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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, 2000
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 $7,000,000, 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, 2001 was 6,581,114.
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 conducted by the Company's Mexican
subsidiaries, had previously been reported as a separate industry segment
for 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 and the
receivable associated with the sale of businesses in Mexico.
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. One 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 2001 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 combined general liability and
contractor pollution insurance policy provides base coverage of $1,000,000
per occurrence and excess liability coverage 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, 2000 and December 31, 1999 was $20,500,000 and $21,700,000,
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, 2000 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, 2000, the Company had four full-time
employees in its executive offices and 14 full-time employees in its
insulation business, for a total of 18 employees. These include three
executive officers, project managers/estimators, purchasing, accounting,
and office staff.
As of December 31, 2000, the Company employed approximately 142
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 49 1996 Chief Financial Officer, Director
Bruce H. Haglund 49 1983 Secretary, General Counsel, Director
Grant S. Kesler 57 1991 President, Chief Executive Officer, Director
Raymond J. Pacini 45 1999 Director
Robert D. Rizzo 55 1999 President MIC/MEC
J. Thomas Talbot 65 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 $21,775
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 $6,675 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 $15,100
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 vigorously
defending all claims. The Company does not believe that these claims,
individually or in the aggregate, will have a material adverse effect on its
financial condition.
On October 2, 1996, following a long period of 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.
On October 13, 1997, the Company 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 was
one likened to expropriation. The Company's position is since it was not
being allowed to operate a legally authorized project, it had 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, 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.
On August 30, 2000, the tribunal issued its decision. It ruled that
Mexico had indirectly expropriated the Company's investment in its completed
landfill facility. The tribunal awarded $16,685,000 in damages, with
interest accruing at 6% per annum compounded monthly, beginning October 15,
2000.
On October 27, 2000, the United Mexican States filed a petition with
the Supreme Court of British Columbia, Canada, seeking to have the award set
aside by the court under the Commercial Arbitration Act of Canada. On
November 14, 2000, the filing was amended to also seek a setting aside of
the award under the International Commercial Arbitration Act. A hearing on
the case was completed on March 2, 2001 and a decision is not anticipated
until May 2001. However, regardless of the decision rendered, the Company
anticipates an appeal to the British Columbia Court of Appeals. There is no
definitive timetable for completion of this process. Estimates range from
several months to over a year. Interest continues to accrue until paid.
If the favorable decision were upheld by the Canadian courts, all
damages awarded to the Company would be due and 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 all damages awarded could be collected or
collateralized; however, there can be no assurance that the Company will not
encounter additional collection delays.
The Company has devoted substantial resources in the pursuit of its
claim under the NAFTA. 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 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 remain successful. If the Award is ultimately reversed,
the impact will be material and adverse (see Note B to the financial
statements).
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 defended the case on several
grounds. Other holders of similar warrant agreements have reached a
settlement with the Company. In August 2000, Morton and the Company reached
an agreement whereby Morton received its additional ratchet adjustment of
318,400 shares. This adjustment fixed Morton's total warrants at 398,000
shares exercisable at $2.50 per share, expiring on February 28, 2001. In
September 2000, Morton exercised 210,000 warrants in exchange for common
shares of the Company, for which the Company received $425,000 net after
deducting $100,000 in settlement costs.
On November 13, 2000, the Company filed a complaint in the Superior
Court of California against a former employee, the U.S. parent of the buyer
and its representative for breach of contract, fraud, collusion and other
causes of action in connection with the Company's sale of its Mexican
businesses. This case is one where the Company has suffered damages and
continues to accrue damages and a monetary award is sought as the remedy.
No trial date has yet been set. No assurances can be given on the outcome.
(See Note C to the financial statements.)
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On November 20, 2000, the Company held its Annual Meeting of
Shareholders in Newport Beach, California. The following matters were
presented for the approval of the shareholders with the results presented:
A. The election of five members to the Board of Directors of the
Company, to serve until the next annual meeting. The results of the
shareholders' votes are as follows:
For Against
---------- ----------
Grant S. Kesler 5,078,671 349,956
Anthony C. Dabbene 5,080,271 348,356
Bruce H. Haglund 5,080,271 348,356
Raymond Pacini 5,080,271 348,356
J. Thomas Talbot 5,080,271 348,356
B. To ratify the adoption of the Metalclad Corporation 2000 Omnibus
Stock Option and Incentive Plan. The results were as follows:
For: 2,175,336
Against: 835,090
Abstain: 23,235
C. To ratify the appointment of Moss Adams LLP as the independent
public accountants of the Company for the year ended December 31, 2000. The
results were as follows:
For: 5,130,992
Against: 248,564
Abstain: 49,071
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, 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
Fiscal Year Ended December 31, 2000
1st Fiscal Quarter Ended March 31, 2000 5 9/16 3 1/4
2nd Fiscal Quarter Ended June 30, 2000 3 7/8 3
3rd Fiscal Quarter Ended September 30, 2000 4 5/8 2 7/32
4th Fiscal Quarter Ended December 31, 2000 2 29/32 1 1/4
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, 2001, the approximate number of record holders of the Company's
Common Stock was 1,621.
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
Year Ended December 31, Ended Ended
------------------------------------------ Dec.31,(4) May 31,
2000 1999 1998 1997 1996 1996
-------- ------- ------- ------- -------- -------
(in thousands, except per share amounts)
Statement of Operations Data (1)
Revenues from
continuing operations $17,769 $13.422 $10,009 $8,971 $5,519 $11,445
Loss from continuing operations (1,702) (1,971) (1,775) (2,000) (1,706) (5,630)
Loss from discontinued operations (2) (63) (2,228) (3,003) (2,610) (1,574) (1,150)
Net loss (1,765) (4,199) (4,778) (4,610) (3,280) (6,780)
Earnings per share:(3)
Net loss per common share, continuing
operations - basic and diluted $(0.31) $(0.50) $(0.58) $(0.68) $(0.60) $(2.50)
Net loss per common share,
discontinued operations - basic
and diluted $(0.01) $(0.57) $(0.99) $(0.89) $(0.50) $(0.50)
----- ----- ----- ----- ----- -----
Net loss per common share - basic
and diluted $(0.32) $(1.07) $(1.57) $(1.57) $(1.10) $(3.00)
===== ===== ===== ===== ===== ======
Weighted average shares
outstanding(3) 5,470,002 3,918,912 3,036,277 2,943,806 2,891,045 2,277,052
Balance Sheet Data
Total assets(5) $10,898 8,974 11,356 11,598 14,250 16,695
Convertible notes 1,029 2,071 1,640 1,500 - -
Convertible debentures (2) 310 360 1,202 20 229 239
Shareholders' equity (deficit)(2)(5) 6,367 4,657 3,936 8,244 11,259 14,207
Common shares outstanding(3) 6,581,114 4,859,498 3,056,912 3,006,387 2,912,324 2,873,323
- ------------------------
(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) 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.
(3) Effective July 2, 1999, the Company implemented a 1 for 10 reverse stock split. All prior periods have been
restated.
(4) Effective June 1, 1996, the Company changed its fiscal year end to December 31.
(5) Restated to reflect reclassification of certain related party receivables.
No dividends were paid or declared during the years ended December 31,
2000, 1999, 1998, 1997 or the seven months ended December 31, 1996, or the
fiscal year ended May 31, 1996.
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, 2000, the value of the peso was 9.65 to the U.S. dollar. As of
December 31, 2000, 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 $779,000 representing the
Company's basis in the assets sold; 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. To date, the Company believes that the buyer has not
achieved any of the milestones necessary to trigger additional payments.
Moreover, the Company believes that the buyer is in default of its agreement
with the Company under the indemnity provisions and may have committed fraud
in attempting to assign its interest in the companies purchased to a former
employee of Metalclad. The Company has engaged counsel and believes it has
a cause of action against the buyer and the former Company employee and the
Orange County, California based parent of the buyer as a result of
representations said parent made relative to giving the buyer financial
support in its acquisition of the companies purchased. On November 13,
2000, a complaint was filed in Orange County with the Superior Court of
California. The Company cannot assure the outcome of such a case. If the
Company is not successful in this litigation, it could result in writing off
the $779,000 note receivable. (See Note C to the financial statements.)
Net assets totaling $4,816,000 are related to the NAFTA claim, are not
a part of the sale described above, and the ultimate disposition of which is
dependent on the final decision. Relative to the NAFTA assets on August 30,
2000, the tribunal awarded the Company $16,685,000 in damages, with interest
accruing at 6% per annum compounded monthly, beginning October 15, 2000. On
October 27, 2000, the United Mexican States filed a petition with the
Supreme Court of British Columbia, Canada, seeking to have the award set
aside by the court under the Commercial Arbitration Act of Canada. On
November 14, 2000, the filing was amended to also seek a setting aside of
the award under the International Commercial Arbitration Act. A hearing on
the case was completed on March 2, 2001 and a decision is not anticipated
until May 2001. However, regardless of the decision rendered, the Company
anticipates an appeal to the British Columbia Court of Appeals. There is no
definitive timetable for completion of this process. Estimates range from
several months to over a year. Interest continues to accrue until paid.
(See Notes B and M to the financial statements.)
Twelve Months Ended December 31, 2000 Compared to
Twelve Months Ended December 31, 1999.
Insulation Business. Total revenues were $17,769,000 in 2000 as
compared to $13,422,000 for 1999, an increase of 32%. 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 Revenues. Contract revenues for the twelve months ended
December 31, 2000 were $17,674,000 as compared to $13,135,000 for the twelve
months ended December 31, 1999, an increase of 35%. 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, 2000 were $15,753,000 as compared
to $11,606,000 for the twelve months ended December 31, 1999, an increase of
36% which is attributed to the increased level of direct costs associated
with higher revenues.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses were $1,553,000 for the twelve months ended December
31, 2000 as compared to $1,297,000 for the twelve months ended December 31,
1999, an increase of 20%. This increase reflects a one-time retention bonus
paid to employees and increased legal costs associated with asbestos claims.
Gross Operating Profit. Gross Operating Profit for the year ended
December 31, 2000 was $463,000 as compared to $520,000 for the twelve months
ended December 31, 1999, a decrease of 11%. This decrease is primarily due
to an increase in the operations, selling, general and administrative
expenses, as discussed above, partially offset by higher gross profit
margins.
Discontinued Operations. Loss from discontinued operations for the
twelve months ended December 31, 2000 was $63,000 compared to a loss of
$2,228,000 for the twelve months ended December 31, 1999. The 2000 loss
primarily represents legal fees paid to the International Centre for
Settlement of Investment Disputes ("ICSID") as the Company's share of the
final NAFTA arbitration costs. These expenses were not anticipated in the
1999 year end accrual of costs for discontinued operations. 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 court's decision. It is believed that future
costs, if any, will not be material, pending the final disposition. Future
costs, if any, will be charged to operations as incurred.
Corporate Expense. Corporate expenses were $1,948,000 for the twelve
months ended December 31, 2000 as compared to $2,140,000 for the twelve
months ended December 31, 1999, a decrease of 9%. The decline was achieved
by reductions in staffing and costs.
Interest Expense. Interest expense was $257,000 for the twelve months
ended December 31, 2000 compared to interest expense of $392,000 for the
twelve months ended December 31, 1999. This reduction in interest expense
was primarily due to the conversions of debt to equity during the year.
Consolidated Results. The net loss for the year ended December 31,
2000 was $1,765,000 as compared to $4,199,000 for 1999, a decrease of 58%.
This decreased loss is attributable to completion of the NAFTA claim
arbitration and the discontinuance of business in Mexico. Losses from
continuing operations were $1,702,000 versus $1,971,000, a decline of 14%.
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.
Gross Operating Profit. Gross operating profit for the year ended
December 31, 1999 was $520,000 as compared to $395,000 for the twelve months
ended 1998, an increase of 32%. This increase is attributed to the
Company's efforts to diversify its client base, including its entry into the
commercial insulation market.
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 facts 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 after 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 its NAFTA arbitration hearing September 9, 1999.
The Tribunal issued its decision on August 30, 2000 in favor of the Company.
In October 2000, Mexico filed an action in the Supreme Court of British
Columbia, Canada, seeking to have the Tribunal's decision set aside or
annulled. On March 2, 2001, the hearing on the matter was completed. A
decision on the case is pending. The Company is, therefore, awaiting the
finality of this case 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 court's decision. It is believed that
future costs, if any, will not be material, pending the final disposition.
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 due to 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 $392,000 as compared to interest expense of $193,000
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 loss carryforwards available for
U.S. federal and California taxes, respectively. See Note I to 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.
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 the twelve
months ended December 31, 2000 the note holder exercised its rights and
converted $1,092,000 of note principal into 795,910 shares at an average
price of $1.37. As a result of these conversions the note holder forfeited
accrued interest in the amount of $161,000. As of December 31, 2000 the
note holder reached the maximum allowable conversion option of the notes and
presently cannot convert the notes into additional shares of the Company.
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. In the fourth quarter of 2000, $52,035 of debenture
principal and interest was converted into 47,752 shares at an average price
of $1.09 per share.
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 positive working capital at December 31, 2000 of
$753,000 compared to negative working capital of $854,000 at December 31,
1999. The Company had cash and cash equivalents at December 31, 2000 of
$354,000 and $769,000 at December 31, 1999. Cash used in continuing
operations for the twelve months ended December 31, 2000 was $2,331,000
compared to $1,177,000 for 1999. Cash used by discontinued operations for
the twelve months ended December 31, 2000 was $403,000 compared to cash used
of $2,008,000 for 1999. Cash used in operating activities for the twelve
months ended December 31, 2000 was funded primarily by cash and cash
equivalents on hand at the beginning of the year as well as the warrant
exercises completed during the twelve months.
For the twelve months ended December 31, 2000 the Company generated
negative cash flow from continuing operations of $2,331,000, of which
$170,000 in negative cash flow related to the insulation business due
primarily to larger than usual accounts receivable for work performed in
December 2000. Given the Company's client base, the energy market problems
in California could adversely affect the Company's ability to collect the
receivable from one of its major clients, should they experience financial
problems. The remaining negative cash flow is related to corporate
activities; including corporate overheads, expenses associated with public
companies, interest expense and on-going legal costs associated with pursuit
of 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, 2001. Given the Company's decision to discontinue
operations in Mexico, and sell its businesses, the cash requirements in
Mexico have greatly diminished. The Company is pursuing additional
financing alternatives to maintain its operations, including equity
financing, potential insider transactions, and accounts receivable
financing. The Company believes it will obtain the necessary funds to
continue its planned operations throughout 2001; 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 has discontinued 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.
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 2001 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 2001 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, 2000. The Company's 2001 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 2001 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 2001 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 related proceedings. 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, 2000 was $74,000.
In November, 2000 the Board of Directors approved advances against
legal costs on behalf of Mr. Kesler, in his pursuit of certain personal
legal matters related to his position in the Company. As of December 31,
2000, Mr. Kesler owes the Company $57,000 related to these advances, which
may be recoverable from pending litigation.
During the twelve months ended December 31, 2000, the Company incurred
legal fees of $28,000 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. As
of December 31, 2000, fees totaling $167,000 remain unpaid.
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)
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 Form of 2000 Omnibus Stock Option and Incentive Plan (7)
10.7 Employment Agreement between MIC and Robert D. Rizzo dated
September 1, 2000.
10.8 Decision of NAFTA Tribunal dated August 30, 2000(8)
22. List of Subsidiaries of the Registrant
23. Consents of Experts and Counsel
(b) Reports on Form 8-K
The Company filed Form 8-K/A on February 9, 2000, reporting the sale of
Mexican assets.
The Company filed Form 8-K on September 5, 2000, reporting the pro forma
results of the NAFTA arbitration.
- ---------------------
(1) Filed with the Company's Annual Report on Form 10-K for the year
ended December 31, 1997 and incorporated herein by this reference.
(2) Filed with the Company's Registration Statement on Form S-1 dated
December 15, 1987 and incorporated herein by this reference.
(3)Filed with the Company's Transition Report on Form 10-K for the five
months ended May 31, 1993 and incorporated herein by this reference.
(4) Filed with the Company's Proxy Statement dated September 10, 1996 and
incorporated herein by this 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.
(6) Filed with the Company's Form S-3/A dated July 2, 1999 and
incorporated herein by this reference.
(7) Filed with the Company's Preliminary Proxy Statement dated October
20, 2000 and incorporated herein by this reference.
(8) Filed with the Company's Annual Report on Form 8-K dated September 5,
2000 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, 2001
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, 2001
- --------------------- (Principal Executive Officer)
Grant S. Kesler
/s/Anthony C. Dabbene Chief Financial Officer & Director March 30, 2001
- --------------------- (Principal Financial and
Anthony C. Dabbene Accounting Officer)
/s/Bruce H. Haglund Secretary & Director March 30, 2001
- ---------------------
Bruce H. Haglund
/s/J. Thomas Talbot Director March 30, 2001
- ---------------------
J. Thomas Talbot
/s/Raymond J. Pacini Director March 30, 2001
- ---------------------
Raymond J. Pacini
CONSOLIDATED FINANCIAL STATEMENTS
and
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
For the year ended
December 31, 2000
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
Financial Statements:
Consolidated Balance Sheets - December 31, 2000, 1999 and
1998............................................................F-2
Consolidated Statements of Operations - the Years Ended
December 31, 2000, 1999 and 1998................................F-3
Consolidated Statements of Shareholders' Equity - the Years
Ended December 31,2000, 1999 and 1998...........................F-4
Consolidated Statements of Cash Flows - the Years Ended
December 31, 2000, 1999 and 1998................................F-5
Notes to Consolidated Financial Statements......................F-6
Supplementary Financial Statement Schedules:
Schedule II - Valuation and Qualifying Accounts................F-23
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 three
years in the period ended December 31, 2000. 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 three
years in the period ended December 31, 2000 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
Irvine, California
February 23, 2001
Metalclad Corporation and Subsidiaries
CONSOLIDATED BALANCE SHEETS
December 31,
------------------------------
2000 1999
ASSETS ----------- -----------
Current assets:
Cash and cash equivalents $ 354,345 $ 769,176
Accounts receivable, less allowance for doubtful
accounts of $50,000 and $20,000 at December 2000
and 1999, respectively 3,965,975 1,644,991
Costs and estimated earnings in excess of billings
on uncompleted contracts 82,920 147,991
Inventories 114,129 161,832
Prepaid expenses and other current assets 137,486 125,630
Receivables from related parties, net 195,814 148,285
---------- ----------
Total current assets 4,850,669 2,997,905
Property, plant and equipment, net 336,497 357,769
Net assets of discontinued operations 4,905,754 4,815,811
Note receivable--sale of Mexican assets 779,402 779,402
Other assets 25,765 23,086
---------- ----------
$10,898,087 $ 8,973,973
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,166,727 $ 898,745
Current liabilities, net -discontinued operations 90,139 339,936
Accrued expenses 722,369 499,076
Billings in excess of costs and estimated
earnings on uncompleted contracts 26,724 -
Current portion of long-term debt 62,451 42,798
Convertible zero coupon notes 1,029,194 2,071,003
---------- ----------
Total current liabilities 4,097,604 3,851,558
Long-term debt, less current portion 123,489 105,915
Convertible subordinated debentures 310,000 360,000
---------- ----------
Total liabilities 4,531,093 4,317,473
---------- ----------
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; 6,581,114, and 4,859,498 issued and
outstanding at December 2000 and 1999, respectively 658,111 485,950
Additional paid-in capital 67,659,747 64,330,947
Accumulated deficit (59,871,257) (58,106,460)
Officer's receivable (524,184) (498,514)
Accumulated other comprehensive income (1,555,423) (1,555,423)
---------- ----------
6,366,994 4,656,500
---------- ----------
$10,898,087 $ 8,973,973
========== ==========
The accompanying notes are an integral part of these consolidated balance sheets.
Metalclad Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
Year ended December 31,
--------------------------------------
2000 1999 1998
----------- ----------- -----------
Revenues
Contract revenues $17,673,680 $13,134,928 $ 9,912,194
Material sales 79,627 224,850 92,227
Other 15,545 62,136 4,250
---------- ---------- ----------
17,768,852 13,421,914 10,008,671
---------- ---------- ----------
Operating costs and expenses
Contract costs and expenses 15,703,563 11,404,866 8,548,872
Cost of material sales 49,263 200,623 71,316
Selling, general and administrative 1,552,696 1,296,615 993,369
---------- ---------- ----------
17,305,522 12,901,104 9,613,557
---------- ---------- ----------
Gross operating profit 463,330 519,810 395,114
Corporate expense (1,947,939) (2,140,338) (1,983,578)
---------- ---------- ----------
Operating loss (1,484,609) (1,620,528) (1,588,464)
Interest expense (257,363) (391,847) (192,547)
Other income, net 40,362 41,215 5,536
---------- ---------- ----------
Loss from continuing operations (1,701,610) (1,971,160) (1,775,475)
Loss from discontinued operations (63,187) (2,227,534) (3,002,914)
---------- ---------- ----------
Net loss $(1,764,797) $(4,198,694) $(4,778,389)
========== ========== ==========
Weighted average number of common shares 5,470,002 3,918,912 3,036,277
========== ========== ==========
Loss per share of common stock, continuing
operations basic and diluted $(.31) $ (.50) $ (.58)
===== ===== =====
Loss per share of common stock, discontinued
operations basic and diluted $(.01) $ (.57) $ (.99)
===== ===== =====
Loss per share of common stock basic and
diluted $(.32) $(1.07) $(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, 2000, 1999 and 1998
Accumulated Total
Additional Other Share-
Common Stock Paid-in Accumulated Officer's Comprehensive holders'
Shares Amounts Capital Deficit Receivable Income Equity
---------- ---------- ----------- ------------- ----------- ------------- -----------
Balance at December 31, 1997 30,063,870 $3,006,387 $56,962,689 $(49,129,377) $ (455,461) $(2,140,110) $8,244,128
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
Officer's loan; interest - - - - (22,275) - (22,275)
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) (477,736) (2,140,110) 3,936,180
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 612,750 61,275 1,403,058 - - - 1,464,333
Common stock issued under
warrants 1,151,336 115,134 2,667,838 - - - 2,782,972
Officer's loan; interest - - - - (20,778) - (20,778)
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) (498,514) (1,555,423) 4,656,500
Debt conversions and interest 843,662 84,366 1,220,706 - - - 1,305,072
Common stock issued under
warrants 877,954 87,795 2,108,094 - - - 2,195,889
Officer's loan; interest - - - - (25,670) - (25,670)
Net loss - - - (1,764,797) - - (1,764,797)
---------- --------- ---------- ----------- --------- ---------- ----------
Balance at December 31, 2000 6,581,114 $ 658,111 $67,659,747 $(59,876,257) $ (524,184) $(1,555,423) $ 6,366,994
========== ========= ========== =========== ========= ========== ==========
The accompanying notes are an integral part
of these consolidated statements.
Metalclad Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31,
-------------------------------------------------
2000 1999 1998
------------ ------------ -------------
Cash flows from operating activities:
Net loss $(1,764,797) $(4,198,694) $(4,778,389)
Adjustments to reconcile net loss to net cash used in
operating activities:
Loss from discontinued operations 63,187 2,227,534 3,002,914
Depreciation and amortization 106,657 229,327 128,921
Provision for losses on accounts receivable - - (8,907)
Issuance of stock for services and interest - 107,800 8,441
Issuance of stock for debt conversions 2,035 1,464,333 -
Loss on disposal of fixed assets 13,878 - -
Changes in operating assets and liabilities:
Decrease (increase) in accounts receivable (2,320,984) (816,305) 595,205
Decrease (increase) in unbilled receivables 65,071 (4,319) 88,401
Decrease (increase) in inventories 47,703 14,865 (15,456)
Decrease (increase) in prepaid expenses and other assets (11,856) (69,138) 84,833
Decrease (increase) in receivables from related parties (47,529) 70,650 (57,767)
Increase (decrease) in accounts payable and accrued expenses 1,491,275 (152,047) 236,394
Increase (decrease) in billings over cost 26,724 (71,280) 50,553
(Increase) decrease in other assets (2,679) 20,076 -
--------- --------- ---------
Net cash used in continuing operations (2,331,315) (1,177,198) (664,857)
Net cash used in discontinued operations (402,927) (2,008,131) (1,566,810)
--------- --------- ---------
Net cash used in operating activities (2,734,242) (3,185,329) (2,231,667)
--------- --------- ---------
Cash flows from investing activities:
Capital expenditures - continuing operations (99,263) (171,809) (274,104)
Proceeds (expenditures) - discontinued operations - 125,000 (388,940)
--------- --------- ---------
Net cash used in investing activities (99,263) (46,809) (663,044)
--------- --------- ---------
Cash flows from financing activities:
Proceeds from long-term borrowings 300,877 901,472 1,392,548
Payments on long-term borrowings - continued operations (52,422) (182,292) -
Borrowing by an officer (25,670) (20,778) (22,275)
Proceeds from exercise of stock options - - 111,527
Proceeds from exercise of warrants 2,195,889 2,782,972 372,750
--------- --------- ---------
Net cash provided by continuing operations 2,418,674 3,481,374 1,854,550
Net cash provided (used) in discontinued operations - - 120,391
--------- --------- ---------
Net cash provided by financing activities 2,418,674 3,481,374 1,974,941
Effects of exchange rates on cash - - 139,969
Loss on foreign currency translations - - (210,926)
--------- --------- ---------
Increase (decrease) in cash and cash equivalents (414,831) 249,236 (990,727)
Cash and cash equivalents at beginning of period 769,176 519,940 1,510,667
--------- --------- ---------
Cash and cash equivalents at end of period $ 354,345 $ 769,176 $ 519,940
========= ========= =========
Supplemental disclosures of cash flow information:
Cash paid for interest $ 92,393 $ 71,060 $ 1,603
========= ========= =========
Disclosure of noncash investing and financing activities:
During the twelve months ended December 31, 2000, the Company converted approximately $1,305,000 of zero coupon
notes payable into 844,000 shares of common stock.
During the twelve months ended December 31, 1999, the Company sold certain Mexican assets, previously included
in net assets of discontinued operations, in exchange for a note receivable in the amount of $779,402.
The accompanying notes are an integral part of these consolidated statements.
METALCLAD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL 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 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. 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. On
August 30, 2000, the tribunal issued its decision. It ruled that Mexico
had indirectly expropriated the Company's investment in its completed
landfill facility. The tribunal awarded compensation be paid to the
Company totaling $16,685,000 plus interest accruing at 6% per annum
compounded monthly, beginning October 15, 2000, until paid. As of
December 31, 2000, and pending collection, the financial statements do not
include any amounts that have been awarded as a result of the NAFTA
litigation.
On October 27, 2000, the United Mexican States filed a petition with the
Supreme Court of British Columbia, Canada, seeking leave to appeal the
award under the Commercial Arbitration Act of Canada. The Company was
formally notified on November 27, 2000 that on November 14, 2000, the
filing was amended to also seek a setting aside of the award under the
International Commercial Arbitration Act. A hearing on the case was
completed March 2, 2001 and a decision is not anticipated until May 2001.
However, regardless of the decision rendered, the Company anticipates an
appeal to the British Columbia Court of Appeals. There is no definitive
timetable for completion of this process. Estimates range from several
months to over a year. Interest continues to accrue until paid.
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, sold its operating and
development businesses and is maintaining the NAFTA assets until
completion of its arbitration. (See Notes B and M.)
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 and to fund
general and administrative expenses without sufficient revenues to offset.
These matters raise substantial doubt about the Company's ability to
continue as a going concern. The Company is continuing its efforts to
reduce costs and increase its revenues. The Company is pursuing
additional financing alternatives to maintain its operations including
equity financings, potential transactions with insiders and potential
accounts receivable financings. 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, warrants and convertible debt 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.
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
New Accounting Pronouncements
In December 1999, the Securities and Exchange Commission ("SEC") issued Staff
Accounting Bulletin ("SAB") No. 101, as amended, Revenue Recognition in
Financial Statements. SAB No. 101 provides guidance for revenue recognition
and the SEC staff's views on the application of accounting principles to
selected revenue recognition issues. We will adopt the provisions of SAB No.
101 in the first quarter of fiscal year 2001. We have not determined the
impact the adoption of SAB No. 101 will have on our consolidated financial
statements.
In March 2000, the Financial Accounting Standards Board ("FASB") issued
Interpretation No. 44, Accounting for Certain Transactions Involving Stock
Compensation. Interpretation No. 44 clarifies the application of APB
Opinion No. 25 and is effective July 1, 2000. Interpretation No. 44
clarifies the definition of "employee" for purposes of applying APB
Opinion No. 25, the criteria for determining whether a plan qualifies as
a noncompensatory plan, the accounting consequence of various modifications
to the terms of a previously fixed stock option or award, and the accounting
for an exchange of stock compensation awards in a business combination. We
will adopt the provisions of FASB Interpretation No. 44 in the first quarter
of fiscal year 2001. We have not determined the impact the adoption of
Interpretation No. 44 will have on our consolidated financial statements.
In June 1998, the FASB issued SFAS No. 133, as amended, Accounting for
Derivative Instruments and Hedging Activities. SFAS No. 133 requires the
recognition of all derivatives in the consolidated balance sheet as
either assets or liabilities measured at fair value. We will adopt the
provision of SFAS No. 133 in the first quarter of fiscal year 2002. We
have not determined the impact the adoption of SFAS No. 133 will have on
our consolidated financial statements.
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.
Accounting for the Impairment of Long-Lived Assets
The Company addresses the realization of its assets as required by SFAS 121
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to be Disposed of". This statement requires that long-lived assets and certain
identifiable intangibles to be held and used be reviewed for impairment
whenever events or changes in circumstances indicate that the carrying value
of an asset may not be recoverable. The Company has conducted this review
and believes that no impairment currently exists and no material adjustments
are necessary to the valuation of its assets.
NOTE 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, enforceable decision is rendered in the claim.
The loss from discontinued operations during fiscal 1999 includes a
provision of $107,000 for anticipated costs to complete the ongoing NAFTA
claim. For the twelve months ended December 31, 2000, the Company incurred
additional costs of $91,000 which have been charged against the December 31,
1999 accrual. Additionally, $63,000 in fees for continuing costs of the
NAFTA proceedings have been charged to discontinued operations, in 2000.
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,
--------------------------------------
2000 1999 1998
---------- ---------- ----------
Net sales $ - $ 4,140,571 $ 5,232,554
Operating loss - (2,116,496) (2,587,300)
Interest expense - (111,038) (415,614)
Loss from discontinued operations (63,187) (2,227,534) (3,002,914)
The net assets of discontinued operations are as follows:
December 31,
--------------------------
2000 1999
------------ ------------
Current assets $ 19,029 $ 14,554
Current liabilities (109,168) (354,490)
---------- ----------
Net current liabilities (90,139) (339,936)
---------- ----------
Property, plant and equipment, net 4,466,890 4,377,369
Other assets 438,864 438,442
---------- ----------
Net non-current assets 4,905,754 4,815,811
---------- ----------
Net assets of discontinued operations $4,815,615 $4,475,875
========= =========
Included in net assets of discontinued operations, at December 31, 2000 is
approximately $4,816,000 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. On October 27, 2000, the United Mexican States filed a petition
with the Supreme Court of British Columbia, Canada, seeking to have the
award set aside by the court under the Commercial Arbitration Act of
Canada. On November 14, 2000, the filing was amended to also seek a
setting aside of the award under the International Commercial Arbitration
Act. A hearing on the case was completed on March 2, 2001 and a decision
is not anticipated until May 2001. However, regardless of the decision
rendered, the Company anticipates an appeal to the British Columbia Court
of Appeals. There is no definitive timetable for completion of this
process. Estimates range from several months to over a year. Interest
continues to accrue until paid. If the favorable decision were upheld by
the Canadian courts, all damages awarded to the Company would be due and
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 all damages could be
collected or collateralized; however, there can be no assurance that the
Company will not encounter collection difficulties or delays.
Furthermore, should a decision be rendered against the Company, assets
totaling $4,906,000 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
representing the Company's basis in the assets sold; however, no gain 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.
On November 13, 2000, the Company filed a complaint in the Superior Court
of California against a former employee, the U.S. parent of the buyer and
its representative for breach of contract, fraud, collusion and other
causes of action associated with this transaction. A trial
date has not yet been set and no assurances can be given on the outcome.
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,
--------------------------
2000 1999
------------ ------------
Machinery and equipment $ 546,649 $ 570,105
Automotive equipment 386,964 308,557
Leasehold improvements 3,039 3,039
-------- --------
936,652 881,701
Less accumulated depreciation
and amortization (600,155) (523,932)
-------- --------
$ 336,497 $ 357,769
======== ========
NOTE F - ACCRUED EXPENSES
Accrued expenses consist of the following:
December 31,
--------------------------
2000 1999
------------ ------------
Accrued interest $ 15,500 $ 124,947
Wages, bonuses and taxes 244,316 46,893
Union dues 154,155 -
Accounting fees and legal fees 88,000 205,000
Insurance 179,803 58,345
Other 40,595 63,891
-------- --------
$ 722,369 $ 499,076
======== ========
NOTE G - CONVERTIBLE DEBT
Convertible Zero Coupon Notes
In December 1997, the Company issued $2,200,000 of 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 ("MIC").
The net equity value of MIC is $2,030,000 as of December 31, 2000. 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
$15.00 per share, and are now convertible into shares of the Company's
common stock at $2.50 per share.
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 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 months ended December 31, 2000
the note holder exercised its rights and converted $1,092,000 of note
principal into 795,910 shares at an average price of $1.37. As a result
of these conversions the note holder forfeited accrued interest in the
amount of $161,000. As of December 31, 2000 the note holder reached the
maximum allowable conversion option of the notes and presently cannot
convert the notes into additional shares of the Company.
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 were 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. In the fourth quarter of 2000,
$52,035 of debenture principal and interest was converted into 47,752
shares at an average price of $1.09 per share.
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 8.65% for periods of 48 to 60 months with the last
payment due in 2005. Principal maturities over the next five years average
$37,200.
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 are as follows:
December 31,
-------------------------
2000 1999
----------- -----------
Assets:
Allowances established against
realization of certain assets $ 48,000 $ 43,000
Net operating loss carryforwards 8,754,000 8,887,000
Capital loss carryforwards 3,433,000 2,680,000
Accrued liabilities and other 66,000 94,000
--------- ---------
12,301,000 11,704,000
Valuation allowance (12,301,000) (11,704,000)
---------- ----------
$ - $ -
========== ==========
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, 2000, the Company has available for U.S. federal and
California state income tax purposes net operating loss carryforwards of
approximately $22,000,000 and $6,500,000, respectively. These
carryforward amounts expire in the years 2006 through 2020 and 2001
through 2010, respectively. 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 applicable, 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 2010.
Capital loss carryforwards of approximately $8,500,000 are available to
offset any future capital gains recognized by the Company for both U.S.
federal and California purposes.
The realization of the Company's deferred tax assets is dependent upon the
Company's ability to generate taxable income in the future. The Company
has recorded a 100% valuation allowance against all of the 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 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. 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, 2000, there were options
outstanding under the 1992 Plan for 39,500 shares, and 37,500 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, 2000, there were options outstanding under
the 1993 Plan for 33,100 shares, and 34,400 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, 2000 there were 390,000
options outstanding under this plan and 210,000 options available for
grant.
On November 20, 2000, the Company adopted an omnibus stock option plan
(the "2000 Plan") which authorized the issuance of 1,000,000 options to
acquire the Company's stock. The terms of the 2000 Plan are the same as
the 1997 Plan.
During the year ended December 31, 2000, 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
540,000 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,
-----------------------------------------------------------------------
2000 1999 1998
--------------------- --------------------- ---------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
--------- ----- -------- ----- -------- -----
Options outstanding at
beginning of the year 954,800 $12.49 607,650 $19.30 392,300 $22.28
Granted 540,000 3.00 390,000 2.99 246,300 13.79
Exercised - - - - (17,850) 7.50
Canceled (42,000) 13.84 (42,850) 22.69 (13,100) 20.88
--------- -------- --------
Options outstanding at
end of the year 1,452,800 $ 8.92 954,800 $12.49 607,650 $19.30
--------- -------- --------
Options Exercisable 874,312 $12.49 886,430 $12.76 572,100 $19.45
========= ======== ========
The following significant assumptions were utilized to calculate the fair
value information presented utilizing the Black-Scholes Multiple Option
Approach:
Year Ended December 31,
--------------------------------------
2000 1999 1998
---------- ---------- ----------
Risk free interest rate 5.95% 6.00% 6.00%
Expected life 5.0 years 1.82 years 1.5 years
Expected volatility 1.32 1.247 1.07
Expected dividends - - -
Weighted average fair value of
options granted $1.49 $1.6691 $0.608
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 12/31/00 in years price as of 12/31/00 price
--------------- -------------- ---------------- -------- -------------- --------
$2.50 - $3.00 920,000 9.36 $ 2.98 370,002 $ 2.99
$4.09 - $12.50 38,800 7.21 $ 7.70 27,350 $ 8.46
$15.00 - $16.25 242,300 6.83 $15.26 235,260 $15.27
$22.50 - $45.00 251,700 4.14 $24.71 241,700 $24.80
--------- -------
$2.50 - $45.00 1,452,800 7.98 $ 8.92 874,312 $12.49
========= =======
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,
----------------------------------------------
2000 1999 1998
------------ ------------ ------------
Net loss as reported $(1,765,000) $(4,199,000) $(4,778,000)
Pro forma compensation
expense (806,000) (651,000) (1,497,000)
---------- ---------- ----------
Pro forma net loss $(2,571,000) $(4,850,000) $(6,275,000)
========== ========== ==========
Pro forma loss per share $(0.47) $(1.24) $(2.07)
===== ===== =====
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, 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
Issued - -
Exercised (877,954) 1.69- 3.50
Expired (311,464) 3.50
Ratchet adjustment 318,400 2.50
---------
Warrants outstanding at December 31, 2000 1,267,495 $2.50-$12.50
=========
On February 28, 2001 an additional 734,606 warrants are scheduled to
expire.
Common Stock
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 675 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.
During the year ended December 31, 2000, the Company issued 1,721,616
shares, with 877,954 being the result of warrant exercises and 843,662
being the result of debt conversion.
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, 2000, 1999 and 1998.
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
$372,606, $334,670 and $222,443 for the years ended December 31, 2000,
1999 and 1998, respectively.
NOTE L - SIGNIFICANT CUSTOMERS
Sales for the year ended December 31, 2000 to Curtom-Metalclad were
approximately $8,470,000, primarily representing work performed at
Southern California Edison ("SCE") plants under the strategic alliance
program. The Company had trade accounts receivable of $2,294,000 from
Curtom-Metalclad/SCE as of December 31, 2000. Additionally, the Company
had sales of $1,049,000 and $2,323,000 to Equilon and ARCO, respectively,
during 2000. Accounts receivable from these two customers were $84,000
and $312,000, respectively, as of December 31, 2000. Concentration of the
Company's receivables in a few customers increase the credit risk exposure
of the Company to upsets in the customers' businesses. Given the
Company's client base, the energy market problems in California could
adversely affect the Company's ability to collect the receivable from one of
its major clients, should they experience financial problems.
Sales for the year ended December 31, 1999 to Curtom-Metalclad were
approximately $4,287,000 representing work at SCE 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 SCE 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. Concentration of the Company's receivables in a few customers
increase the credit risk exposure of the Company to upsets in the
customers' businesses.
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 89% of the Company's employees are covered under collective
bargaining arrangements. Certain of these agreements expire in October
and December 2001. The Company anticipates a timely renewal of these
agreements.
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 $248,677, $209,042 and $178,245 for the years
ended December 31, 2000, 1999 and 1998, respectively. Future minimum
non-cancelable lease commitments are as follows:
Year ending December 31,
2001 $262,265
2002 123,376
2003 -
-------
$385,641
=======
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 aggregate 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 January 2, 1997, the Company filed a claim against the United Mexican
States under the provisions of the North American Free Trade Agreement.
The Company alleged that it was not being allowed to operate its legally
authorized and completed landfill facility in San Luis Potosi, Mexico.
On August 30, 2000, the tribunal issued its decision. It ruled that
Mexico had indirectly expropriated the Company's investment in its
completed landfill facility. The tribunal awarded $16,685,000 with
interest, accruing at 6% per annum compounded monthly, beginning October
15, 2000.
On October 27, 2000, the United Mexican States filed a petition with the
Supreme Court of British Columbia, Canada, seeking to have the award set
aside by the court under the Commercial Arbitration Act of Canada. On
November 14, 2000, the filing was amended to also seek a setting aside of
the award under the International Commercial Arbitration Act. A hearing
on the case was completed on March 2, 2001 and a decision is not
anticipated until May 2001. However, regardless of the decision rendered,
the Company anticipates an appeal to the British Columbia Court of
Appeals. There is no definitive timetable for completion of this process.
Estimates range from several months to over a year. Interest continues to
accrue until paid.
If the favorable decision were upheld by the Canadian courts, all damages
awarded to the Company would be due and 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 all damages could be collected or collateralized;
however, there can be no assurance that the Company will not encounter
collection difficulties or delays.
NOTE N - RELATED PARTY TRANSACTIONS
Receivables from related parties are comprised of the following :
December 31,
--------------------------
2000 1999
------------ ------------
Loans to executive officers, directors
and employees $145,814 $101,444
Other 50,000 46,841
------- -------
$195,814 $148,285
======= =======
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 $36,000, $37,000 and
$0 for the years ended December 31, 2000, 1999 and 1998, respectively. As
of December 31, 2000, fees totaling $167,000 remain unpaid.
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.
In November, 2000, the Board of Directors approved advances against legal
costs on behalf of Mr. Kesler, Metalclad CEO, in his pursuit of certain
personal legal matters related to his position in the Company. As of
December 31, 2000, Mr. Kesler owes the Company $57,000 related to these
advances, which may be recoverable from pending litigation.
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, 2000
- ----------------------------
Deducted from asset accounts:
Allowance for doubtful accounts $20,000 $30,000 - - $50,000
====== ======
Allowance for excess and
obsolete inventory $ 5,000 - - - $ 5,000
====== ======
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, 1997
- ----------------------------
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
====== ======