under the milestone
payment schedule. In the event that the buyer is not successful in its
efforts to open the project or continue the businesses, the Company will be
required to write down its receivable in the transaction.
Net assets totaling $4,476,000 are related to the NAFTA claim, are not
a part of this sale and the disposition of which is dependent on the final
decision. Relative to the NAFTA assets, the Company's claim is for
$90,000,000; however, the tribunal is the final arbiter on value and
damages, if any.
Twelve Months Ended December 31, 1999
Compared to Twelve Months Ended December 31, 1998.
Insulation Business. Total revenues from the insulation business for
the twelve months ended December 31, 1999 were $13,422,000 as compared to
$10,009,000 for the twelve months ended December 31, 1998, an increase of
34%.
Contract Revenues. Contract revenues for the twelve months ended
December 31, 1999 were $13,135,000 as compared to $9,912,000 for the twelve
months ended December 31, 1998, an increase of 33%. This increase is
attributed to the Company's efforts to diversify its client base, including
its entry into the commercial insulation market. The Company's accounts
receivable have also increased due to the increased contract revenues and
the timing of cash receipts.
Contract and Material Costs. Contract and material costs and expenses
for the twelve months ended December 31, 1999 were $11,606,000 as compared
to $8,620,000 for the twelve months ended December 31, 1998, an increase of
35%. This increase is consistent with the Company's increase in revenues.
Selling, General and Administrative Costs. Selling, general and
administrative costs for the twelve months ended December 31, 1999 were
$1,297,000 as compared to $993,000 for the twelve months ended December 31,
1998, an increase of 31% due to the increased volume of work for the year.
Discontinued Operations. Effective October 8, 1999, the Company sold
its interests in Administracion Residuos Industriales, S.A. de C.V.,
Ecosistemas Nacionales, S.A. de C.V. and Ecosistemas El Llano, S.A. de C.V.
The Company also intends to dispose of its interests in Ecosistemas del
Potosi, S.A. de C.V. and Confinamiento Tecnico de Residuos Industriales,
S.A. de C.V., pending resolution of the NAFTA claim. Due to losses incurred
in excess of Company estimates at the measurement date, the Company recorded
additional losses from discontinued operations of $2,228,000 for the twelve
months ended December 31, 1999, net of previously accrued losses of $450,000
at December 31, 1998. Such additional losses are a result of the following
changes in fact from the December 31, 1998 measurement date: A) The
Company's Mexican operating losses exceeded management's original estimate
by $780,000. These additional losses were a direct result of a delay in the
closing of the sale of the non-NAFTA related assets due to unforeseen
additional legal document requirements in Mexico as well as impacts on the
businesses' operations as the sale was made known. B) The $450,000 accrual
did not contain any provisions for the Company's direct costs of pursuing
its NAFTA claim. The full extent of the NAFTA hearing process was unknown
until the middle of the third quarter, as witness lists, court fees,
procedures, etc. could not have been anticipated earlier. As a result of
the hearing process, the Company incurred additional costs of $868,000,
which it could not have reasonably foreseen at December 31, 1998.
Additionally, the Company wrote off $585,000 of foreign currency losses
previously included in the equity section of its balance sheet and
associated with the assets sold.
The Company concluded the NAFTA arbitration hearing on September 9,
1999. A short post-hearing brief was filed by the Company, with the NAFTA
tribunal, in early November 1999. The Company anticipates final resolution
of this claim during second quarter 2000. Until that time, the Company
believes that legal, consulting and other administrative expenses may
continue to be incurred. The Company is also awaiting the tribunal's
decision to determine the disposition of the NAFTA assets. Management
cannot reasonably estimate future losses going forward as the schedule on
completion of this claim is beyond the Company's control. However, the
Company is currently not aware of any other requirements or filings
necessary while it awaits the tribunal's decision. It is believed that
future costs, if any, will not be material, pending the final decision.
Future costs, if any, will be charged to operations as incurred.
Corporate Expense. Corporate expenses were $2,140,000 for the twelve
months ended December 31, 1999 as compared to $1,984,000 for the twelve
months ended December 31, 1998, an increase of 8%. The net increase was
primarily an increase in outside services for accounting, consulting and
shareholder expenses related to various statutory filings.
Interest Expense. Interest expense for the twelve months ended
December 31, 1999 was $360,000 as compared to interest expense of $187,000
for the twelve months ended December 31, 1998. This is due to the addition
of interest-bearing debt during the second half of 1998 and amendments to
the zero coupon notes increasing the interest rate during 1999, as well as
new interest bearing debt in 1999.
Income Taxes. Due to the losses incurred during the twelve months
ended December 31, 1999 and 1998, the Company did not record a provision for
income taxes. At December 31, 1999, the Company has approximately
$22,000,000 and $8,000,000 in net operating losses carryforwards available
for U.S. federal and California taxes, respectively. See Note I of the
consolidated financial statements.
Consolidated Results. The net loss for the twelve months ended
December 31, 1999 was $4,199,000 as compared to a net loss of $4,778,000 for
the twelve months ended December 31, 1998. This loss is attributed to the
increased interest cost associated with new capital to complete the NAFTA
claim as well as the write off of foreign currency losses associated with
the sold Mexican assets. The 1999 loss is less than 1998 primarily due to
the discontinuance of the Mexican operations.
Twelve Months Ended December 31, 1998
Compared to Twelve Months Ended December 31, 1997.
Insulation Business. Total revenues were $10,009,000 in 1998 as
compared to $8,971,000 for 1997, an increase of 12%. This increase is
attributed to work performed under the Company's various maintenance
agreements, particularly with ARCO, and the Company's continuing efforts in
the commercial insulation market.
Contract and Material Costs. Contract and material costs and expenses
were $8,620,000 in 1998 compared to $7,686,000 in 1997 an increase of 12%,
attributed to the increased level of direct costs associated with higher
revenues.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses were $993,000 in 1998 compared to $1,177,000 for the
same period in 1997, a decrease of 16%. This decrease reflects the full
year results of the Company's cost reduction program, initiated in 1997.
Discontinued Operations. Loss from discontinued operations for the
twelve months ended December 31, 1998 was $3,003,000 compared to a loss of
$2,610,000 for the twelve months ended December 31, 1997. The 1998 loss
includes an accrual of $450,000 associated with the decision to discontinue
the Mexican waste management business. In addition, the 1998 and 1997 loss
includes approximately $598,000 and $298,000 of legal and consulting
expenses associated with the Company's ongoing NAFTA arbitration.
Corporate Expense. Corporate expenses were $1,984,000 for the twelve
months ended December 31, 1998 as compared to $2,171,000 for the twelve
months ended December 31, 1997, a decrease of 9%. The decline was achieved
by reductions in staffing and costs.
Interest Expense. Interest expense was $187,000 for the twelve months
ended December 31, 1998 compared to interest income of $62,000 for the
twelve months ended December 31, 1997, largely due to the Company's issuance
of notes and debentures in 1998.
Consolidated Results. The net loss for the year ended December 31,
1998 was $4,778,000 as compared to $4,610,000 for 1997, an increase of 4%.
This increased loss is attributable to accruals associated with discontinued
operations in Mexico and the costs to pursue the Company's NAFTA claim.
Liquidity and Capital Resources
In November 1991, the Company completed the acquisition of Eco-Metalclad,
Inc. ("ECO-MTLC"), commenced the development of the hazardous
industrial waste treatment business in Mexico and began advancing cash to
its Mexican subsidiaries for use in the Mexican business. Funding the
development of the Company's Mexican business required substantial capital.
To obtain capital for the development of the business of the Company in
Mexico, the Company made private placements of its common stock and
convertible subordinated debentures and obtained loans from financial
institutions.
In the fourth quarter of 1998, the Company committed to a plan to
discontinue its Mexican operations and to seek potential buyers for its
Mexican business. Although no further investments are being made in Mexico,
the Company continues to rely upon additional capital to maintain its NAFTA
related assets, complete its NAFTA arbitration and support its remaining
operations.
In July 1998, the Company issued $1,000,000 in 7% Convertible
Debentures due in July 2001, netting the Company $875,000. In February,
1999 the Company redeemed $150,000 of these debentures. During 1999, the
holder of these debentures converted all of the remaining principal and
interest due into common stock of the Company.
In August 1998, the Company issued $350,000 in 10% Convertible
Subordinated Debentures due in August 2001, netting the Company $308,000.
During July 1999, the holder of these debentures converted the entire
principal amount into common stock of the Company.
On July 30, 1999 the Company entered into an amendment of the terms of
its Five-Year Zero Coupon Notes with the holder. The amendment included the
conversion of accrued interest through July 30, 1999 into principal notes,
the interest rate was adjusted from 9.3% to 12% effective July 31, 1999, the
convertibility of the notes and the holder's redemption option on the notes
was extended until the earlier of March 31, 2000 or completion of the NAFTA
proceedings and the conversion rate per share will be at the lesser of 70%
of the average market price per share or $2.50 per share. In no event,
however, can the holder convert its principal into common shares such that
it would result in the holder obtaining shares that would exceed 19.99% of
the outstanding common stock of the Company. Should the holder exercise its
right to convert the notes, all accrued interest would be forfeited. As
part of this amendment, the note holder agreed to exercise certain of its
warrants and to purchase $250,000 in additional notes.
During August and September 1999, the Company issued $360,000 in
three-year 10% Convertible Subordinated Debentures on terms similar to the
previously issued debentures, with the conversion price being the lower of
$2.50 or 75% of market.
During the twelve months ended December 31, 1999, the Company received
approximately $2,783,000 from the exercise of warrants. Additionally, the
Company issued 38,500 shares of its common stock to certain employees of the
Company in exchange for $108,000 in payroll obligations.
The Company had negative working capital at December 31, 1999 of
$145,000 compared to negative working capital of $4,289,000 at December 31,
1998. The Company had cash and cash equivalents at December 31, 1999 of
$769,000 and $520,000 at December 31, 1998. Cash used in continuing
operations for the twelve months ended December 31, 1999 was $1,953,000
compared to $662,000 for 1998. Cash used by discontinued operations for the
twelve months ended December 31, 1999 was $1,104,000 compared to cash used
of $1,567,000 for 1998. Cash used in operating activities for the twelve
months ended December 31, 1999 was funded primarily by cash and cash
equivalents on hand at the beginning of the year as well as the warrant
exercises and issuances of convertible debt completed during the twelve
months.
For the twelve months ended December 31, 1999 the Company generated
negative cash flow from continuing operations of $1,953,000, of which
$72,000 in negative cash flow related to the insulation business due
primarily to larger than usual collection of accounts receivable in December
1998. The remaining negative cash flow is related to corporate activities,
primarily the Company's NAFTA claim. The Company will require substantial
additional financing to continue pursuit of its NAFTA claim, along with
general and administrative expenses without revenues to offset such
expenses. The Company is aware of its ongoing cash needs and continues to
work with its investment bankers and other sources to meet its ongoing needs
through December 31, 2000. Given the Company's decision to discontinue
operations in Mexico, and sell its businesses, the cash requirements in
Mexico have greatly diminished. The Company believes it will obtain the
necessary funds to continue its planned operations throughout 2000; however,
no assurances can be given that such funds will be available to the Company
as required.
Reverse Stock Split
On June 2, 1999 the shareholders of the Company approved a reverse
stock split of the Company's common stock in a ratio of one share for up to
ten shares of its outstanding common stock.
Pursuant to this approval, the Board of Directors of the Company
approved a reverse split of the common shares in a ratio of one share for
every ten shares. This reverse split was effective on July 2, 1999.
Foreign Currency Translation
Effective January 1, 1999, Mexico is no longer considered to be "highly
inflationary". However, the Company is discontinuing its Mexican operations,
therefore, the impact of this change had no effect on the Company's
financial statements.
Impact of Inflation
The Company reflects price escalations in its quotations to its
insulation customers and in its estimation of costs for materials and labor.
For construction contracts based on a cost-plus or time-and-materials basis,
the effect of inflation on the Company is negligible. For projects on a
fixed-price basis, the effect of inflation may result in reduced profit
margin or a loss as a result of higher costs to the Company as the contracts
are completed; however, the majority of the Company's contracts are
completed within 12 months of their commencement and the Company believes
that the impact of inflation on such contracts is insignificant.
Although inflation has been a significant factor in the Mexican economy
in general since the devaluation, the Company does not anticipate that it
will have a material impact on its current or remaining operations.
Year 2000 Issues
As previously reported, over the past year the Company developed and
implemented a plan to address the anticipated impacts of the Year 2000
problem. The Company also surveyed selected third parties to determine the
status of their Year 2000 compliance programs. In addition, the Company
developed contingency plans specifying what the Company would do if we or
important third parties experienced disruptions to critical business
activities as a result of the Year 2000 problem.
The Company's Year 2000 plan was completed in all material respects
prior to the anticipated Year 2000 failure dates. As of March 15, 2000, the
Company has not experienced any materially important business disruptions or
system failures as a result of Year 2000 issues, nor is it aware of any Year
2000 issues that have impacted its customers, suppliers or other significant
third parties to an extent significant to the Company. However, Year 200
compliance has many elements and potential consequences, some of which may
not be foreseeable or may be realized in future periods. Consequently,
there can be no assurance that unforeseen circumstances may not arise, or
that the Company will not in the future identify equipment or systems that
are not Year 2000 compliant.
As of December 31, 1999, the Company incurred total incremental costs
of $74,500 addressing Year 2000 issues. The Company does not anticipate
that it will incur any more material costs related to the Year 2000 issue.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements and schedules listed in the
accompanying Index to Consolidated Financial Statements are attached hereto
and filed as a part of this Report under Item 14.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by Item 401 of Regulation S-K is set forth in
the Company's 2000 Annual Meeting Proxy Statement which will be filed with
the Securities and Exchange Commission not later than 120 days after
December 31, 2000. The Company's 2000 Annual Meeting Proxy Statement,
exclusive of the information set forth under the captions "Report of the
Compensation Committee" and "Company Performance," are incorporated herein
by this reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 402 of Regulation S-K is set forth in
the Company's 2000 Annual Meeting Proxy Statement which will be filed with
the Securities and Exchange Commission not later than 120 days after
December 31, 1999. The Company's 2000 Annual Meeting Proxy Statement,
exclusive of the information set forth under the captions "Report of the
Compensation Committee" and "Company Performance," are incorporated herein
by this reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by Item 403 of Regulation S-K is set forth in
the Company's 2000 Annual Meeting Proxy Statement which will be filed with
the Securities and Exchange Commission not later than 120 days after
December 31, 1999. The Company's 2000 Annual Meeting Proxy Statement,
exclusive of the information set forth under the captions "Report of the
Compensation Committee" and "Company Performance," are incorporated herein
by this reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In October 1994, in consideration of extraordinary contributions to the
Company, including but not limited to the pledge of 75,500 shares of common
stock of the Company owned by them to facilitate necessary financings for
the Company, the board of Directors approved a loan of $370,000 to each of
Mr. Kesler and Mr. Neveau. Such borrowings are due 30 days after demand and
bear annual interest at the prime rate of interest plus 7%. In February
1996 Messrs. Kesler and Neveau each repaid $150,000 to the Company. In
March 1996, the notes were amended to modify the loan principal between
Messrs. Kesler and Neveau as well as to adjust the interest rates, effective
March 1, 1996 to a variable rate based upon the Company's quarterly
investment rate. Repayment of these notes has been extended until
completion of the NAFTA arbitration. Mr. Kesler's note is secured by his
employment agreement.
In June 1996, Mr. Neveau, Chairman of the Board of Directors, Senior
Vice President, and a Director of the Company, resigned his position
effective the next shareholders' meeting. As a result, the Company and Mr.
Neveau renegotiated the terms of his employment agreement relative to
compensation, benefits and stock options. Since May 1997, the Company has
been offsetting payments due Mr. Neveau against his outstanding loan balance
to the Company. There are no remaining payments due Mr. Neveau and his
indebtedness to the Company as of December 31, 1999 was $71,000.
During the twelve months ended December 31, 1999, the Company incurred
legal fees of $77,000 from the law firm of Gibson, Haglund & Paulsen, of
which Bruce H. Haglund, general counsel, Director, and Secretary of the
Company, is a principal; however, none of such fees have yet been paid.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) The following documents are filed as part of this report on Form 10-K:
1. Financial Statements
Reports of Independent Public Accountants
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Shareholders' Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
2. Schedules to Financial Statements
Schedule II - Valuation and Qualifying Accounts
All schedules, other than those listed above, are omitted, as the
information is not required, is not material or is otherwise furnished.
3. Exhibits
The following exhibits are being filed with this Annual Report on
Form 10-K and/or are incorporated by reference therein in accordance with
the designated footnote references:
3. Restated and Amended Certificate of Incorporation and Bylaws of
the Company, and all amendments thereto. (1)
3.1 Form of Certificate for Common Stock (2)
10.1 Form of 1993 Omnibus Stock Option and Incentive Plan (3)
10.2 Form of 1996 Omnibus Stock Option and Incentive Plan (4)
10.3 Employment Agreement between the Company and Grant S. Kesler
dated January 1, 1998 (5)
10.4 Employment Agreement between the Company and Anthony C.
Dabbene dated January 1, 1998 (5)
- ----------------
(1) Filed with the Company's Annual Report on Form 10-K for the year
ended December 31, 1997 and incorporated herein by this reference.
(2) Filed with the Company's Registration Statement on Form S-1 dated
December 15, 1987 and incorporated by reference.
(3) Filed with the Company's Transition Report on Form 10-K for the five
months ended May 31, 1993 and incorporated herein by this reference.
(4) Filed with the Company's Preliminary Proxy Statement dated September
10, 1996 and incorporated herein by this by reference.
(5) Filed with the Company's Annual Report on Form 10-K for the year ended
December 31, 1998 and incorporated herein by this reference.
10.5 Form of 7% Convertible Debenture Due July 31, 2001 between
the Company and The Shaar Fund Ltd. Dated July 30, 1998 (6)
10.6 Amendatory Agreement between the Company and Sundial
International Fund Limited and Ultra Pacific Holdings S.A. dated July 30,
1999
10.7 Form of 10% Convertible Subordinated Debentures Due 2002
between the Company and various parties dated August and September 1999
22. List of Subsidiaries of the Registrant
23. Consents of Experts and Counsel
(b) Reports on Form 8-K
A Current Report on Form 8-K dated October 8, 1999 was filed on October
20, 1999 reporting the completion of the sale to Geologic, S.A. de C.V., of
all the Company's interest in the businesses known as Administracion
Residuos Industriales, S.A. de C.V., Ecosistemas Nacionales, S.A. de C.V.,
Quimica Omega, S.A. de C.V., and Ecosistemas El Llano, S.A. de C.V. An
amended Current Report on Form 8-K/A-1 was filed on February 9, 2000
providing the required pro forma financial statements relating to the sale.
- ----------------
(6) Filed with the Company's Form S-3/A dated July 2, 1999 and incorporated
herein by this reference.
SUPPLEMENTAL INFORMATION
An annual report and a proxy statement shall be furnished to the
security holders of the Company subsequent to the filing of this Form 10-K.
The Company shall furnish copies of the annual report to security holders
and the proxy statement to the Securities and Exchange Commission when it is
sent to the security holder.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
METALCLAD CORPORATION
By: /s/Anthony C. Dabbene
-----------------------------------
Anthony C. Dabbene
Chief Financial Officer
Date: March 30, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signatures Title Date
/s/Grant S. Kesler Chief Executive Officer and Director March 30, 2000
- --------------------- (Principal Executive Officer)
Grant S. Kesler
/s/Anthony C. Dabbene Chief Financial Officer & Director March 30, 2000
- --------------------- (Principal Financial and
Anthony C. Dabbene Accounting Officer)
/s/Bruce H. Haglund Secretary & Director March 30, 2000
- ---------------------
Bruce H. Haglund
/s/J. Thomas Talbot Director March 30, 2000
- ---------------------
J. Thomas Talbot
/s/Raymond J. Pacini Director March 30, 2000
- ---------------------
Raymond J. Pacini
CONSOLIDATED FINANCIAL STATEMENTS
and
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
For the year ended
December 31, 1999
METALCLAD CORPORATION
ITEM 14(A)(1) and (2)
METALCLAD CORPORATION AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
The following Consolidated Financial Statements of Metalclad Corporation
and subsidiaries are included in Item 8:
Reports of Independent Public Accountants on Consolidated Financial
Statements:
Report of Moss Adams LLP.......................................F-1
Report of Arthur Andersen LLP...................................F-2
Financial Statements:
Consolidated Balance Sheets - December 31, 1999 and 1998........F-3
Consolidated Statements of Operations - the Years Ended
December 31, 1999, 1998 and 1997................................F-4
Consolidated Statements of Shareholders' Equity - the Years
Ended December 31, 1999, 1998 and 1997.........................F-5
Consolidated Statements of Cash Flows - the Years Ended
December 31, 1999, 1998 and 1997...............................F-6
Notes to Consolidated Financial Statements......................F-7
Supplementary Financial Statement Schedules:
Schedule II - Valuation and Qualifying Accounts................F-22
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
The Board of Directors and Shareholders of Metalclad Corporation:
We have audited the accompanying consolidated balance sheets of
Metalclad Corporation (a Delaware Corporation) and subsidiaries as of
December 31, 1999 and 1998, and the related consolidated statements of
operations, shareholders' equity and cash flows for each of the two years in
the period ended December 31, 1999. These financial statements are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Metalclad
Corporation and subsidiaries as of December 31, 1999 and 1998, and the
results of their operations and their cash flows for each of the two years
in the period ended December 31, 1999 in conformity with generally accepted
accounting principles.
The accompanying financial statements have been prepared assuming that
the Company will continue as a going concern. As discussed in Note A to the
financial statements, the Company has suffered recurring losses from
operations and has a large accumulated deficit that raises substantial doubt
about its ability to continue as a going concern. Management's plans in
regard to these matters are also described in Note A. The financial
statements do not include any adjustments relating to the recoverability and
classification of asset carrying amounts or the amount and classification of
liabilities that might result should the Company be unable to continue as a
going concern.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in the index of
financial statements is presented for purposes of complying with the
Securities and Exchange Commission's rules and is not part of the basic
financial statements. The data for the years ended December 31, 1999 and
1998 has been subjected to the auditing procedures applied in the audits of
the basic financial statements and, in our opinion, fairly state in all
material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
MOSS ADAMS LLP
Costa Mesa, California
March 17, 2000
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
The Board of Directors and Shareholders of Metalclad Corporation:
We have audited the consolidated balance sheet of Metalclad Corporation
as of December 31, 1997 (not separately presented herein) and the related
consolidated statements of operations, shareholders' equity and cash flows
for the year then ended. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion
on these financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that
our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Metalclad Corporation as of December 31, 1997 and the consolidated results
of their operations and their cash flows for the year then ended, in
conformity with accounting principles generally accepted in the United
States.
The accompanying financial statements have been prepared assuming that
the Company will continue as a going concern. As discussed in Note A to the
financial statements, the Company has suffered recurring losses from
operations and has a large accumulated deficit that raises substantial doubt
about its ability to continue as a going concern. Management's plans in
regard to these matters are also described in Note A. The financial
statements do not include any adjustments relating to the recoverability and
classification of asset carrying amounts or the amount and classification of
liabilities that might result should the Company be unable to continue as a
going concern.
Our audit was made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in the index of
financial statements is presented for purposes of complying with the
Securities and Exchange Commission's rules and is not part of the basic
financial statements. The data for the year ended December 31, 1997 has
been subjected to the auditing procedures applied in the audit of the basic
financial statements and, in our opinion, fairly states in all material
respects the financial data required to be set forth therein in relation to
the basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Orange County, California
April 15, 1998
Metalclad Corporation and Subsidiaries
CONSOLIDATED BALANCE SHEETS
December 31,
------------------------------
1999 1998
----------- -----------
ASSETS
Current assets:
Cash and cash equivalents $ 769,176 $ 519,940
Accounts receivable, less allowance for doubtful
accounts of $20,000 at December 1999 and 1998 1,644,991 828,686
Costs and estimated earnings in excess of billings
on uncompleted contracts 147,991 143,672
Inventories 161,832 176,697
Prepaid expenses and other current assets 125,630 56,492
Receivables from related parties, net 77,686 151,765
Note receivable--sale of Mexican assets 779,402 -
---------- ----------
Total current assets 3,706,708 1,877,252
Property, plant and equipment, net 357,769 271,592
Net assets of discontinued operations 4,815,811 9,096,300
Other assets 23,086 43,162
---------- ----------
$ 8,903,374 $11,288,306
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 898,745 $ 636,096
Current liabilities, net -discontinued operations 339,936 2,886,067
Accrued expenses 499,076 913,772
Billings in excess of costs and estimated
earnings on uncompleted contracts - 71,280
Current portion of long-term debt 42,798 18,585
Convertible zero coupon notes 2,071,003 1,640,000
---------- ----------
Total current liabilities 3,851,558 6,165,800
Long-term debt, less current portion 105,915 51,949
Convertible subordinated debentures 360,000 1,201,547
---------- ----------
Total liabilities 4,317,473 7,419,296
---------- ----------
Commitments and Contingencies (Note M)
Shareholders' equity :
Preferred stock, par value $10; 1,500,000 shares
authorized; none issued - -
Common stock, par value $.10; 80,000,000 shares
authorized; 4,859,498, and 30,569,122 issued and
outstanding at December 1999 and 1998, respectively 485,950 3,056,912
Additional paid-in capital 64,330,947 57,404,880
Accumulated deficit (58,106,460) (53,907,766)
Officers' receivable (569,113) (544,906)
Accumulated other comprehensive income (1,555,423) (2,140,110)
---------- ----------
4,585,901 3,869,010
---------- ----------
$ 8,903,374 $11,288,306
========== ==========
The accompanying notes are an integral part
of these consolidated balance sheets.
Metalclad Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
Year ended December 31,
-------------------------------------
1999 1998 1997
----------- ---------- ----------
Revenues
Contract revenues $13,134,928 $9,912,194 $8,533,425
Material sales 224,850 92,227 201,976
Other 62,136 4,250 235,702
---------- --------- ---------
13,421,914 10,008,671 8,971,103
---------- --------- ---------
Operating costs and expenses
Contract costs and expenses 11,404,866 8,548,872 7,525,047
Cost of material sales 200,623 71,316 161,297
Selling, general and administrative 1,296,615 993,369 1,177,047
---------- --------- ---------
12,902,104 9,613,557 8,863,391
---------- --------- ---------
Corporate expense (2,140,338) (1,983,578) (2,170,683)
Operating loss (1,620,528) (1,588,464) (2,062,971)
Interest income (expense) (359,777) (187,011) 62,460
Other income 9,145 - -
---------- --------- ---------
Loss from continuing operations (1,971,160) (1,775,475) (2,000,511)
Loss from discontinued operations (2,227,534) (3,002,914) (2,609,622)
---------- --------- ---------
Net loss $(4,198,694) $(4,778,389) $(4,610,133)
========== ========== ==========
Weighted average number of common shares 3,918,912 3,036,277 2,943,806
========== ========== ==========
Loss per share of common stock, continuing
operations basic and diluted $ (.50) $ (.58) $ (.68)
===== ===== =====
Loss per share of common stock, discontinued
operations basic and diluted $ (.57) $ (.99) $ (.89)
===== ===== =====
Loss per share of common stock basic and
diluted $(1.07) $(1.57) $(1.57)
===== ===== =====
The accompanying notes are an integral part
of these consolidated statements.
Metalclad Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
The Years Ended December 31, 1999, 1998 and 1997
Accumulated Total
Additional Other Share-
Common Stock Paid-in Accumulated Officers' Comprehensive holders'
Shares Amounts Capital Deficit Receivable Income Equity
---------- ---------- ----------- ------------- ----------- ------------- -----------
Balance at December 31, 1996 29,123,239 $2,912,324 $55,582,063 $(44,643,578) $ (576,640) $(2,158,916) $11,115,253
Issuance of common stock 5 - - - - - -
Common stock issued under
stock option and warrants 910,626 91,063 1,274,876 - - - 1,365,939
Officers' loans; interest
and repayments - - - - 56,477 - 56,477
Stock issued under bonus plans 30,000 3,000 105,750 - - - 108,750
Other - - - 124,334 - - 124,334
Foreign currency translation
adjustment - - - - - 18,806 18,806
Net loss - - - (4,610,133) - - (4,610,133)
---------- --------- ---------- ----------- --------- ---------- ----------
Balance at December 31, 1997 30,063,870 3,006,387 56,962,689 (49,129,377) (520,163) (2,140,110) 8,179,426
Issuance of common stock 6,752 675 7,765 - - - 8,440
Common stock issued under
stock option and warrants 498,500 49,850 434,426 - - - 484,276
Officers' loans; interest
and repayments - - - - (24,743) - (24,743)
Net loss - - - (4,778,389) - - (4,778,389)
---------- --------- ---------- ----------- --------- ---------- ----------
Balance at December 31, 1998 30,569,122 3,056,912 57,404,880 (53,907,766) (544,906) (2,140,110) 3,869,010
Reverse stock split 1 for 10 (27,512,210) (2,751,221) 2,751,221 - - - -
Issuance of common stock
for services 38,500 3,850 103,950 - - - 107,800
Debt conversions and interest 612,753 61,275 1,403,058 - - - 1,464,333
Common stock issued under
warrants 1,151,333 115,134 2,667,838 - - - 2,782,972
Officers' loans; interest - - - - (24,207) - (24,207)
Foreign currency translation
adjustment - - - - - 584,687 584,687
Net loss - - - (4,198,694) - - (4,198,694)
---------- --------- ---------- ----------- --------- ---------- ----------
Balance at December 31, 1999 4,859,498 $ 485,950 $64,330,947 $(58,106,460) $ (569,113) $(1,555,423) $ 4,585,901
========== ========= ========== =========== ========= ========== ==========
The accompanying notes are an integral part
of these consolidated statements.
Metalclad Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31,
-------------------------------------------------
1999 1998 1997
------------ ------------ -------------
Cash flows from operating activities:
Net loss $(4,198,694) $(4,778,389) $(4,610,133)
Adjustments to reconcile net loss to net cash used in
operating activities:
Loss from discontinued operations 2,227,534 3,002,914 2,609,622
Depreciation and amortization 229,327 128,921 235,045
Provision for losses on accounts receivable - (8,907) -
Issuance of stock for services and interest 107,800 8,441 108,750
Non-cash (see below) issuance of stock for debt conversions 1,464,333 - -
Changes in operating assets and liabilities:
Decrease (increase) in accounts receivable (816,305) 595,205 690,149
Decrease (increase) in unbilled receivables (4,319) 88,401 (57,305)
Decrease (increase) in inventories 14,865 (15,456) 152,916
Decrease (increase) in prepaid expenses and other assets (69,138) 84,833 789,093
Distributions from Curtom-Metalclad - - 12,588
Decrease (increase) in receivables from related parties 74,079 (55,299) 16,375
Increase (decrease) in accounts payable and accrued expenses (152,047) 236,394 (1,402,629)
Increase (decrease) in billings over cost (71,280) 50,553 (24,741)
Increase in note receivable sale of Mexican assets (779,402) - -
Decrease in other assets 20,076 - 1,164
--------- --------- ---------
Net cash used in continuing operations (1,953,171) (662,389) (1,479,106)
Net cash used in discontinued operations (1,103,729) (1,566,810) (1,922,081)
--------- --------- ---------
Net cash used in operating activities (3,056,900) (2,229,199) (3,401,187)
--------- --------- ---------
Cash flows from investing activities:
Capital expenditures continuing operations (171,809) (274,104) -
Capital expenditures discontinued operations - (388,940) (705,240)
--------- --------- ---------
Net cash used in investing activities (171,809) (663,044) (705,240)
--------- --------- ---------
Cash flows from financing activities:
Proceeds from long-term borrowings 901,472 1,392,548 1,500,000
Payments on long-term borrowings continued operations (182,292) - (210,000)
(Borrowings) repayments by officers (24,207) (24,743) 56,477
Proceeds from exercise of stock options - 111,527 -
Proceeds from exercise of warrants 2,782,972 372,750 1,365,939
--------- --------- ---------
Net cash provided by continuing operations 3,477,945 1,852,082 2,712,416
Net cash provided (used) in discontinued operations - 120,391 -
--------- --------- ---------
Net cash provided by financing activities 3,477,945 1,972,473 2,712,416
--------- --------- ---------
Effects of exchange rates on cash - 139,969 (22,672)
Loss on foreign currency translations - (210,926) (2,413)
--------- --------- ---------
Increase (decrease) in cash and cash equivalents 249,236 (990,727) (1,419,096)
Cash and cash equivalents at beginning of period 519,940 1,510,667 2,929,763
--------- --------- ---------
Cash and cash equivalents at end of period $ 769,176 $ 519,940 $1,510,667
========= ========= =========
Supplemental disclosures of cash flow information:
Cash paid for interest $ 71,060 $ 1,603 $ 114,820
========= ========= =========
The accompanying notes are an integral part
of these consolidated statements.
NOTE A DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
Description of Business
Metalclad Corporation (the "Company") is engaged in insulation services,
including asbestos abatement and material sales, to customers primarily in
California (the "Insulation Business"). The Company has also been engaged
in the development of hazardous and non-hazardous industrial waste
treatment and storage facilities, as well as the collection and recycling
of industrial waste for disposition to landfills or as alternative fuels
for cement kilns in Mexico (the "Mexican Business").
After several years of developing the Mexican Business, the Company
determined that its efforts would not be successful due to political
opposition in Mexico. On October 13, 1997, the Company filed a "memorial"
with the NAFTA tribunal for its claim to recover the value of its landfill
investment in Mexico. On February 17, 1998, the United Mexican States
("Mexico") responded to the Company's claim to the tribunal by filing a
"counter-memorial". On August 21, 1998 the Company filed its "reply" to
Mexico and on April 19, 1999 Mexico filed its "rejoinder". A pre-hearing
conference took place July 6, 1999 and the final hearing took place in
Washington, D.C. from August 30 to September 9, 1999. Post-hearing briefs
were filed by the Company, the Mexican government and the United States
government on November 8, 1999. The Company has been advised by the NAFTA
Tribunal that a final decision will be unlikely before late April 2000.
Because of this arbitration, the Company's other businesses in Mexico,
including its development of a second landfill facility in the State of
Aguascalientes, have been impacted dramatically. Consequently, the
Company has discontinued its businesses in Mexico, selling its operating
and development businesses, while maintaining its NAFTA assets until
completion of its arbitration. (See Note B.)
The accompanying financial statements have been prepared assuming the
Company will continue as a going concern. As shown in the financial
statements, the Company has incurred recurring losses from operations and
has a large accumulated deficit. Additionally, the Company may require
substantial additional financing to complete its NAFTA claim to fund
general and administrative expenses without sufficient revenues to offset.
These matters raise substantial doubt about the Company's ability to
continue as a going concern. The Company is continuing its efforts to
reduce costs and increase its revenues. The Company is pursuing
additional financing alternatives to maintain its operations which may
include a continuation of its warrant exchange program. The financial
statements to do not include any adjustments relating to the
recoverability of asset carrying amounts or the amount and classification
of liabilities that might result should the Company be unable to continue
as a going concern.
Principles of Consolidation/Investments
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. Investments in other companies and
joint venture corporations which are 20-50% owned are reported on the
equity method. Significant intercompany accounts and transactions have
been eliminated in consolidation. Direct costs incurred relating to the
acquisition or formation of an equity method investment are capitalized
and are amortized over five years.
Cash Equivalents
The Company considers all highly liquid investments with original
maturities of three months or less to be cash equivalents. The carrying
amount approximates fair value because of the short maturity of those
instruments.
Inventories
Inventories, which consist principally of insulation products and related
materials, are stated at the lower of cost (determined on the first-in,
first-out method) or market.
Depreciation and Amortization
Property, plant and equipment is stated at cost. Depreciation and
amortization is computed using the straight-line method over the estimated
useful lives of related assets which range from between five to seven
years for machinery, equipment and leasehold improvements. Assets related
to the Company's hazardous waste treatment facility located in Mexico are
included in discontinued operations and will be disposed of upon
resolution of the NAFTA claim. (See Note B.)
Revenue Recognition
Fixed price insulation installation and asbestos abatement contracts are
accounted for by the percentage-of-completion method wherein costs and
estimated earnings are included in revenues as the work is performed. If
a loss on a fixed price contract is indicated, the entire amount of the
estimated loss is accrued when known. Time and material contracts are
accounted for under a cost plus fee basis. Retentions by customers under
contract terms are due at contract completion.
Loss Per Share
The Company computes loss per share in accordance with Statement of
Financial Accounting Standards ("SFAS") 128, "Earnings Per Share". This
statement requires the presentation of both basic and diluted net loss per
share for financial statement purposes. Basic net loss per share is
computed by dividing loss available to common shareholders by the weighted
average number of common shares outstanding. Diluted net loss per share
includes the effect of the potential shares outstanding, including
dilutive stock options and warrants using the treasury stock method.
Because the impact of options and warrants are antidilutive, there is no
difference between the loss per share amounts computed for basic and
diluted purposes. Weighted average share calculations for all periods
presented have been adjusted to reflect the 1 for 10 reverse stock split.
(See Note J.)
Stock-Based Compensation
The Company accounts for stock-based compensation for employees under the
provisions of APB 25. As required, the Company complies with the
disclosure provisions of SFAS 123, "Accounting for Stock-Based
Compensation". SFAS 123 requires the Company to disclose pro forma net
income and earnings per share as if the fair value based accounting method
of SFAS 123 had been used to account for stock based compensation. These
disclosures are included in Note J.
Income Taxes
The Company accounts for income taxes using the liability method as
prescribed by SFAS 109, "Accounting for Income Taxes".
Comprehensive Income - Foreign Currency Translation
In 1998, the Company adopted SFAS 130, "Reporting Comprehensive Income".
This statement establishes rules for the reporting of comprehensive income
and its components. Comprehensive income consists of net income and
foreign currency translation adjustments and is presented in the
Consolidated Statement of Shareholders' Equity. The adoption of SFAS 130
had no impact on total shareholders' equity. Prior year financial
statements have been reclassified to conform to the SFAS 130 requirements.
Through December 31, 1996, all assets and liabilities of the Mexican
subsidiaries were translated at the current exchange rate as of the end of
the accounting period. Items in the statements of operations were
translated at average currency exchange rates. As of January 1, 1997,
Mexico has been deemed a highly inflationary economy. This results in the
U.S. dollar being the functional currency of the Company's Mexican
entities and the net exchange gain or losses resulting from the
translation of assets and liabilities of the Mexican entities now being
included in income, except for the effects of exchange rate changes on
intercompany transactions of a long-term investment nature which are still
recorded as a separate component of shareholders' equity.
Beginning January 1, 1999, Mexico is no longer deemed highly inflationary.
However, the Company has discontinued its Mexican operations and therefore
this will not impact future reported results of operations. (See Note B.)
Reclassifications
Certain reclassifications have been made to prior period consolidated
financial statements to conform with the current year presentation.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
NOTE B DISCONTINUED OPERATIONS
In 1991, the Company embarked on a strategy to develop an integrated
industrial waste management business in Mexico. After seven years of
developing this business, the Company determined that its efforts would
not be successful due to political opposition in Mexico. Consequently, in
the fourth quarter of 1998, Management committed to a plan to sell its
Mexican operations to a third party.
The Company's discontinued operations contain two components: 1) ongoing
operations and development and 2) the landfill assets associated with its
NAFTA claim. In the fourth quarter of 1999, the Company completed a sale
of its ongoing businesses (see Note C). The Company's NAFTA assets will
be retained until a final decision is rendered in the claim.
The loss for discontinued operations during fiscal 1999 includes a
provision for anticipated costs to complete the ongoing NAFTA claim
process of $107,000. Based upon the decision in the NAFTA claim, the
Company may have to write down assets of discontinued operations without
an offsetting damage award. Additionally, accumulated foreign currency
losses of $1,555,000, currently a component of shareholders' equity, will
be written off upon disposition of the NAFTA assets.
The consolidated financial statements for prior periods have been restated
to reflect the accounting for discontinued operations.
Net sales and loss from discontinued operations are as follows:
Year Ended December 31,
--------------------------------------
1999 1998 1997
---------- ---------- ----------
Net sales $ 4,140,571 $ 5,232,554 $ 2,913,720
Operating loss (2,116,496) (2,587,300) (2,517,467)
Interest expense (111,038) (415,614) (92,155)
Loss from discontinued operations (2,227,534) (3,002,914) (2,609,622)
The net assets of discontinued operations are as follows:
December 31,
--------------------------
1999 1998
------------ ------------
Current assets $ 14,554 $ 1,068,803
Current liabilities (354,490) (3,954,870)
---------- ----------
Net current liabilities (339,936) (2,886,067)
---------- ----------
Property, plant and equipment, net 4,377,369 7,676,774
Other assets 438,442 1,419,526
---------- ----------
Net non-current assets 4,815,811 9,096,300
---------- ----------
Net assets of discontinued operations $4,475,875 $6,210,233
========= =========
Included in net assets of discontinued operations, at December 31, 1999 is
approximately $4,476,000 representing the Company's investment in its
completed hazardous waste treatment facility in the State of San Luis
Potosi, Mexico, known as "El Confin". The Company has been granted all
necessary federal governmental authorizations to open and operate the
facility but, as yet, has not received the support of the state and local
governments. Consequently, on October 2, 1996, the Company filed a Notice
of Intent to File Claim Under the North American Free Trade Agreement
("NAFTA"). The claim was filed with the International Centre for
Settlement of Investment Disputes ("ICSID") in Washington, D.C. On
January 13, 1997, the Secretary General of ICSID registered the Company's
claim and notified both the United States and Mexican governments of the
registration. A final hearing on the claim was completed on September 9,
1999. A binding decision by ICSID tribunal is expected in the second
quarter of 2000. The Company's claim is one under the category of
"Likened to Expropriation" wherein the Company, having been denied the
right to operate its constructed and permitted facility, claims its
property has therefore been, as a practical matter, expropriated,
entitling the Company to the fair market value of the facility as damages.
Although the Company remains confident in its position, no assurances can
be given that it will be successful in this arbitration process. The
realization of the capitalized landfill costs and goodwill associated with
El Confin is dependent upon a successful resolution of the Company's NAFTA
claim. Based upon independent appraisal and management's best estimate,
the Company believes that the proceeds from the NAFTA claim will
significantly exceed the carrying value of the El Confin assets. The
Company intends to dispose of this asset upon resolution of the NAFTA
claim. However, should a decision be rendered against the Company, assets
totaling $4,816,000 may be impaired and could potentially result in a
write down should the Company be unable to sell or otherwise recover its
investment.
NOTE C NOTE RECEIVABLE SALE OF MEXICAN ASSETS
In October 1999, the Company completed a sale of its operating businesses
and development project located in Aguascalientes. The sale specifically
excluded those Mexican assets involved in the NAFTA claim. The terms of
this sale stipulate payment of the purchase price in stages as various
benchmarks are achieved in the operation of the business as well as the
buyer's assumption of all liabilities. The Company received an initial
cash payment of $125,000 and recorded a receivable of $779,402; however,
no gain or loss will be recorded on the payments until 100% of the
Company's net investment is recovered.
Under the terms of the sale, the Company can receive up to $5,000,000 in
payments as certain specific milestones are met. The most significant
milestone payments are associated with the buyer's ability to complete and
open the Aguascalientes landfill project. If the buyer can obtain all
necessary authorizations, complete construction and open the facility,
payments totaling $1,125,000 will be due the Company under the milestone
payment schedule. Presently, the buyer has not completed any of the
milestones associated with the Aguascalientes project. It is at least
reasonably possible that the buyer may not complete any of the milestones.
In the event that the buyer is not successful in its efforts to open the
project or continue the businesses, the Company will be required to write
down its receivable in the transaction.
The Company addresses the realization of its assets as required by SFAS
121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of". This statement requires that long-lived assets
and certain identifiable intangibles to be held and used be reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying value of an asset may not be recoverable. The Company has
conducted this review and believes that no impairment currently exists and
no material adjustments are necessary to the valuation of its assets.
NOTE D - INVESTMENTS IN UNCONSOLIDATED AFFILIATES
In 1989, the Company entered into a joint venture with a minority service
firm ("Curtom-Metalclad") to perform industrial insulation and industrial
asbestos abatement services similar to those performed by the Company.
When contracts are obtained by the joint venture, the Company performs the
work specified in the contract as a subcontractor to the joint venture.
Curtom-Metalclad's operations and financial position are not material to
the Company taken as a whole.
NOTE E -- PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following:
December 31,
--------------------------
1999 1998
------------ ------------
Machinery and equipment $ 570,105 $ 525,766
Automotive equipment 308,557 183,087
Leasehold improvements 3,039 1,039
-------- --------
881,701 709,892
Less accumulated depreciation
and amortization (523,932) (438,300)
-------- --------
$ 357,769 $ 271,592
======== ========
NOTE F -- ACCRUED EXPENSES
Accrued expenses consist of the following:
December 31,
--------------------------
1999 1998
------------ ------------
Accrued interest $ 124,947 $ 59,439
Wages, bonuses and taxes 46,893 467,873
Union dues - 97,933
Accounting fees and legal fees 205,000 112,700
Other 122,236 175,827
-------- --------
$ 499,076 $ 913,772
======== ========
NOTE G CONVERTIBLE DEBT
Convertible Zero Coupon Notes
In December 1997, the Company issued $2,200,000 Five Year Zero Coupon
Secured Notes, due December 31, 2002, netting the Company $1,500,000. The
effective interest rate of these notes is 9.33%. The Company is
amortizing the difference between the value at maturity and the purchase
price over five years. Upon the market price of the Company's common
stock closing at or above $1.50 for ten consecutive trading days, the
notes become convertible into common stock of the Company at $1.50 per
share and the Company is to issue warrants to purchase 1,500,000 common
shares of stock with an exercise price of $1.50 per share. Both the
conversion price and warrant exercise price also contain anti-dilution
provisions. Additionally, the notes are redeemable at the option of the
holder, or the Company, any time after March 31, 2000. These notes are
secured by 100% of the stock of Metalclad Insulation Corporation. The
carrying value of Insulation is $1,568,000 as of December 31, 1999. In
February 1998, the conditions triggering convertibility of the notes and
the issuance of warrants were met.
In June 1998, the Company negotiated a bridge loan with the holder of
these notes in the amount of $250,000. As additional consideration for
the bridge loan, the Company issued 250,000 warrants exercisable at $1.25.
In connection with this financing, certain amendments were made to the
original Five Year Zero Coupon Notes which granted the holder an
additional 400,000 warrants exercisable at $1.50 as part of the
anti-dilution provision of the original warrants and clarifying the
anti-dilution language contained in the original notes. The bridge loan was
paid in its entirety from the proceeds of the Company's July 1998
financing. Due to the anti-dilution provisions contained in both the
notes and the warrants, the holder of these notes had rights similar to
those of the Company's existing warrant holders. As part of the Company's
negotiations with the warrant holders to solve the issue of the ongoing
anti-dilution effects on the number of shares underlying the warrants, the
holder of these notes also had to be addressed to solve the anti-dilution
provisions contained in the notes. In February 1999, the Company and the
holder reached agreement on the conversion price of the notes, originally
priced to convert at $15.000 per share, and are now convertible into
shares of the Company's common stock at $2.50 per share.
Convertible Subordinated Debentures
In July 1998, the Company issued $1,000,000 in 7% Convertible Debentures
due in July 2001. The debentures are convertible into shares of the
Company's common stock at $1.25 or 75% of current market price, whichever
is lower. The Company has the option to redeem all or portions of this
debenture at 125% of the principal amount of the redemption. The
debenture also allows for a mandatory redemption in the event of an award
in the NAFTA arbitration or, in certain cases, if the Company obtains
additional equity investment. The mandatory redemption is also at 125% of
the then-outstanding principal balance. In February 1999, the Company
redeemed $150,000 of the principal amount of the debentures. As of
December 31, 1999, all of these remaining debentures were converted into
common stock of the Company.
In August 1998, the Company issued $350,000 in 10% Convertible
Subordinated Debentures due in August 2001 on terms similar to the
previously issued debentures. The debentures are convertible into shares
of the Company's common stock at $1.25 per share through June 30, 1999.
After June 30, the debentures are convertible at 75% of current market
price or $1.25 whichever is lower. As of December 31, 1999 all of these
debentures were converted into common stock of the Company.
During the third quarter of 1999, the Company issued $360,000 in three-year
10% convertible subordinated debentures on terms similar to the
previously issued debentures, with the conversion price being the lower of
$2.50 per share or 75% of the market price per share. These debentures
are due in August and September, 2002.
NOTE H LONG-TERM DEBT
Long-term debt consists of various notes payable to a finance company for
vehicles used in the ordinary course of the Company's insulation business.
The notes are secured by automotive equipment and bear interest at rates
ranging from .9% to 5.9% for periods of 48 months with the last payment
due in 2003.
NOTE I - INCOME TAXES
There was no provision for income taxes for the periods presented due to
losses incurred and the Company's inability to recognize certain loss
carry forwards. The major deferred tax items at December 31, 1998 and
1997 are as follows:
Year Ended December 31,
--------------------------
1999 1998
------------ ------------
Assets
Allowances established against
realization of certain assets $ 43,000 $ 10,000
Net operating loss carryforwards 8,887,000 8,878,800
Capital loss carryforwards 2,680,000 -
Accrued liabilities and other 94,000 206,165
--------- ---------
11,704,000 9,094,965
Valuation allowance (11,704,000) (9,094,965)
--------- ---------
$ - $ -
========= ==========
The difference between the actual income tax benefit and the tax benefit
computed by applying the statutory federal income tax rate to the net loss
before income taxes is attributable to the inability to recognize
currently the future benefit of net operating loss carryforwards.
At December 31, 1999, the Company has available for U.S. federal and
California income tax purposes net operating loss carryforwards of
approximately $22,000,000 and $8,000,000, respectively. These
carryforward amounts expire in the years 2000 through 2019 and 2000
through 2004, respectfully. The ultimate utilization of the net operating
loss carryforwards may be limited in the future due to changes in the
ownership of the Company. This limitation, if imposed, has not been
determined by the Company. The Company also has Mexican net operating
loss carryforwards of approximately $2,000,000 which may be available to
offset future taxable income. The Mexican losses are subject to a ten-year
tax carryforward period and expire in the years 2004 through 2009.
The Company has recorded a 100% valuation allowance against deferred tax
assets due to the uncertainty regarding their realizability.
NOTE J - SHAREHOLDERS' EQUITY
Reverse Stock Split
On June 2, 1999, the shareholders of the Company approved a reverse stock
split of the Company's common stock in a ratio of one for up to ten shares
of its outstanding common stock. Pursuant to this approval, the Board of
Directors of the Company approved a reverse split of the common shares in a
ratio of one share for every ten shares. This reverse split was effective
on July 2, 1999. All reference to shares and per share amounts in the
accompanying footnotes have been restated to reflect this action.
Stock Options
On August 18, 1992, the Company adopted an omnibus stock option plan (the
"1992 Plan") which authorized the issuance of 160,000 options to acquire the
Company's common stock. At December 31, 1999, there were options
outstanding under the 1992 Plan for 62,000 shares, and 15,000 available for
grant. These options will expire 10 years from the date of grant.
On March 24, 1993, the Company adopted an omnibus stock option plan (the
"1993 Plan") which authorized the issuance of 100,000 options to acquire the
Company's common stock. The terms of the 1993 Plan are the same as the 1992
Plan. At December 31, 1999, there were options outstanding under the 1993
Plan for 42,600 shares, and 24,900 options available for grant. These
options expire 10 years from the date of the grant.
On May 15, 1997, the Company adopted an omnibus stock option plan (the "1997
Plan") which authorized the issuance of 600,000 options to acquire the
Company's common stock. At December 31, 1999 there were 390,000 options
outstanding under this plan and 210,000 options available for grant.
During the year ended December 31, 1999, the Board of Directors and its
Compensation Committee approved the grant to various officers, directors and
employees of the Company of options to purchase an aggregate of 390,000
shares of common stock. The options were granted at exercise prices equal
to or exceeding the fair market value of the Company's common stock on the
measurement date, expire 10 years from the date of grant and have various
vesting schedules.
The following is a summary of options granted:
Year ended December 31,
-----------------------------------------------------------------------
1999 1998 1997
--------------------- --------------------- ---------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
-------- ----- -------- ----- -------- -----
Options outstanding at
beginning of the year 607,650 $19.30 392,300 $22.28 484,825 $27.51
Granted 390,000 2.99 246,300 13.79 89,000 14.72
Exercised - - (17,850) 7.50 - -
Canceled (42,850) 22.69 (13,100) 20.88 (181,525) 32.55
-------- ----- -------- ----- -------- -----
Options outstanding at
end of the year 954,800 $12.49 607,650 $19.30 392,300 $22.28
======== ===== ======== ===== ======== =====
Options Exercisable 886,430 572,100 369,900
======== ======== ========
The following significant assumptions were utilized to calculate the fair
value information presented utilizing the Black-Scholes Multiple Option
Approach:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------------------------------- ----------------------------
Weighted
average Weighted Weighted
Number remaining average Number average
Range of outstanding contractual life exercise exercisable exercise
exercise prices as of 12/31/99 in years price as of 12/31/99 price
--------------- -------------- ---------------- -------- -------------- --------
$2.50 - $3.00 380,000 9.61 $2.96 350,000 $3.00
$4.09 - $12.50 68,800 8.01 $9.79 56,000 $10.68
$15.00 - $16.25 250,800 7.82 $15.25 235,230 $15.27
$22.50 - $45.00 255,200 5.11 $24.68 245,200 $24.77
--------------- ------- ---- ----- ------- ------
$2.50 - $45.00 954,800 7.82 $12.49 886,430 $12.76
=============== ======= ==== ===== ======= ======
As the Company has adopted the disclosure requirements of SFAS 123, the
following table shows pro forma net loss and loss per share as if the fair
value based accounting method had been used to account for stock-based
compensation cost.
Year Ended December 31,
----------------------------------------------
1999 1998 1997
------------ ------------ ------------
Net loss as reported $(4,199,000) $(4,778,000) $(4,610,000)
Pro forma compensation
expense (651,000) (1,497,000) (547,000)
---------- ---------- ----------
Pro forma net loss $(4,850,000) $(6,275,000) $(5,157,000)
========== ========== ==========
Pro forma loss per share $(1.24) $(2.07) $(1.75)
===== ===== =====
The effects of applying SFAS 123 in this pro forma disclosure are not
indicative of future amounts.
Stock Purchase Warrants
In connection with various debt offerings, stock placements and services
provided, the Company has issued various stock purchase warrants. All such
warrants were issued at prices which approximated or exceeded fair market
value of the Company's common stock at the date of grant and are exercisable
at dates varying from one to five years.
Summarized information for stock purchase warrants is as follows:
Number Price
of Warrants Per Share
----------- -----------
Warrants outstanding at December 31, 1997 666,189 $15.00
Issued 256,840 12.50 15.00
Exercised (32,000) 12.50
Expired (22,100) 15.00
--------- ------------
Warrants outstanding at December 31, 1998 868,929 12.50 22.50
Issued 596,433 3.50
Exercised (1,151,336) 2.50 3.50
Expired (15,885) 3.50 22.50
Ratchet Adjustment 1,840,372 2.50 3.50
--------- ------------
Warrants outstanding at December 31, 1999 2,138,513 $2.50 $12.50
========= ============
Common Stock
During the year ended December 31, 1997, the Company issued a total of
94,060 shares, with 91,060 being the result of warrant exercises and 3,000
issued as stock bonuses previously accrued in 1996. The Company realized
net proceeds of $1,366,000 from these transactions.
During the year ended December 31, 1998, the Company issued 50,525 shares,
with 32,000 being the result of warrant exercises, 17,850 being from the
exercise of options and 6,75 being for services. The Company realized net
proceeds of $484,000 from these transactions.
During the year ended December 31, 1999, the Company issued 1,802,586
shares, with 1,151,336 being the result of warrant exercises, 38,500 to
certain employees in exchange for payroll obligations and 612,336 being the
result of debt conversions.
NOTE K - EMPLOYEE BENEFIT PLANS
Effective January 1, 1990, the Company established a contributory profit
sharing and thrift plan for all salaried employees. Discretionary matching
contributions are made by the Company based upon participant contributions,
within limits provided for in the plan. No contributions were made in the
years ended December 31, 1999, 1998 and 1997.
Additionally, the Company participates in several multi-employer plans,
which provide defined benefits to union employees of its participating
companies. The Company makes contributions determined in accordance with
the provisions of negotiated labor contracts. The contributions were
$334,670, $222,443 and $257,000 for the years ended December 31, 1999, 1998
and 1997, respectively.
NOTE L - SIGNIFICANT CUSTOMERS
Sales for the year ended December 31, 1999 to Curtom-Metalclad were
approximately $4,287,000 representing work at Edison plants. Additionally,
the Company had sales of $3,093,000 to ARCO and $2,930,000 to Equilon. As of
December 31, 1999 the Company had accounts receivables of $609,000 from
Curtom-Metalclad, $124,000 from ARCO and $78,000 from Equilon.
Sales for the year ended December 31, 1998 to Curtom-Metalclad were
approximately $3,136,000 representing work performed at Edison plants under
the strategic alliance program. Additionally, the Company had sales of
$3,776,000 to ARCO and $1,357,000 to Equilon (formerly Texaco). As of
December 31, 1998, the Company had accounts receivable from Curtom-Metalclad
of $150,000, ARCO of $110,000, Edison of $177,000 and Equilon of $118,000.
Sales for the year ended December 31, 1997 to Curtom-Metalclad were
approximately $3,573,000, including $3,533,000 performed at Edison plants
under the strategic alliance program. The Company had trade accounts
receivable of $355,000 from Curtom-Metalclad as of December 31, 1997.
Additionally, the Company had sales of $1,455,000 and $1,557,000 to Texaco
and ARCO, respectively, during 1997. Accounts receivable from these two
customers were $128,000 and $489,000, respectively, as of December 31, 1997.
NOTE M - COMMITMENTS AND CONTINGENCIES
Employment Agreements
The Company has employment agreements with its executive officers. These
agreements continue until terminated by the executive or the Company and
provide for minimum salary levels, as adjusted for cost of living changes.
These agreements include incentive bonuses based upon specified management
goals, and a covenant against competition with the Company extending for a
period of time after termination.
Collective Bargaining Agreements
Approximately 85% of the Company's employees are covered under collective
bargaining arrangements. Certain of these agreements expire in December
2000 and October 2001. The Company anticipates a timely renewal of these
contracts.
Leases
The Company leases its facilities under non-cancelable operating lease
agreements which expire at various dates through 2002. Total rent expense
under operating leases was $209,042, $178,245 and $307,839 for the years
ended December 31, 1999, 1998 and 1997, respectively. Future minimum
non-cancelable lease commitments are as follows:
Year ending December 31,
------------------------
2000 $237,910
2001 249,422
2002 117,973
-------
$605,305
=======
Litigation
In the ordinary course of its insulation business, certain parties have
filed a substantial number of claims against the Company for actual and
punitive damages. Presently, the number of these claims exceed 300. The
potential value of the claims is in the range of $1,000,000 to $5,500,000.
The Company continues to have adequate insurance coverage with financially
sound carriers responding to these claims and does not foresee any
significant financial exposure resulting from these claims. Throughout its
history, the Company has maintained insurance policies that typically
respond to these claims. Based on the advice of counsel, it is management's
opinion that these actions, individually and in the aggregate, will not have
a significant adverse impact on the Company's financial position or results
of operations.
On May 14, 1999, two shareholders, as individuals, filed almost identical
litigations in both state and federal courts in Los Angeles against the
Company, its officers, directors and certain advisors. Their claims
include violations of the California Corporations Code, intentional
misrepresentation, negligent misrepresentation, constructive fraud, breach
of fiduciary duty, and negligence. No specific amount of damages is
claimed. The federal cases have been consolidated and 10 of the 11
individual defendants have been dismissed with prejudice. In state court
there is pending an Order to Show Cause as to why the cases should not be
either consolidated with the federal cases or dismissed. The Company
believes these cases have no merit and that an adverse decision would not
be material to the Company. The Company intends to defend the cases
rigorously and seeks recovery of its costs and fees from the plaintiffs.
On July 7, 1999, Morton Associates, a Virgin Islands Corporation, filed
suit in federal court in Los Angeles against the Company requesting a
declaratory judgment interpreting certain anti-dilution provisions of a
warrant agreement owned by Morton. The Company has defended the case on
the ground that there was no consideration for the provision in the
warrant agreement, upon which Morton relies. Other holders of similar
warrant agreements have reached a settlement with the Company. The
Company cannot predict the outcome, but believes that an adverse ruling
would not be material to its operations.
No assurances can be given that the Company will be successful in its
defense of these litigations. The Company maintains directors and
officers liability insurance, which has been noticed on these claims, and
believes its insurance coverages to be adequate to cover any potential
damages, if awarded.
NOTE N - RELATED PARTY TRANSACTIONS
Receivables from related parties are comprised of the following:
December 31,
--------------------------
1999 1998
--------- ---------
Loans to executive officers, directors
and employees $ 30,845 $ 61,570
Other 46,841 90,195
-------- --------
$ 77,686 $151,765
======== =======
Loans to executive officers, directors and employees are represented by
promissory notes, due on demand and bear interest at 6%.
An officer and director of the Company is a partner in a law firm which
has received payments for legal fees of approximately $37,000, $0, and
$47,000 for the years ended December 31, 1999, 1998 and 1997,
respectively.
During fiscal 1995 the Company loaned $740,000 to two officers of the
Company. In February 1996, the officers each repaid $150,000 to the
Company. In March 1996, the notes were amended to modify the loan
principal and to adjust the interest rates, effective March 1, to a
variable rate based upon the Company's quarterly investment rate. The
repayment of these notes has been extended until completion of the NAFTA
proceedings.
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, 1999
- ----------------------------
Deducted from asset accounts:
Allowance for doubtful accounts $20,000 - - - $20,000
====== ======
Allowance for excess and
obsolete inventory $ 5,000 - - - $ 5,000
====== ======
Year ended December 31, 1998
- ----------------------------
Deducted from asset accounts:
Allowance for doubtful accounts $28,907 - - 8,907 $20,000
====== ======
Allowance for excess and
obsolete inventory $16,009 - - 11,009 $ 5,000
====== ======
Year ended December 31, 1997
- ----------------------------
Deducted from asset accounts :
Allowance for doubtful accounts $28,907 - - - $28,907
====== ======
Allowance for excess and
obsolete inventory $25,289 - - 9,280 $16,009
====== ======