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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]
For the fiscal year ended May 31, 1996
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
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 Identification No.)
incorporation or organization)
3737 Birch Street, Suite 300
Newport Beach, California 92660
(Address of Principal Executive Office) (Zip Code)
Registrant's telephone number, including area code (714) 476-2772
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 July 31, 1996 was approximately $86,200,000, based
upon the average of the bid and asked prices of the Common Stock, as
reported on the Nasdaq Small Cap Market.
The number of shares of the Common Stock of the registrant outstanding
as of July 31, 1996 was 28,733,229.
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 1996
Annual Meeting of Stockholders are incorporated by reference into Part III
hereof.
PART I
ITEM 1. BUSINESS
(a) General Development of Business
Mexican Hazardous Waste Treatment Business. Since November 1991, the
Company has been actively involved in the development of integrated
hazardous waste treatment and disposal facilities in various states in the
Republic of Mexico. The business is comprised of two major parts:
operation and development.
All operating activities associated with waste collection, transport,
and disposal are conducted by BFI-Omega, S.A. de C.V. ( BFI-OMEGA ), the
Company s joint venture with Browning-Ferris Industries de Mexico, S.A. de
C.V. ( BFI-Mexico ), a subsidiary of BFI International, Inc., which in turn
is a subsidiary of Browning-Ferris Industries, Inc. (NYSE: BFI) ( BFI ).
All developmental activities are conducted by the Company s subsidiary,
Ecosistemas Nacionales, S.A. de C.V. ( ECONSA ). BFI-OMEGA s business is
comprised of waste collection, transportation, and treatment, through
branches located in Guadalajara, Aguascalientes, San Luis Potosi, Mexico
City, Tampico and Puebla. In addition, it operates a blending and
recycling plant in Tenango and has its headquarters in Mexico City.
ECONSA s primary business has been the development of a landfill and
treatment facility located in the State of San Luis Potosi. Its other
development activities include an additional hazardous waste landfill in
another state, a facility for non-hazardous industrial waste in yet another
state, the location of a hazardous waste incinerator, the development of an
a q ueous waste treatment facility, and in the exportation for the
destruction of polychlorinated biphenyls ( PCBs ).
Industrial Insulation Contracting. The Company has historically been
engaged in industrial insulation contracting services, including asbestos
abatement services and insulation material sales, to customers primarily in
California. Insulation services include the installation of high and low
temperature insulation on pipe, ducts, furnaces, boilers, and other types
of industrial equipment for a variety of industrial facilities. The
Company sells insulation accessories incident to its service business to
its customers as well as other insulation contractors. The Company's
customers consist primarily of industrial facilities, such as public
utilities, oil refineries, and manufacturing plants.
Corporate Structure. The Company, incorporated originally in 1947 as
an Arizona corporation, was reincorporated in Delaware on November 24,
1993. The Company's wholly-owned United States subsidiaries include Eco-
Metalclad, Inc. ("ECO-MTLC"), a Utah corporation, Metalclad Insulation
Corporation ("MIC"), a California corporation, and Metalclad Environmental
Contractors ("MEC"), a California corporation.
The Company's Mexican subsidiaries include Ecosistemas Nacionales,
S.A. de C.V. ("ECONSA"), Ecosistemas del Potosi, S.A. de C.V., formerly
known as Eco Administracion, S.A. de C.V. ("ECOPSA"), Quimica Omega, S.A.
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de C.V. ("QUIMICA OMEGA"), Consultoria Ambiental Total, S.A. de C.V.
("CATSA"), and Confinamiento Tecnico de Residues Industriales, S.A. de C.V.
("COTERIN"). Each of the Mexican subsidiaries is a corporation of variable
capital (sociedad anonima de capital variable). QUIMICA OMEGA is a wholly-
owned subsidiary of the Company; ECONSA and CATSA are wholly-owned by ECO-
MTLC, which also owns the capital stock of COTERIN. ECOPSA is wholly-owned
by ECONSA. The Company is in the process of restructuring the ownership of
its Mexican subsidiaries so that ECONSA will hold the capital stock of all
Mexican subsidiaries.
Unless otherwise indicated, the term "Company" refers to Metalclad
C o r poration, its United States and Mexican subsidiaries, and its
predecessors.
The Company's principal executive offices are located at 3737 Birch
Street, Suite 300, Newport Beach, California 92660, United States, and its
telephone number is (714) 476-2772. MIC and MEC serve their industrial
insulation contracting customers from their headquarters in Anaheim,
California and branch offices in Sacramento, California and Salt Lake
City, Utah. ECO-MTLC's offices are in Newport Beach, California, and the
Company's Mexican subsidiaries' offices are located in Mexico City and the
City of San Luis Potosi.
(b) Significant Events
1. On April 9, 1996, the Company and BFI, through wholly-owned Mexican
subsidiaries, formed BFI-OMEGA as a 50%-50% owned joint venture corporation
to provide a full range of industrial waste collection, transportation,
recycling, treatment, and disposal services in Mexico. The Company s
interest in BFI-OMEGA is owned by QUIMICA OMEGA; BFI s interest is owned by
BFI-Mexico. Pursuant to a shareholders agreement between the parties, the
Company will contribute its business assets relating to certain waste
collection, treatment, and disposal activities to BFI-OMEGA as its initial
capital contribution to the venture. BFI-Mexico will contribute a
transportable hazardous waste incinerator to BFI-0MEGA as its initial
capital contribution to the venture.
Since the formation of BFI-OMEGA, additional branches have been
added in Tampico, Puebla, and southwestern Mexico City. Additional
branches are now being developed in Toluca, Veracruz, and Coatzacoalcos.
In addition, a pilot plant for the treatment of aqueous waste is being
developed at BFI-OMEGA s Tenango plant, with future expansion contemplated.
2. In July 1996, the Company, through its Curtom-Metalclad
partnership, received a purchase order for $10,000,000 from Southern
California Edison ( SCE ), a long-term client of the Company, for the
furnishing of asbestos abatement and re-insulation services at various SCE
locations. The term of the purchase order is for five years. The purchase
order is part of SCE s alliance program for strategic partnering with
selected contractors and other service providers. The value of the order
is an estimate by the Company and separate releases of work scope are
required to perform under the agreement; however, the Company believes the
value of work ultimately performed may exceed the initial purchase order
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amount during the term.
3. The Company has applied with Nasdaq for listing of the Company s
Common Stock on the National Market System ( NMS ) as the Company believes
the financial statement contained in this report qualifies it for NMS
status.
(c) Financial Information About Industry Segments
The Company, through MIC and MEC, is engaged in industrial insulation
services, industrial asbestos abatement services, and insulation material
sales, such activities constituting one industry segment. The development
and operation of the industrial waste treatment business, commenced in
November 1991 through ECO-MTLC and now conducted by the Company s Mexican
subsidiaries, has been reported as a separate industry segment for 1994,
1995 and 1996. Financial information concerning the Company's business
segments is included and incorporated by reference in Part II and Part IV
of this Form 10-K.
(d) Narrative Description of Business
INTRODUCTION
Business in Mexico. Since November 1991, the Company has been actively
involved in doing business in Mexico. The Company s initial focus was the
development of facilities for the treatment, storage and disposal of
industrial hazardous waste.
In May 1994, the Company acquired QUIMICA OMEGA, a ten-year old
Mexican company engaged in the business of industrial waste collection,
recycling, blending, the production of fuel by-products for sale to the
cement kilns and disposal at licensed facilities.
In April 1996, the Company formed a joint venture in Mexico with BFI-
Mexico. The joint venture, which became effective for accounting purposes
on March 10, 1996, has an expanded focus in Mexico including collection,
transportation, treatment, and disposal of all industrial wastes. Excluded
from the joint venture is the development and ownership of disposal
facilities and international brokerage of PCBs. Also excluded is any
municipal solid waste business.
As of the date of this report, the Company has two main businesses in
M e xico: (i) the business conducted by ECONSA, which owns through
subsidiaries one landfill and treatment facility and is involved in
developing additional facilities; and (ii) the business conducted by BFI-
OMEGA.
Business in the United States. For over 50 years, the Company has
been engaged in the industrial insulation contractors, services, including
asbestos abatement services and insulation material sales to customers
primarily in California. Insulation services include the installation of
high and low temperature insulation on pipe, ducts, furnaces, boilers, and
other types of industrial equipment for a variety of industrial facilities.
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The Company sells insulation accessories to its service customers as well
as other insulation contractors. The Company's customers consist primarily
of industrial facilities, such as public utilities, oil refineries, and
manufacturing plants.
MEXICAN BUSINESS
ECONSA. ECONSA s role for the Company in Mexico is to develop
facilities for the treatment, storage, and disposal of industrial waste.
ECONSA, through subsidiaries, will own these facilities after development,
but anticipates that all management and operation will be done by BFI-OMEGA
under the terms of operating agreements which will be negotiated for each
facility.
ECONSA, through a subsidiary, owns a completed hazardous waste
landfill and treatment facility in the State of San Luis Potosi. The
landfill is located in the remote area of La Pedrera, Guadalcazar and is
known by its trade name, El Confin . It comprises 2,200 acres of land,
has a permitted capacity of 360,000 tons of waste per year and is designed
presently to handle approximately 160,000 tons per year when fully
operational.
El Confin is presently not in operation because the governor of San
Luis Potosi is actively opposed to its opening. Even though ECONSA
believes the state has no authority over activities relating to hazardous
waste management or permitting and the landfill meets or exceeds all
applicable environmental standards, Mexican political custom accords the
governor broad rights within his state. The Company is working with the
Mexican federal authorities to resolve this dispute between federal and
state authority. The Company has been assured by the highest level in the
Mexican government that the Company s investment will be respected. The
Company believes that the effort shown by the federal government of Mexico
will be fruitful, however, no guarantees or assurances can be made.
There is currently administrative litigation involving the community,
state, federal government, and the Company, in which the Company believes
its positions are supported by the relevant facts and statutes. However,
the Company also believes that even success in the litigation will not
permit operation if the governor is actively opposed to the project.
ECONSA is active in developing additional projects in Mexico,
including the following:
1. An additional hazardous waste landfill and treatment facility near
the heart of industrial Mexico. Because of the Company s experience in
developing these facilities and the base of support developed at the state
and community level in which the project is planned, it is believed this
p r oject can proceed more rapidly than prior projects provided no
s u bstantial unanticipated obstacles arise. Substantial development
activity can be undertaken on this project within fiscal year 1997.
Although there can be no assurances, the Company believes this project is
financable and has had several productive meetings with Mexican and
international lenders. This project will be similar in size and capability
4
to El Confin and will include an area for treating and disposing of non-
hazardous industrial waste.
2. An industrial waste treatment and disposal facility. The Company
has responded to an invitation from a major industrialized state in Mexico
to develop and install a facility for the treatment and disposal for non-
hazardous industrial waste. A site for the project meeting technical,
political, and social requirements has been selected. The Company is
finalizing a development plan with the state and believes this project can
be underway within fiscal 1997. This project is also considered
financeable, although no assurances can be given.
3. An incineration project. The Company has obtained a federal
permit for the construction and operation of a hazardous waste incinerator,
but is unwilling to locate the project within the state of San Luis Potosi
so long as its landfill remains out of operation. Because BFI-OMEGA owns
an incinerator subject to no debt and ready to operate, the Company is
pursuing the use of this incinerator for a specific user on an in sito
basis before beginning full-scale commercial use. It is expected that the
incinerator can be in operation within fiscal 1997, but no assurances can
be given because of the politics involved in developing and opening Mexican
hazardous waste treatment facilities.
4. An aqueous waste treatment facility. The Company is developing an
aqueous waste treatment pilot plant at BFI-OMEGA s Tenango facility. It is
expected that if the pilot project presently being undertaken at BFI-
OMEGA s Tenango plant is successful, a full scale, stand alone plant will
be built similar to facilities presently being operated by BFI in Great
Britain and Italy. A site has been selected with permitting underway. It
is expected a decision about moving forward will be made during the
Company s current fiscal year with development time thereafter expected to
be one year. Both the incinerator above and this project will be owned and
operated by BFI-OMEGA, with ECONSA playing a developmental role only.
Although no assurances can be given, it is believed this plant is
financeable and will cost in the range of $7-$10 million.
5. PCB exporting. The Company is one of four companies in Mexico
licensed to broker the export of PCBs from Mexico. The Company has
successfully exported PCBs to Great Britain for incineration and is
presently exploring relationships in the United States for export. The
Company has also acquired an option to purchase one other Mexican company
also licensed in the same manner. A decision on moving forward with the
purchase of this entity will be made in the near future. The Company
believes this acquisition can be made from current working capital with no
additional financing required.
BFI-OMEGA. In connection with the formation of BFI-OMEGA, a five-year
business plan was approved that envisions expansion of the existing QUIMICA
OMEGA business. At the time of formation, operations were limited to
branches in Guadalajara, Aguascalientes, San Luis Potosi, Nuevo Leon and
Mexico City; a blending and recycling plant in Tanango; offices in Mexico
City; and some facilities at the Cruz Azul cement company in Hidalgo.
Since the formation of the joint venture, new sales districts and branches
5
have been opened in Tampico, Puebla, and Mexico City. Also, development
activities are underway for branches to be located in Toluca, Veracruz, and
Coatzacoalcos.
In addition to the expansion of the existing business of QUIMICA
OMEGA, the joint venture intends to expand to include an integrated service
which will be able to satisfy all of the requirements of large industrial
waste producers. In addition to contributing a fully operational hazardous
waste incinerator to the joint venture, BFI has brought new systems and
technologies heretofore not deployed in Mexico.
By following its business plan, BFI-OMEGA intends to capture a
significant share of the newly developing market for environmental services
in the industrial heart of Mexico. BFI-OMEGA is developing a new
technology for disposing of industrial solid hazardous waste now being used
at the Tenango plant. This material has been successfully used as
alternate fuel at the Cruz Azul cement plant and steps are being taken to
expand existing capacity for creation of this solid fuel from hazardous
waste. BFI has also brought to the joint venture experience with a
technology for the treatment of aqueous wastes, industrial wastes with a
high water content. This technology has been successfully used in Great
Britain and Italy and a plant is under development by BFI in Argentina. A
market study for Mexican aqueous wastes has been completed with favorable
results. A pilot plant will be built at BFI-OMEGA s Tenango facility after
which a large independent plant will be built, provided profitability is
demonstrated at the pilot plant. Even though BFI-OMEGA will not own
disposal facilities, it is anticipated that BFI-OMEGA will manage and
operate all such facilities developed by the Company pursuant to negotiated
operating agreements for each such site.
Mexican Governmental Regulations and Permits. The Company's proposed
business in Mexico is highly regulated and is subject to Mexican
environmental law. Development of each proposed hazardous waste treatment
facility cannot be commenced until the Company receives a separate
unconditional permit to construct (a "Construction Permit") from the
applicable local, state, and federal agencies of the Mexican government. A
completed facility cannot be opened until the Company has received a permit
to operate (an "Operating Permit") the facility from such agencies.
Although the federal Construction and Operating Permits take precedence
over state and local authorizations under Mexican law, the Company's
objective is to obtain state and local authorizations and public support
before commencing construction and operation of a facility.
The Secretariat of Environment, National Resources and Fishing,
( SEMARNAP ) is the Mexican federal government ministry charged with
environmental policy formulation and enforcement of such policy under the
General Law of Ecological Equilibrium and Environmental Protection which
was enacted in 1988 (the "General Ecology Law"). Under the General Ecology
Law, regulations have been adopted which require, among other things, the
permit for construction and operation of facilities which treat, store, or
dispose of hazardous wastes. SEMARNAP has divided its environmental
functions between two autonomous agencies: Instituto Nacional de Ecologia
6
(the National Institute of Ecology or "INE"), which is responsible for
regulation and permitting, and Procuraduria Federal de Proteccion al
Ambiente (the Office of the Federal Attorney for the Protection of the
Environment or "PROFEPA"), which is responsible for inspection, compliance,
and enforcement. A Construction Permit from INE cannot be obtained until
the site for the facility has acquired zoning and land use permits from
local and state agencies and INE approves feasibility studies, risk
analysis, and environmental impact studies. The commencement of operations
of each facility is contingent upon receipt of an Operating Permit from
INE. Operation of each facility and compliance with the regulations of INE
will be monitored by PROFEPA on a continuous basis.
Insurance. The Company's Mexican operations are covered by a general
liability insurance policy, which provides base coverage of $1,000,000 per
occurrence and in the aggregate, and expires in May 1997. The Company
believes that its current insurance arrangements are adequate for the
Company s current needs and that coverage will be available at reasonable
prices for anticipated future needs.
Market. The Company has made a substantial investment in creating a
comprehensive evaluation of the industrial waste market in Mexico. Various
organizations participated in specific aspects of the evaluation and the
study included numerous direct interviews with waste generators. The study
identifies the distribution of waste types by industry segment, estimates
the quantity of hazardous wastes generated in Mexico, identifies specific
pricing structure for current waste handling activities, and identifies
existing and possible future competitors. As a result of this study, the
Company estimates that the total industrial waste generated annually is
approximately 150 million tons, of which approximately 6.2 million tons are
hazardous and likely to be processed at commercial facilities. The
remaining waste will most likely be processed in-house by industry. The
Company's conclusions are consistent with reports from SEMARNAP and the
United States Department of Commerce which estimate that 146 million tons
of industrial wastes are generated annually and that 5.1 million tons are
hazardous and likely to be processed off-site at commercial facilities.
Each of the Company's proposed landfill facilities, with an design
capacity of 160,000 tons per year, will be able to process approximately 3%
of the estimated 6.2 million tons of hazardous waste generated in Mexico
annually.
Competition. The Company believes El Confin will be the first fully
integrated waste treatment facility in Mexico operating to international
standards. Existing facilities do not typically offer either a high level
of technology or a high degree of integration with regard to the processing
of waste. As an integrated hazardous waste management facility, the
Company has no known, commercially active competitors. The Company
believes that it will encounter limited competition from small companies
operating in various niches of the waste treatment industry; however,
companies with substantially greater financial, technical, marketing, and
other resources than the Company may enter the market and compete with the
Company's anticipated business. With the Company s joint venture with BFI-
Mexico, one potential competitor has become a partner.
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The only substantial disposal operation currently operating in Mexico
is a landfill located near Monterrey which is 60%-owned by Waste
Management. This landfill receives wastes from plants throughout Mexico
and has had significant growth during the last few years as a result of the
increased enforcement activities of PROFEPA. Although this landfill will
be a competitor, the Company believes that in many cases the technologies
offered at the Company's proposed facilities will be both preferred because
of the design and treatment strategies incorporated into the Company s
landfill and competitively priced as a result of transportation cost
savings. See Transportation.
Although the Company believes the hazardous waste treatment market in
Mexico is substantial and growing, to the extent potential competitors
establish facilities in Mexico and offer comparable services at lower
prices or more cost-effective waste disposal alternatives, the Company's
ability to compete effectively could be adversely affected. No such
competition is yet evident in Mexico and the impact of devaluation has
slowed entry of other U.S. firms evaluating Mexico.
Transportation. The Company believes that its single most competitive
short and long-term advantage in the Mexican marketplace is due to the
location of El Confin and QUIMICA OMEGA/BFI-OMEGA facilities. The El
Confin site is centrally located in Mexico and situated near the
intersection of the major north/south transportation route (Highway 57) and
the major east/west transportation route (Highway 70), both of which are
well-maintained and conveniently traveled. The central location of the
site will minimize the freight element of waste-handling costs to
industries located in many of the major Mexican industrial zones. The
distances from major cities in Mexico to El Confin are approximately as
follows:
San Luis Potosi 100 km (65 miles) Durango 481 km (300 miles)
Aguascalientes 203 km (125 miles) Monterrey 537 km (335 miles)
Guadalajara 348 km (215 miles) Veracruz 758 km (470 miles)
Mexico City 413 km (260 miles) Oaxaca 950 km (590 miles)
Tampico 418 km (260 miles) Chihuahua 1,050 km (650 miles)
The Company is actively negotiating contracts with several fully-
licensed transportation companies which operate throughout Mexico.
Employees. As of May 31, 1996, the Company had a full-time staff of
approximately 138 employees working in its Mexican operations, including
a p p roximately three executive personnel, and 32 clerical workers.
Approximately 42 of these employees are represented by a Mexican labor
union. The Company considers its relations with its employees in Mexico
and the union representing them to be good. All but approximately 20
employees will be transferred to BFI-OMEGA.
Industrial Insulation Contracting Services
Background. The Company's industrial insulation contracting services
include the installation of high and low temperature insulation on pipe,
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ducts, furnaces, boilers, and various other types of industrial equipment
for industrial facilities. Insulation services are provided for new
construction and maintenance of existing facilities. The Company is a
licensed general contractor and typically provides project management,
l a b o r, 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. Industrial 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 industrial insulation contracting business has
historically included, among other things, maintenance, removal, repair,
and re-installation of insulation on existing industrial 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
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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 which 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
c o nducted 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 three-day course approved by EPA and the Occupational Safety and
Health Administration ("OSHA") and all supervisors of abatement projects
are required to attend a nine-hour first aid/CPR/safety course and an
eight-hour EPA/AHERA refresher course annually. Six of the Company's full-
time employees and 43 hourly employees have been trained and certified as
"competent individuals" under EPA regulations relating to the training of
asbestos abatement workers. All employees are issued detailed training
materials and the Company typically conducts a job safety analysis in the
job bidding stage.
The Company requires the use of protective equipment and sponsors
periodic medical examination of all field employees. During removal
procedures, ACM is generally wetted to minimize fiber release and
filtration devices are used to reduce contamination levels. Air monitoring
to determine asbestos fiber contamination levels is conducted on all
abatement projects involving the removal of friable asbestos. The Company
has a comprehensive policy and procedure manual which 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
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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 most of its insulating
materials and accessories from Pabco, Fibrex, R.P.R. and C.W.C.I. Although
t h e Company purchases most of its supplies from these national
manufacturers, there are many suppliers of the same materials and the
Company is not dependent on any one source for the materials and
accessories used in its insulation services, asbestos abatement and
insulation material sales business.
Marketing and Sales
Industrial 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 industrial
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. The joint venture, known as
"Curtom-Metalclad," submits bids for industrial 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 Company concentrates its insulation
material sales efforts on large industrial companies, such as oil
refineries and power plants, which perform their own insulation maintenance
activities. The Company also markets to power generating companies which
are involved in co-generation projects. The Company contacts directly its
customers and potential customers involved in insulation maintenance and
new construction in an effort to have the Company specified as their
11
supplier.
Customers. The Company's industrial insulation customers are
predominantly public utilities, oil refiners, food processors, paper
processors, manufacturers, and engineering and construction companies.
Contracts with two customers accounting for more than 10% of the Company's
insulation contracting revenues during the 12 months ended May 31, 1996
included contracts with Southern California Edison for $2,417,000 and
Curtom-Metalclad for $1,267,000. The Company anticipates that contracts
with Southern California Edison will continue to account for more than 10%
of the Company s insulation contracting revenues.
Competition. Competition in the industrial insulation contracting
services business is intense and is expected to remain intense in the
foreseeable future. Competition in their area involves a few national and
regional companies which provide integrated services and many regional and
local companies which 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
n u mber of its industrial 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 asbestos and general liability
insurance policy, which provides base coverage of $5,000,000 per occurrence
and excess liability coverage up to $10,000,000, expires in August 1996 and
is in the process of renewal. Although the Company has secured bonding
capacity of $5,000,000, $500,000 of which was fully utilized at May 31,
1996, the Company's current industrial insulation and asbestos abatement
services customers typically do not generally require performance bonds.
The Company believes that its current bonding arrangements are adequate for
the Company's anticipated future needs.
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
s u b j ect 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
12
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
c o ntrols, 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 industrial insulation services at
May 31, 1996 and 1995 was $1,200,000 and $1,122,000, respectively. Backlog
is calculated in terms of anticipated revenues on fixed-price 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 May 31, 1996
will be completed during the next twelve months. The majority of the
Company's present business is on cost-plus contracts for which there is no
backlog. The Company fulfills product and supply orders promptly, and
there is no backlog in the material sales business.
Employees. As of May 31, 1996, the Company had a full-time staff of
approximately 17 salaried employees working in industrial insulation
contracting services, including four executive officers, two division
managers, four insulation services contract administrators, and seven
clerical workers. None of these employees is represented by a labor union.
As of May 31, 1996, the Company employed approximately 75 hourly
employees for industrial 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 which 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
13
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 major work stoppages due to strikes by such employees.
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
------------------------------------------------------------------------------------
Grant S. Kesler 53 1991 President, Chief Executive Officer, Director
T. Daniel Neveau 54 1991 Chairman of the Board, Sr. Vice President,
Director
Javier Guerra Cisneros 49 1994 Director, Vice President-Mexican Operations,
Director General of QUIMICA OMEGA and ECONSA
Gordon M. Liddle 55 1991 Director
Douglas S. Land 39 1994 Director
Anthony C. Dabbene 45 1996 Chief Financial Officer
Bruce H. Haglund 45 1983 Secretary-General Counsel
Glenn W. Meyer 44 1990 President, MIC/MEC
Wayne M. May 49 1989 Vice President - Power Division, MIC
David Duclett 46 1989 Vice President - Marketing & Sales, MIC/MEC
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. Mr.
Kesler is a graduate of the University of Utah College of Law and a
member of the Utah State Bar Association.
T. Daniel Neveau has been a Director of the Company since July 1991
and the Chairman of the Board since September 1993. He is presently the
President of Oak Tree Group, Inc., a real estate development company he
formed in 1978. Since 1980, Mr. Neveau has been senior general manager of
Brierfield Marketing, Inc., a company formed under Mr. Neveau's direction.
Since 1972, Mr. Neveau has been general partner of San-Dan, a real estate
investment partnership. Since 1982, Mr. Neveau has been President of
Edgewood Group Corporation. Since 1986, Mr. Neveau has been general
partner of Village Partnership. From 1977 through 1979, Mr. Neveau was
Vice President and Controller of Emporium Department Stores. From 1970
through 1977, Mr. Neveau was Vice President and Director of Management
Information of May Company. From 1965 to 1970, Mr. Neveau was an officer
in the United States Army. Mr. Neveau received a B.A. degree from the
14
University of California at Riverside in 1965.
Javier Guerra Cisneros has been a director of the Company since May
1994 and the Director General of QUIMICA OMEGA since its formation in 1981.
He also founded and was the President of the Institute on Industrial
Hazardous Waste, a non-profit organization that promotes public awareness
of the Mexican environmental regulations through its publication DIP.
Since 1990, Mr. Guerra, through QUIMICA OMEGA, has been one of the pioneers
in the implementation in Mexico of the program to use hazardous wastes as
supplemental fuel in cement kilns. He has more than 10 years of experience
on environmental regulations and handling of hazardous wastes in Mexico and
the United States as well as in the compliance of Mexican environmental
legislation. He has participated in multiple conferences on ecological
matters, including seminars sponsored by the EPA and SEDESOL. Mr. Guerra
is a business administration graduate from the Universidad Iberoamericana
in Mexico City, with studies in international marketing at the St. Gallen
University in Switzerland. He has also made specialized engineering
studies in the areas of combustion equipment and chemicals.
Gordon M. Liddle has been a Director of the Company since July 1991.
He has been the owner and Chief Executive Officer of Winder Dairy Inc.
since 1983. From 1982 to 1983, Mr. Liddle was Senior Vice President of
Christensen Inc. From 1980 to 1982, Mr. Liddle was a Director and Chief
Operating Officer of the contracting and mining division of Christensen
Inc. From 1970 to 1980, Mr. Liddle was Chief Financial Officer of
Christensen Inc. From 1967 to 1970, Mr. Liddle was a Director and Chief
Executive Officer of Transportation Safety Systems. Mr. Liddle presently
serves a member of the Board of Directors of Trustco, Inc. and QSI
Corporation. Mr. Liddle received a B.S. from Utah State University in 1966
and an M.B.A. degree from the University of Utah in 1967.
Douglas S. Land has been a Director of the Company since November
1994. He has been the President of Economic Analysis Group, Ltd. ( EAG ), a
Washington D.C.-based economic consulting firm since its formation in 1983.
Mr. Land manages EAG s New York office. He is also a founder of Chesapeake
Group, Inc., an affiliate of EAG formed in 1988, which provides merchant
banking services to new ventures and middle-market companies with specific
emphasis on environmental projects. Mr. Land specializes in developing and
implementing financing strategies for new and intermediate-stage projects.
He received an M.B.A. degree from the Wharton Graduate School and an M.A.
in International Relations from the University of Pennsylvania.
Anthony C. Dabbene has been the Chief Financial Officer for the
Company since January 1996. 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. He received a B.B.A. degree in Accounting from St. Francis College
and an M.B.A. degree from Long Island University, New York.
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
15
July 1991. Since April 1994, Mr. Haglund has been a principal in the law
firm of Gibson, Haglund & Johnson. From February 1991 to April 1994, Mr.
Haglund was a principal in the law firm of Phillips, Haglund, Haddan &
Jeffers. From 1984 to February 1991, he was a partner in the law firm of
Gibson & Haglund. Mr. Haglund is also the Secretary and a member of the
Board of Directors of GB Foods Corporation and the Secretary of Renaissance
Golf Products, Inc., public companies whose stock is traded on the Nasdaq
Small Cap Market. He is a graduate of the University of Utah College of
Law.
Glenn W. Meyer has been employed by the Company since October 1983 and
has been the President of Metalclad Insulation Corporation since June 1990.
He was Vice President of Metalclad Insulation Corporation from 1981 to June
1990. From 1976 to 1981, he was employed as a Contract Administrator by
Metalclad Products Corporation. Mr. Meyer received a B.S. degree in
maritime engineering from California Maritime Academy.
Wayne M. May has been the Vice President - Power Division of Metalclad
Insulation Corporation since November 1989. He has been employed by the
Company in various capacities since 1968, including Contract Administrator,
Estimator, Material Sales Manager, and Warehouse Supervisor. He is
experienced in all phases of construction, with particular emphasis on
utility plants. Mr. May s background includes a 25-year association with
various utilities in Southern California.
David Duclett has been employed by the Company since 1977 and has been
Vice President of Marketing and Sales of Metalclad Insulation and Metalclad
Environmental since 1989. Mr. Duclett s main responsibilities are to plan,
implement and achieve the overall objectives of the Company while
e s tablishing and building long-term client relationships. He has
negotiated and managed contracts for both industrial and commercial work,
with concentration on refinery and utility maintenance work and hi-rise
commercial buildings. Mr. Duclett received a B.A. degree in communications
from California State University, Fullerton.
ITEM 2. PROPERTIES
The Company leases space for its offices and warehouse facilities
under leases of varying terms at rentals aggregating approximately $15,500
per month. The Company's executive offices are located in Newport Beach,
California which consists of approximately 3,800 square feet leased at a
current rate of $5,162 per month. The Newport Beach lease expires in July
1997. Facilities in Anaheim, California house the Southern California
i n d u strial insulation services and the insulation material sales
operations. The Anaheim facility consists of 26,000 square feet of office
and warehouse space which is leased at the current rate of $8,000 per
month. The Anaheim lease expires in April, 1999. The Sacramento facility
consists of approximately 10,000 square feet which is leased on a month-to-
month basis for a monthly rental of $1,500.
The Company owns approximately 145 acres of unimproved land located in
Tulare County, California which is not related to the business of the
16
Company and is being held for sale.
ECOPSA owns an approximately 92-hectare parcel (approximately 227
acres) of land in Santa Maria del Rio near San Luis Potosi, Mexico.
COTERIN owns approximately 2,200 acres of land near La Pedrera in the
Mexican state of San Luis Potosi on which El Confin is located.
QUIMICA OMEGA owns approximately 1.25 acres of land in Tenango del
Valle, Mexico and a 6,940 square foot lot in Tenango del Valle on which an
office building and a manufacturing plant is located. In addition, QUIMICA
OMEGA rents space, on a month-to-month basis, for its executive offices and
warehouse facilities in Mexico for rent aggregating $8,260 per month as
follows:
Monthly
Location Approximate Rent
of Property Square Footage (US $) Term
---------------------------------------------------------------------
Naucalpan 25,000 $5,400 Mo./Mo.
Tenango 5,380 675 Mo./Mo.
Guadalajara 6,456 1,475 Mo./Mo.
Guadalajara (unimproved land) 6,456 372 Mo./Mo.
Aguascalientes 8,000 338 Mo./Mo.
As part of the QUIMICA OMEGA and BFI-Mexico joint venture, the newly
formed BFI-OMEGA will accept assignment of all leases and facility
agreements of QUIMICA OMEGA.
ITEM 3. LEGAL PROCEEDINGS
The Company has contested an assessment by the State Compensation
Insurance Fund ("SCIF"), which provides the Company's workers compensation
insurance, of an additional $330,000 of workers compensation insurance
premium for the 1990 policy year. The Company has not recognized this
assessment as an expense and believes that SCIF has overcharged the Company
by approximately $500,000 as a result of over-reserves for pending claims
and inadequate claim investigation. Although the Company has initiated
legal action against SCIF to recover the alleged damages and intends to
pursue its remedies vigorously, there can be no assurance that the outcome
will be favorable to the Company.
Given the Company s long history in the insulation business and in the
sale of insulation materials, it is subject to various claims related to
prior asbestos related business as well as its current business. The
number of these claims is over 100, the Company believes it has adequate
insurance in place and had adequate insurance in prior years and is
vigorously defending all claims. The Company does not believe that these
claims, individually or in the aggregate, will have a material adverse
effect on its financial condition.
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
17
None.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKOHLDER
MATTERS
The Company's Common Stock is traded on the Nasdaq Small Cap Market under
the symbol "MTLC." The Company has recently filed an application for
listing on the Nasdaq for National Market System, believing it has met all
the criteria required for listing. The following table sets forth, for the
fiscal periods indicated, the high and low sales prices for the Common
Stock as reported by Nasdaq:
Sales Price
High Low
------ ------
Fiscal Year Ended May 31, 1995
1st Fiscal Quarter Ended August 31, 1994 4 1/8 2 1/2
2nd Fiscal Quarter Ended November 30, 1994 4 2 1/2
3rd Fiscal Quarter Ended February 28, 1995 3 3/4 2
4th Fiscal Quarter Ended May 31, 1995 2 1/2 1 1/8
Fiscal Year Ended May 31, 1996
1st Fiscal Quarter Ended August 31, 1995 3 5/16 2 15/16
2nd Fiscal Quarter Ended November 30, 1995 3 13/16 3 1/8
3rd Fiscal Quarter Ended February 28, 1996 5 5/85 5 1/4
4th Fiscal Quarter Ended May 31, 1996 3 1/4 3 1/32
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 July 31, 1996, the approximate number of record holders of the Company's
Common Stock was 1800.
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.
18
Year Year Year 5 Months Year Year
Ended Ended Ended Ended Ended Ended
May 31, May 31, May 31, May 31, Dec 31, Dec. 31,
1996 1995 1994 1993 1992 1991
---------------------------------------------------------
(in thousands, except number of shares and per share amounts)
Statement of Operations Data
Revenues $14,689 $18,032 $16,513 $7,294 $16,316 $21,905
Operating profit (loss) - Insulation (854) 257 327 (552) 211 547
Operating (loss) - Waste Management (1) (4,237) (13,885) (4,376) (2,816) (4,064) (134)
Operating (loss) profit (5,091) (13,628) (4,049) (3,368) (3,853) 413
Income (loss) from continuing operations (6,780) (15,399) (4,892) (3,643) (4,405) 65
Loss from discontinued operations - - - - (126) (1,041)
Net income (loss) (6,780) (15,399) (4,892) (3,643) (4,531) (976)
Earnings per share:
Income (loss) from continuing
operations per common share (.30) (1.13) (.56) (.46) (.66) .01
Net income (loss) per common share (.30) (1.13) (.56) (.46) (.68) (.19)
Balance Sheet Data
Total assets 17,702 10,710 18,311 5,469 7,467 8,303
Long-term debt (2) - 2,050 2,662 192 233 357
Convertible subordinated debentures (2) 239 8,636 8,755 4,733 4,563 -
(1) Includes $6,378,000 write off in May 1995 of the goodwill associated with the May 1994
purchase of QUIMICA OMEGA. See Item 7, Management s Discussion and Analysis of Financial
Conditions and Results of Operations
(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. See Item 7, Management s Discussion and Analysis of
Financial Conditions and Results of Operations .
No dividends were paid or declared during the years ended May 31,
1996, 1995 or 1994, the transition period from January 1, 1993 to May 31,
1993, or for the two years ended December 31, 1992 and 1991.
ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Presentation of Financial Statements
In December 1994, the Mexican government adopted a free market policy
toward the valuation of the Mexican peso. During the month of December
19
1994, the value of the peso declined approximately 44%, falling from 3.4
Mexican pesos to the U.S. dollar in November 1994 to 4.9 Mexican pesos to
the U.S. dollar at December 31, 1994. The value of the Mexican peso
continued to decline throughout 1995. At the close of business on May 31,
1995, the value was 6.15 Mexican pesos to the U.S. dollar, a decline of 79%
since the policy was adopted. At the close of business on May 31, 1996, the
value was 7.4 Mexican pesos to the U.S. dollar. The adverse impact on the
economy of Mexico as a result of the decline in the relative value of its
currency has been dramatic. The Company had a foreign currency translation
adjustment of $(1,875,530) at May 31, 1996, reflected in the equity section
of the balance sheet.
In May 1994, the Company acquired QUIMICA OMEGA for a purchase price
of $6,300,000. The purchase price was based on management's estimate of
the fair value of the Company's common stock issued to the QUIMICA OMEGA
stockholders. The purchase resulted in costs in excess of net assets
a c q u ired of approximately $7,300,000. The recession and economic
uncertainty in Mexico resulting from the devaluation and other political
changes caused the Company to reevaluate its business plan and strategy for
QUIMICA OMEGA. As a result, the Company determined in May 1995 to write
off the balance of the capitalized goodwill of $6,378,000 in accordance
with generally accepted accounting principles.
In April 1996, QUIMICA OMEGA entered into the agreement with BFI
Mexico to form a 50%-50% owned joint venture corporation for the purpose of
providing a full range of industrial waste collection, transportation,
treatment and disposal services (excluding ownership of hazardous waste
landfills) within the Republic of Mexico. QUIMICA OMEGA will contribute
essentially all of its assets, contracts and permits to the new company,
with BFI contributing a transportable hazardous waste incinerator, its
systems and management expertise. (See Note C.)
During the fiscal year ended May 31, 1996 the Company issued a total
of 12,848,000 shares with approximately 4,800,000 shares being issued as a
result of conversions of debentures and debt, 4,000,000 shares being issued
in connection with new placements, and 4,000,000 shares being issued as the
result of the exercise of options and warrants.
Results of Operations
General. The Company s revenues were generated primarily by (i)
revenues in the United States from industrial insulation services and sales
of insulation products and related materials; and (ii) revenues in Mexico
through QUIMICA OMEGA from the collection of waste oils and solvents for
recycling, rental of parts washing machines, and brokering of disposal of
waste.
Since November 1991, the Company has pursued the development of
integrated waste treatment and disposal facilities in several Mexican
states. The Company has completed construction of a hazardous waste
landfill in San Luis Potosi which is not yet open; all other contemplated
projects are in the early stages of development. The Company s results of
operations reflect the costs of development of all such hazardous waste
20
treatment facilities in Mexico.
Fiscal Year Ended May 31, 1996 Compared to Fiscal Year Ended May 31,
1995
Insulation Business. Total revenues and joint venture income from the
insulation business for the year ended May 31, 1996 were $11,536,000 as
compared to $15,804,000 for the same period in 1995, a decrease of 27%.
The portion attributable almost entirely to a decline in contract revenues
for the period. Income from the Curtom-Metalclad joint venture increased
14% to $91,000 from $80,000 for the same period in 1995. The decrease in
contract revenues can be primarily attributed to an overall decline in the
volume of work performed under the Company s various maintenance contracts
with industrial and utility plant clients.
Operating costs and expenses for the year declined to $12,390,000 from
$15,547,000 for fiscal year 1995, a decrease of 20%. Operating margins,
b e f ore selling, general and administrative expenses, decreased to
$1,202,000 from $2,454,000 for 1995, a decline of 51%. This decline can be
attributed to (a) a decrease in revenues which affects operating costs, (b)
cost overruns on three fixed-price contracts, and (c) lower margins in the
marketplace due to the competitive nature of the business. Selling,
general and administrative expenses were $2,055,000 as compared to
$2,198,000 for fiscal 1995, a decrease of 7%.
Mexican Business. Waste management revenues, primarily from the
operations of QUIMICA OMEGA, for the fiscal year ended May 31, 1996, were
$3,457,000 as compared to $2,228,000 for the same period in 1995, an
increase of 55%. The increase in revenues reflects the continued expansion
of operations as well as increased revenues from existing branches. Loss
from joint venture operations, representing QUIMICA OMEGA s 50% ownership
in BFI-OMEGA, was $(143,000) with no comparison period for this new
venture. The joint venture loss represents the period from March 10, 1996
through May 31, 1996 and incorporates the expenses relating to the
c o mmencement of, the transition to, and expansion of BFI-OMEGA s
operations.
Waste collection costs for the fiscal year ended May 31, 1996 were
$3,719,000 as compared to $4,286,000 for the same period in 1995, a
decrease of 13%. The cost reductions are attributed to a streamlining of
operations and efficiencies inherent in higher volumes and additional
experience in the market.
The landfill costs were $3,831,000 in fiscal 1996 as compared to
$5,449,000 for fiscal 1995, a decrease of 30%. Landfill costs are those
costs associated with development and general and administrative costs
incurred by the Company at its corporate headquarters and in Mexico related
to its other business objectives in Mexico, including the opening of the
landfill in San Luis Potosi.
Interest expense for fiscal 1996 was $960,000 as compared to
$1,771,000 in fiscal 1995. The decline is attributed to (a) the conversion
of a substantial amount of the 8% and 9% debentures in August 1995, and (b)
21
the conversion of all remaining debt in February 1996.
Other expense for fiscal 1996 was $728,644 representing the value of
the inducement provided to debenture holders to convert into common stock.
There are no comparative numbers for prior periods.
Consolidated Results. The Company experienced a net loss of
$6,780,000 for the year ended May 31, 1996 compared to a net loss of
$15,399,000 in fiscal 1995, a decrease of 56%. The fiscal 1995 loss
included $6,377,000 associated with the write-off of goodwill related to
the acquisition of QUIMICA OMEGA. Comparing the results, excluding the
write-off of goodwill, the Company s net loss for fiscal 1996 decreased
from fiscal 1995 by 25%, attributed to a reduction in interest costs as
well as a reduction in general and administrative costs associated with the
landfill and other development activities for its Mexican business.
Fiscal Year Ended May 31, 1995 Compared to Fiscal Year Ended May 31,
1994
Insulation Business. Total revenues and joint venture income from the
insulation business for the year ended May 31, 1995 were $15,804,000 as
compared to $16,310,000 for the same period in 1994, a decrease of 3.1%.
The portion attributable to contract revenues decreased 1% to $15,405,000
in fiscal 1995 from $15,565,000 for fiscal 1994. Material sales decreased
4.9% from $287,000 for the year ended May 31, 1994 to $273,000 for the
corresponding period in 1995 due to lower sales to public utility
customers. Income from the Curtom-Metalclad joint venture (see Note D of
Item 8, Financial Statements and Supplementary Data ), increased 33%
during the current fiscal year to $80,000 from $60,000 in the prior year
due to reduced overhead. Other revenues decreased 88% to $46,000 during
fiscal 1995 from $397,000 in the prior fiscal year primarily attributable
to a workers compensation insurance dividend received of approximately
$301,000 in fiscal 1994.
Operating costs and expenses for the insulation business decreased
2.7% during fiscal 1995 to $15,547,000 from $15,983,000 for fiscal 1994.
Contracting costs and expenses decreased 3.4% during the 12 months ended
May 31, 1995 to $13,148,000 from $13,606,000 for the comparable period in
1994. The Company's gross profit on contract revenues increased 15.2% to
$2,257,000 for the year ended May 31, 1995 from $1,959,000 for the
corresponding period in 1994 primarily due to improved material prices.
Cost of material sales decreased 8.6% to $201,000 during the 12 months
ended May 31, 1995 from $220,000 for the same period in 1994 correlating
with the decrease in material sales revenue. Selling, general, and
administrative costs for the insulation business increased 1.9% to
$2,198,000 during the 12 months ended May 31, 1995 from $2,157,000 during
the corresponding period in 1994.
Mexican Business. Waste management revenues of $2,228,000 resulted
from the operations of QUIMICA OMEGA for the 12 months ended May 31, 1995.
Waste collection costs, also associated with QUIMICA OMEGA, were $4,286,000
for the same period. Collection costs exceeded revenue for the year due to
incurring expenses in anticipation of growth and expansion which did not
22
occur because of the impact of the Mexican peso devaluation on the business
of QUIMICA OMEGA.
The write-off of costs in excess of net assets acquired relates to the
QUIMICA OMEGA goodwill which was previously discussed. Due to the
recession and other economic difficulties caused by the peso devaluation,
the Company changed the business plan for QUIMICA OMEGA in the fourth
quarter and wrote off the QUIMICA OMEGA goodwill at the end of the fiscal
year.
The landfill costs were $5,449,000 in fiscal year 1995 compared to
$3,833,000 in the prior year. Landfill costs are those development and
general and administrative costs incurred by Company at its corporate
headquarters and in Mexico related to its other objectives in Mexico,
including the opening of the landfill in San Luis Potosi.
Interest expense for the year ended May 31, 1995 was $1,771,000
compared to $844,000 in the comparable period in 1994, an increase of 110%.
The increase resulted from additional borrowings during the year as well as
the high interest rates being paid by QUIMICA OMEGA during the year on its
borrowings in Mexico.
Consolidated Results. The Company experienced a net loss of
$15,399,000 for the year ended May 31, 1995 compared to a loss of
$4,892,000 in fiscal 1994, an increase in loss of 216%. The increase in
the loss is attributable to (a) the write-off of goodwill associated with
the QUIMICA OMEGA acquisition, (b) losses within the QUIMICA OMEGA
operation, (c) general and administrative costs incurred related to
constructing the landfill and achieving the Company s other objectives for
its Mexican business, and (d) increased interest on debt.
Liquidity and Capital Resources
In November 1991, the Company completed the acquisition of Eco-
Metalclad, Inc. ("ECO-MTLC"), commenced the development of the hazardous
waste treatment business in Mexico and began advancing cash to its Mexican
subsidiaries for use in the Mexican business. Funding the development of
the Company's Mexican business has required and will continue to require
substantial capital. To obtain capital for the continued development of
the business of the Company in Mexico, the Company has made private
placements of its common stock and convertible subordinated debentures and
has obtained loans from financial institutions.
In February 1996, the Company completed a private placement of
1,650,000 shares of its common stock at a price of $4.00 per share, along
with 2,600,000 warrants to purchase common stock at $5.00 per share.
Additionally, Grant S. Kesler, T. Daniel Neveau and Javier Guerra Cisneros,
each an officer and director of the Company, placed 950,000 shares of
common stock priced at $4.00 per share. These latter shares were obtained
through the exercise of stock options at prices ranging from $1.50 to $2.25
with the Company as follows: Mr. Kesler, 425,000 shares; Mr. Neveau,
425,000 shares; and Mr. Guerra, 100,000 shares. The Company and the
selling shareholders each incurred their own costs and fees associated with
23
the private placement, with the Company realizing net proceeds, from its
placement of common stock, of $5,875,000.
The totals for the fiscal year ended May 31, 1996, inclusive of the
private placement in February 1996, include the issuance of approximately
2,400,000 shares at prices ranging from $1.05 to $4.00 with net proceeds of
approximately $8,800,000. Shares totaling 4,000,000 were issued upon the
exercise of options and warrants at prices ranging from $1.375 to $2.25,
generating net proceeds of approximately $6,800,000 including $2,000,000
from the Kesler, Neveau, and Guerra option exercise. Shares totaling
3 , 500,000 were issued in exchange for approximately $8,600,000 in
outstanding 8% and 9% debentures.
In September 1993, the Company obtained a loan in the amount of
$2,500,000 from a financial institution pursuant to the terms of a
promissory note due in September 1995. Interest on the loan accrued at the
prime rate of interest plus 7% and was secured by substantially all of the
assets of the Company. In connection with this financing, the Company
issued the financial institution a five-year warrant to purchase 375,000
shares of common stock at an exercise price of $4.50 per share. In
September 1994, the Company obtained a loan for an additional $525,000 from
the lender, bearing interest at the prime rate plus 7%, payable in November
1994 and was also secured by all of the assets of the Company. In
connection with this loan, the Company granted the lender a five-year
warrant to purchase 75,000 shares of common stock at an exercise price of
$2.625 per share.
In May 1995, the Company entered into a loan modification agreement
with the lender and extended the maturity of the debt, including principal
and interest of approximately $2,800,000 to June 30, 1996. In connection
with the extension, the Company issued the lender 87,578 shares of common
stock, reduced the exercise price of previously granted warrants to $1.59,
extended the expiration date of the warrants to May 31, 2000, and granted
the lender an additional five-year warrant to purchase 600,000 shares of
common stock at an exercise price of $1.908 per share. The agreement with
the lender further provided the lender the right to convert the debt into
shares of common stock at the rate of $1.59 per share. The Company also
agreed to pay the lender an additional $100,000 if the loan was not repaid
in full by October 13, 1995.
In February 1996, the lender exercised its option to convert 100% of
the outstanding loan balance of $1,924,797 into 1,210,564 shares of the
Company s common stock at the conversion rate of $1.59 per share.
The proceeds of the loan from the financial institution and the
issuances of common stock have been utilized for working capital,
equipment, and fixed asset purchases in connection with QUIMICA OMEGA, the
expansion capital required for the newly formed BFI-OMEGA joint venture,
and for the continued development activities of the Company; however, the
C o mpany will require additional capital to develop, construct and
subsequently open the additional facilities it intends to pursue.
Working capital (deficit) at May 31, 1996 was $6,787,000 compared to
24
($1,881,000) at May 31, 1995. The Company had cash and cash equivalents at
May 31, 1996 of $7,344,000 and $381,000 at May 31, 1995. Cash used in
operations for the year ended May 31, 1996 was ($5,823,000) compared to
($5,732,000) for the same period in fiscal 1995. Cash used in operations
in the 12 months ended May 31, 1996 was funded primarily by existing cash
and cash equivalents on hand at the beginning of the fiscal year and by the
proceeds received from stock issuances completed during the year.
The Company believes that the insulation business will generate
adequate cash flows from continuing operations to meet its future
obligations and expenses relating to such operations; however, the Company
will require substantial additional financing to construct and operate
additional waste treatment facilities in Mexico as well as to support the
continuing expansion of the BFI-OMEGA joint venture. Furthermore, to the
extent that the Company is required to expend additional efforts to open
the landfill, additional general and administrative expenses without
revenues to offset such expenses are anticipated until the landfill is
opened.
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 proposed operations.
Impact of Recently Issued Accounting Standards
In March 1995, the Financial Accounting Standards Board issued
Statements of Financial Accounting Standards (SFAS) No. 121 Accounting For
The Impairment of Long-lived Assets For Long-Lived Assets To Be Disposed
Of. The Company is required to adopt SFAS No. 121 as of June 1, 1996, and
management believes the effect of adoption will not have a material impact
on the financial statements.
In October 1995, the Financial Accounting Standards Board issued SFAS
No. 123 Accounting For Stock-based Compensation. The Company has not yet
determined whether it will implement the fair value-based accounting method
or continue accounting for stock options under APB Opinion No. 25.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements and schedules listed in the
25
accompanying Index to Consolidated Financial Statements are attached hereto
and filed as a part of this Report under Item 14.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On May 6, 1996, the Company filed the following information on Form 8-K/A3:
The registrant has dismissed its former principal accountants, Grant
Thornton LLP, effective March 25, 1996.
During the two most recent fiscal years of the registrant and each
s u bsequent interim period preceding March 25, 1996 there were no
disagreements with the former accountants on any matter of accounting
principles or practices, financial statement disclosure or auditing scope
or procedure or any reportable events.
The reports of the former principal accountants on the consolidated
financial statements of the registrant for the fiscal years ended May 31,
1994 and 1995 did not contain qualified opinions. However, their report
dated September 12, 1994 on the consolidated financial statements of the
registrant for the year ended May 31, 1994 did contain an explanatory
paragraph regarding an uncertainty regarding a workers compensation
insurance premium assessment. Also, their report dated August 31, 1995
(except for Note G, as to which the date is September 12, 1995) on the
consolidated financial statements of the registrant for the year ended May
31, 1995 contained explanatory paragraphs regarding uncertainties about the
company s ability to continue as a going concern and regarding the company
not having been granted all necessary governmental authorizations to open
and operate its hazardous waste facility in Mexico.
The Registrant s Board of Directors has approved the decision to
change accountants.
On April 26, 1996, the Company engaged Arthur Andersen LLP as its
principal accountant.
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 1995 Annual Meeting Proxy Statement which will be filed with
the Securities and Exchange Commission not later than 120 days after May
31, 1996. The Company's 1996 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.
26
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 402 of Regulation S-K is set forth in the
Company's 1995 Annual Meeting Proxy Statement which will be filed with the
Securities and Exchange Commission not later than 120 days after May 31,
1996. The Company's 1996 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 1995 Annual Meeting Proxy Statement which will be filed with
the Securities and Exchange Commission not later than 120 days after May
31, 1996. The Company's 1996 Annual Meeting Proxy Statement, exclusive of
the information set forth under the captions "Report of the Compensation
Committee" and "Company Performance," are incorporated herein by this
reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In October 1994, in consideration of extraordinary contributions to
the Company, including but not limited to the pledge of 755,000 shares of
common stock of the Company owned by them to facilitate necessary
financings for the Company, the Board of Directors approved a loan of
$370,000 to each of Mr. Kesler and Mr. Neveau. Such borrowings are due 30
days after demand and bear Annual interest at the prime rate of interest
plus 7%. The borrowings are secured by a pledge of 300,000 shares of
common stock from each borrower. In February 1996 Messrs. Kesler and
Neveau each repaid $150,000 to the Company. In March 1996, the notes were
amended to modify the loan principal between Messrs. Kesler and Neveau as
well as to adjust the interest rates, effective March 1, 1996 to a variable
rate based upon the Company s quarterly investment rate. The amendment
also stipulates that the notes must be re-paid by May 31, 1997.
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.
During the fiscal year ended May 31, 1996, the Company agreed to pay
consulting fees of $51,000 to Mr. Liddle, a director of the Company. These
fees are for services in connection with management oversight and
consulting to the insulation business. Additionally, the Company has
entered into a 19-month consulting agreement with Mr. Liddle for on-going
consulting services at a rate of $5,000 per month.
During the fiscal year ended May 31, 1996, the Company entered into an
agreement with The Chesapeake Group, whose Managing Director is Douglas S.
27
Land, a director of the Company. The agreement engages Chesapeake as a
financial consultant to the Company in matters pertaining to its Mexican
waste operations. Additionally, the Company agreed to certain transaction
fees associated with new business ventures, mergers or acquisitions in
Mexico. During the period ended May 31, 1996, the Company agreed to pay to
Chesapeake $100,000 for consulting services rendered during calendar year
1995 and $8,000 per month for on-going consulting services. In addition,
the Company agreed to pay a transaction fee for the successful closing of
the BFI-OMEGA joint venture of $325,000 and in June 1996 granted 250,000
options for the purchase of common stock of the Company exercisable at
$3.00 per share.
During the fiscal year ended May 31, 1996, the Company paid legal fees
of $283,000 to the law firm of Gibson, Haglund & Johnson, of which Bruce
Haglund, general counsel and Secretary of the Company, is a principal.
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
Report of Independent Public Accountants
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Shareholders' Equity (Deficit)
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
3.1 Form of Certificate for Common Stock (3)
10.1 Warrant to Purchase Common Stock dated August 31, 1991
issued to F.N. Wolf & Co., Inc. (1)
10.2 Warrant to Purchase Common Stock dated November 30,
28
1991 issued to F.N. Wolf & Co., Inc. (1)
10.3 Warrant to Purchase Common Stock dated February 6, 1992
issued to T. Marshall Swartwood (2)
10.4 Warrant to Purchase Common Stock dated February 6, 1992
issued to Glenn Cushman (2)
10.5 Employment Agreement, as amended, between the Company
and Grant S. Kesler dated March 7, 1995 (6)
10.6 Employment Agreement, as amended, between the Company
and T. Daniel Neveau dated March 7, 1995 (6)
10.7 Modification Agreement, as amended, between the Company
and T. Daniel Neveau dated July 15, 1996
10.8 Employment Agreement between the Company and Anthony C.
Dabbene dated July 10, 1996
10.9 Non-Qualified Stock Option Agreement between the
Company and Bruce H. Haglund dated October 17, 1991 (1)
10.10 Non-Qualified Stock Option Agreement between the
Company and T. Daniel Neveau dated October 17, 1991 (1)
10.11 Non-Qualified Stock Option Agreement between the
Company and Gordon M. Liddle dated October 17, 1991 (1)
10.12 Nonstatutory Stock Option Agreement between the Company
and Grant S. Kesler dated March 7, 1995 (6)
10.13 Nonstatutory Stock Option Agreement between the Company
and T. Daniel Neveau dated March 7, 1995 (6)
10.14 Nonstatutory Stock Option Agreement between the Company
and Javier Guerra Cisneros dated March 7, 1995 (6)
10.15 Nonstatutory Stock Option Agreement between the Company
and Bruce H. Haglund dated March 7, 1995 (6)
10.16 Lease dated June 17, 1992 pertaining to the Company s
facilities at 3737 Birch Street, Suite 300, Newport Beach, California 92660
(2)
10.17 Lease dated June 4, 1987 pertaining to the Company s
facilities at 2198 South Dupont Drive, Anaheim, California 92803 (3)
10.18 Third Amendment to Lease dated May 12, 1994 pertaining
to the Company s facilities at 2198 South Dupont Drive, Anaheim, California
92803 (7)
29
10.19 Form of 1993 Omnibus Stock Option and Incentive Plan (4)
10.20 Agreement between Confinamiento Tecnico de Residuos
Industriales, S.A. de C.V. and Eco-Metalclad, Inc. Dated April 23, 1993 and
amendment dated September 9, 1993 (5)
10.21 Employment agreement dated January 3, 1994 between the
Company and Glenn Meyer (5)
10.22 Employment agreement dated January 3, 1994 between the
Company and Wayne May (5)
10.23 Employment agreement dated January 3, 1994 between the
Company and David Duclett
22. List of Subsidiaries of the Registrant
23. Consents of Experts and Counsel
-------------------------------------------
(1) Filed with the Company s Annual Report on Form 10-K for the year
ended December 31, 1991 and incorporated herein by this reference.
(2) Filed with the Company s Annual Report on Form 10-K for the year
ended December 31, 1992 and incorporated herein by this reference.
(3) Filed with the Company s Registration Statement on Form S-1
dated December 15, 1987 and incorporated by reference.
(4) 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.
(5) Filed with the Company s Annual Report on Form 10-K for the year
ended May 31, 1994
(6) Filed with the Company s Annual Report on Form 10-K for the year
ended May 31, 1995
(b) Reports on Form 8-K
A current report on Form 8-K A/3 was filed on May 6, 1996 reporting
the change in the Company s accountants. See Item 9, "Changes in and
Disagreements with Accountants on Accounting and Financial Disclosure.
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.
30
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/Grant S. Kesler
---------------------------------
Grant S. Kesler
Chief Executive Officer
Date: August 30, 1996
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 August 29, 1996
-------------------------- and Director
Grant S. Kesler
/s/T. Daniel Neveau Chairman and Director August 29, 1996
--------------------------
T. Daniel Neveau
/s/Javier Guerra Cisneros Director August 29, 1996
--------------------------
Javier Guerra Cisneros
/s/Gordon M. Liddle Director August 29, 1996
--------------------------
Gordon M. Liddle
/s/Douglas S. Land Director August 29, 1996
--------------------------
Douglas S. Land
/s/Anthony C. Dabbene Chief Financial Officer August 29, 1996
-------------------------- (Principal Accounting Officer)
Anthony C. Dabbene
31
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 Arthur Andersen LLP ...................................F-1
Report of Grant Thornton LLP......................................F-2
Financial Statements:
Consolidated Balance Sheets - May 31, 1996 and 1995...............F-3
Consolidated Statements of Operations - Years Ended
May 31, 1996, 1995 and 1994.......................................F-5
Consolidated Statements of Shareholders' Equity (Deficit) -
Years Ended May 31, 1996, 1995 and 1994...........................F-6
Consolidated Statements of Cash Flows - Years Ended
May 31, 1996, 1995 and 1994.......................................F-7
Notes to Consolidated Financial Statements...........................F-9
Supplementary Financial Statement Schedules:
Schedule II - Valuation and Qualifying Accounts..................F-25
32
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
The Board of Directors and Shareholders of
Metalclad Corporation:
We have audited the accompanying consolidated balance sheet of Metalclad
Corporation (a Delaware Corporation) and subsidiaries as of May 31, 1996,
and the related consolidated statements of operations, shareholders equity
and cash flows for the year then ended. These financial statements are the
responsibility of the Company s management. Our responsibility is to
express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with 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,
e v i dence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audit
provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Metalclad Corporation
and subsidiaries as of May 31, 1996, and the results of their operations
and their cash flows for the year then ended in conformity with generally
accepted accounting principles.
Our audit was made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in the index of
financial statements is presented for purposes of complying with the
Securities and Exchange Commission s rules and is not part of the basic
financial statements. The May 31, 1996 data has been subjected to the
auditing procedures applied in the audit of the basic financial statements
and, in our opinion, fairly states in all material respects the financial
data required to be set forth therein in relation to the basic financial
statements taken as a whole.
ARTHUR ANDERSEN LLP
Orange County, California
August 15, 1996
F-1
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors and Shareholders
Metalclad Corporation
We have audited the accompanying consolidated balance sheet of Metalclad
Corporation and Subsidiaries as of May 31, 1995, and the related
consolidated statements of operations, shareholders equity (deficit) and
cash flows for the years ended May 31, 1995 and 1994. These consolidated
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,
e v i dence 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 consolidated financial position of Metalclad
Corporation and Subsidiaries as of May 31, 1995, and the consolidated
results of their operations and their consolidated cash flows for the years
ended May 31, 1995 and 1994, in conformity with generally accepted
accounting principles.
We have also audited Schedule II of Metalclad Corporation and Subsidiaries
for the years ended May 31, 1995 and 1994. In our opinion, this schedule
presents fairly, in all material respects, the information required to be
set forth therein.
GRANT THORNTON LLP
Irvine, California
August 31, 1995
F-2
Metalclad Corporation and Subsidiaries
CONSOLIDATED BALANCE SHEETS
May 31,
ASSETS 1996 1995
---------- ----------
Current assets:
Cash and cash equivalents $7,344,357 $ 381,406
Accounts receivable, including amounts retained
by customers under contract terms of $25,967 in
1996 and $53,490 in 1995, less allowance for
doubtful accounts of $66,566 in 1996 and
$44,480 in 1995 2,297,820 2,337,968
Costs and estimated earnings in excess of billings
on uncompleted contracts 56,372 343,405
Inventories 325,795 374,029
Prepaid expenses and other current assets,
including restricted certificates of deposits of
$130,000 in 1995 53,371 681,696
Receivables from related parties 105,763 197,408
---------- ----------
Total current assets 10,183,478 4,315,912
Property, plant and equipment, net 5,462,657 5,266,869
Investment and capitalized costs in unconsolidated
affiliates 1,169,221 87,453
Receivables from related parties, non-current - 6,261
Deposits and other assets, including restricted certifi-
cates of deposit of $7,730 in 1995 108,842 138,946
Goodwill, less accumulated amortization of $59,917 in
1996 and $17,469 in 1995 752,835 143,783
Real estate held for sale 25,000 155,515
Capitalized debenture costs, less accumulated amortization
of $456,819 in 1995 - 595,478
---------- ----------
$17,702,033 $10,710,217
========== ==========
The accompanying notes are an integral part of these consolidated balance
sheets.
F-3
Metalclad Corporation and Subsidiaries
CONSOLIDATED BALANCE SHEETS - CONTINUED
May 31,
1996 1995
----------- -----------
LIABILITIES AND SHAREHOLDERS EQUITY (DEFICIT)
Current liabilities:
Accounts payable $ 1,149,586 $ 2,751,540
Accrued payroll, property and other taxes 359,807 596,657
Accrued expenses 1,525,216 1,465,759
Accrued waste disposal costs 255,623 150,474
Billings in excess of costs and estimated earnings
on uncompleted contracts 69,757 113,817
Current portion of long-term debt 36,721 1,118,947
---------- ----------
Total current liabilities 3,396,710 6,197,194
---------- ----------
Long-term debt, less current portion - 2,050,237
---------- ----------
Convertible subordinated debentures 239,533 8,636,109
---------- ----------
Shareholders equity (deficit):
Preferred stock, par value $10; 1,500,000 shares
authorized; none issued--
Common stock, par value $.10; 40,000,000 shares
authorized; 28,733,229 and 15,885,628 issued and
outstanding at 1996 and 1995, respectively 2,873,323 1,588,563
Additional paid-in capital 54,990,952 29,044,185
Accumulated deficit (41,363,763) (34,583,991)
Officers receivable collateralized by stock (559,192) (740,000)
Cumulative foreign currency translation adjustment (1,875,530) (1,482,080)
---------- ----------
14,065,790 (6,173,323)
---------- ----------
$17,702,033 $10,710,217
========== ==========
The accompanying notes are an integral part of these consolidated balance
sheets.
F-4
Metalclad Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
Year ended May 31,
1996 1995 1994
----------- ----------- -----------
Revenues-Insulation
Contract revenues $ 9,941,360 $13,108,952 $12,710,110
Contract revenue from joint venture 1,267,000 2,296,000 2,855,000
Material sales 230,336 272,627 286,565
Income from joint venture 90,817 80,013 60,360
Other 6,390 46,336 397,600
---------- ---------- ----------
11,535,903 15,803,928 16,309,635
Operating costs and expenses - Insulation
Contract costs and expenses 10,160,868 13,148,231 13,606,310
Cost of material sales 173,911 200,588 219,688
Selling, general and administrative expenses 2,055,043 2,197,814 2,156,582
---------- ---------- ----------
12,389,822 15,546,633 15,982,580
---------- ---------- ----------
Operating profit (loss) - Insulation (853,919) 257,295 327,055
---------- ---------- ----------
Revenues - Waste Management
Waste collection 3,456,680 2,228,169 203,332
Landfill - - -
Loss from joint venture (143,415) - -
---------- ---------- ----------
3,313,265 2,228,169 203,332
---------- ---------- ----------
Operating costs and expenses - Waste Management
Waste collection 3,719,137 4,286,178 746,844
Landfill 3,831,117 5,449,289 3,832,294
Write-off of goodwill - 6,377,716 -
---------- ---------- ----------
7,550,254 16,113,183 4,579,138
---------- ---------- ----------
Operating loss - Waste Management (4,236,989) (13,885,014) (4,375,806)
---------- ---------- ----------
Operating loss (5,090,908) (13,627,719) (4,048,751)
Interest expense 960,220 1,771,394 843,653
Other expense 728,644 - -
---------- ---------- ----------
Net loss $(6,779,772) $(15,399,113) $(4,892,404)
========== =========== ==========
Weighted average number of common shares 22,770,516 13,682,800 8,690,676
========== =========== =========
Loss per share of common stock $(.30) $(1.13) $(.56)
===== ====== ====
F-5
Metalclad Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY (DEFICIT)
Years Ended May 31, 1996, 1995 and 1994
Foreign Total
Additional Currency Shareholders
Common Stock Paid-in Accumulated Officers Translation Equity
Shares Amounts Capital Deficit Receivable Adjustment (Deficit)
---------- ---------- ---------- ----------- ----------- ---------- -----------
Balance at May 31, 1993 $7,890,353 $789,036 $11,839,685 $(14,292,474) $ - $ (53,069) $(1,716,822)
Issuance of common stock
for Quimica Omega 2,800,000 280,000 6,020,000 - - - 6,300,000
Issuance of common stock 776,000 77,600 2,170,151 - - - 2,247,751
Common stock issued under stock
option plans and warrants 127,707 12,771 305,605 - - - 318,376
Conversion of debentures to
common stock 97,312 9,731 308,309 - - - 318,040
Translation adjustment - - - - - 34,678 34,678
Net loss - - - (4,892,404) - - (4,892,404)
---------- ---------- ---------- ----------- ----------- ---------- -----------
Balance at May 31, 1994 11,691,372 1,169,138 20,643,750 (19,184,878) - (18,391) 2,609,919
Issuance of common stock 4,119,216 411,921 8,118,061 - - - 8,529,982
Common stock issued under stock
option plans and warrants 30,000 3,000 62,313 - - - 65,313
Conversion of debentures to
common stock 45,040 4,504 175,656 - - - 180,160
Donated capital - - 44,405 - - - 44,405
Advances to officers, collateral-
ized by stock - - - - (740,000) - (740,000)
Translation adjustment - - - - - (1,463,689) (1,463,689)
Net loss - - - (15,399,113) - - (15,399,113)
---------- ---------- ---------- ----------- ----------- ----------- -----------
Balance at May 31, 1995 15,885,628 1,588,563 29,044,185 (34,583,991) (740,000) (1,482,080) (6,173,323)
Issuance of common stock 4,044,986 404,498 9,297,372 - - - 9,701,870
Common stock issued under stock
option plans and warrants 3,951,836 395,184 6,448,386 - - - 6,843,570
Conversion of debentures to
common stock 3,525,581 352,558 8,270,869 - - - 8,623,427
Officers loans; interest &
repayments - - - - 180,808 - 180,808
Debt conversions 1,325,198 132,520 1,974,545 - - - 2,107,065
Donated capital - - (44,405) - - - (44,405)
Translation adjustment - - - - - (393,450) (393,450)
Net loss - - - (6,779,772) - - (6,779,772)
---------- ---------- ---------- ----------- ----------- ---------- -----------
Stockholders Equity
May 31, 1996 28,733,229 $2,873,323 $54,990,952 $(41,363,763) $ (559,192)$(1,875,530) $14,065,790
========== ========== ========== =========== ========== ========== ==========
The accompanying notes are an integral part of these consolidated
statements.
F-6
Metalclad Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended May 31,
1996 1995 1994
---------- ----------- -----------
Cash flows from operating activities:
Net loss $(6,779,772) $(15,399,113) $(4,892,404)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 359,642 1,255,116 365,842
Write-off of goodwill - 6,377,716 -
Other (276,095) - -
Provision for losses on accounts receivable 24,373 - 40,000
Issuance of stock for services and interest
on convertible subordinated debentures 399,608 - -
Issuance of debentures for services 39,323 - -
Debenture conversion expense 728,644 - -
Write down of real estate held
for sale 130,415 - -
Loss on sale of assets - 45,553 48,833
Earnings in excess of distributions from
Curtom-Metalclad 27,412 (27,093) (39,204)
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable (82,641) 97,841 109,514
(Increase) decrease in unbilled receivables 287,033 83,921 (362,976)
(Increase) decrease in inventories 46,839 (9,442) (2,640)
(Increase) decrease in prepaid expenses
and other assets 629,952 623,212 (737,232)
(Increase) decrease in receivables from
related parties 97,914 (7,704) 74,172
(Decrease) increase in accounts payables
and accrued expenses (1,411,379) 1,127,241 (548,147)
(Decrease) increase in billings over costs (44,060) 101,097 (152,917)
---------- ----------- ----------
Net cash used in operating activities (5,822,792) (5,731,655) (6,097,159)
----------- ----------- ----------
Cash flows from investing activities:
Purchases of property, plant and equipment (735,780) (3,411,080) (1,925,973)
Investments and capitalized costs in
unconsolidated affiliates (1,353,972) - -
----------- ----------- -----------
Net cash used in investing activities $(2,089,752) $(3,411,080) $(1,925,973)
----------- ----------- -----------
The accompanying notes are an integral part of these consolidated
statements.
F-7
Metalclad Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
Year ended May 31,
1996 1995 1994
---------- ---------- ----------
Cash flows from financing activities:
Proceeds from revolving line of credit and long-term
borrowings $ 11,154 $ 797,297 $2,500,000
Payments on revolving line of credit and long-term
borrowings (906,456) (517,144) (599,770)
Payments on Officers receivable collateralized by
stock (net) 180,808 (740,000) -
Sale of common stock 8,864,862 8,529,982 2,247,751
Issuance of common stock under stock option plans
and warrants 6,843,570 65,313 318,376
Issuance of convertible subordinated debentures,
net of offering costs - 61,000 4,340,599
Payments of convertible subordinated debentures - (38,368) -
---------- ---------- ----------
Net cash provided by financing activities 14,993,938 8,158,080 8,806,956
---------- ---------- ----------
Effect of exchange rates on cash (118,443) 219,570 34,678
---------- ---------- ----------
Increase (decrease) in cash and cash equivalents 6,962,951 (765,085) 818,502
---------- ---------- ----------
Cash and cash equivalents at beginning of period 381,406 1,146,491 327,989
---------- ---------- ----------
Cash and cash equivalents at end of period $7,344,357 $ 381,406 1,146,491
========= ========= =========
Supplemental disclosures of cash flow information:
Cash paid for interest $ 951,968 $1,260,373 $ 898,583
========= ========= =========
Supplemental schedule of noncash investing and financing activities:
Effective May 5, 1994, the Company acquired the stock of Quimica Omega in
exchange for 2.8 million shares of the Company s common stock, as follows:
Common stock acquired $6,300,000
Net liabilities assumed 1,013,831
---------
Cost in excess of net assets acquired $7,313,831
=========
During fiscal year 1996, 125,000 shares of common stock were issued at
$3.50 per share as additional consideration for the acquisition of
COTERIN (see Note C).
During fiscal year 1996, approximately $8.6 million in convertible
subordinated debentures converted into common stock of the Company at
the induced conversion rate of $2.50 per share. Debenture conversion
F-8
rate at the time of the offer by the Company was $2.82 per share.
During fiscal year 1996, approximately $2.1 million in debt converted
into common stock of the Company at the conversion rate of $1.59 per
share.
Metalclad Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
May 31, 1996 and 1995
NOTE A - SIGNIFICANT ACCOUNTING POLICIES
Description of Business
Metalclad Corporation (the Company ) is engaged in industrial insulation
services, including asbestos abatement services and insulation material
sales, to customers primarily in California (the Insulation Business ).
The Company is also engaged in the development of hazardous waste treatment
facilities and the collection and recycling of hazardous waste for
disposition to landfills or cement kilns in Mexico (the Mexican Business )
(see Note C).
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. Costs incurred relating to the acquisition or
formation of an equity method investment are considered part of the
investment.
Contracts in Process
Fixed price insulation installation and asbestos abatement contracts are
accounted for by the percentage-of-completion method wherein costs and
estimated earnings are included in revenues as the work is performed. If a
loss on a fixed price contract is indicated, the entire amount of the
estimated loss is accrued when known. Time and material contracts are
accounted for under a cost plus fee basis. Retentions by customers under
contract terms are due at contract completion.
Waste Collection Revenue
Revenues pertaining to the collection of industrial waste products are
recognized when waste is collected. Estimated costs of reprocessing and
disposal are accrued when revenues are recognized. Certain of the
collected wastes are blended and subsequently sold as fuel to cement kilns.
Revenues from fuel sales are recognized upon delivery to the customers;
related processing and transportation costs are recognized when incurred.
F-9
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.
Hazardous Waste Treatment Facility
During fiscal 1994, the Company acquired COTERIN (see Note C), which owns a
landfill site that had been operated as a waste transfer station prior to
the acquisition. Management of the Company is continuing its efforts to
obtain public support from state and local government officials to assure
s a fe and uninterrupted operations of an expanded modern landfill.
Capitalized costs consist of acquisition, development and construction
costs, including engineering, consulting, environmental studies, permitting
and legal costs associated with the landfill. (See note B)
Landfill operating costs and expenses of the waste management business in
Mexico for the years ended May 31, 1996, 1995 and 1994 consist of direct
costs in Mexico as well as costs incurred in the United States-based
corporate headquarters of the Company including compensation, travel,
legal, accounting, consulting and payments made to officers, directors and
other related parties. The full amount of the costs incurred at the
corporate headquarters has been allocated to the waste management business
in Mexico because the individuals located therein spend their time
primarily in the development of that business.
Depreciation and Amortization
Property, plant and equipment is stated at cost. Depreciation 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 to 25 years for hazardous waste
treatment facilities.
Goodwill
Goodwill as of May 31, 1996 represents the cost of purchasing COTERIN (see
Note C) over the fair value of its net assets. The Company is amortizing
its goodwill over 10 years.
The Company periodically evaluates the recoverability of these costs by
comparing the carrying value to estimated future cash flows from the
related operations. As a result of a significant devaluation of the
Mexican Peso during December 1994 and a resulting adverse impact on the
economy in Mexico, coupled with the recurring losses in QUIMICA OMEGA, (see
note C) the Company s business plan related to this entity was modified
substantially. The new business plan would no longer substantiate the
carrying value of the goodwill acquired relating to the QUIMICA OMEGA
purchase and, accordingly, the amounts associated with QUIMICA OMEGA at May
31, 1995 were written off, which resulted in a charge to operations of
$6,377,716.
Cash Equivalents
F-10
T h e Company considers all highly liquid investments with original
maturities of three months or less to be cash equivalents. The carrying
amount approximates fair value because of the short maturity of those
instruments.
Loss Per Share
Loss per share has been computed based upon the weighted average number of
common shares outstanding during the period. Stock options and warrants
are anti-dilutive and have been excluded from the computation.
Income Taxes
The Company accounts for income taxes using the liability method as
prescribed by Financial Accounting Standards No. 109, Accounting for
Income Taxes .
Foreign Currency Translation
All assets and liabilities of the Mexican subsidiaries are translated at
the current exchange rate as of the end of the accounting period. Items in
the statements of operations are translated at average currency exchange
rates. The value of the Mexican Peso relative to the U.S. Dollar declined
from approximately 3.4 Mexican Pesos in June 1994 to 6.2 Mexican Pesos to
the U.S. Dollar in May 1995 to approximately 7.4 Mexican Pesos to the U.S.
Dollar at May 31, 1996. The resulting translation adjustment is recorded
as a separate component of shareholders equity (deficit).
Reclassifications
Certain reclassifications have been made to prior period consolidated
financial statements to conform with the current year presentation.
Impact of Recently Issued Accounting Standards.
In March 1995, the Financial Accounting Standards Board issued Statements
of Financial Accounting Standards (SFAS) No. 121 Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of . SFAS No 121 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 amount of an asset
m a y not be recoverable based on the estimated future cash flows
(undiscounted and without interest charges). SFAS No. 121 also requires
that long-lived assets and certain identifiable intangibles to be disposed
of be reported at the lower of carrying amount or fair value less costs to
sell. The Company is required to adopt SFAS No. 121 as of June 1, 1996,
and management believes the effect of adoption will not have a material
impact on the financial statements.
In October 1995, the Financial Accounting Standards Board issued SFAS No.
123 Accounting for Stock-Based Compensation . Under SFAS No. 123,
companies have the option to implement a fair value-based accounting method
or continue to account for employee stock options and stock purchase plans
F-11
using the intrinsic value-based method of accounting as prescribed by
Accounting Principles Board (APB) Opinion No. 25 Accounting for Stock
Issued to Employees. Entities electing to remain under APB Opinion No. 25
must make pro forma disclosures of net income or loss and earnings per
share as if the fair value-based method of accounting defined in SFAS No.
123 had been applied. SFAS No. 123 is effective for financial statements
for fiscal years beginning after December 15, 1995. The Company has not
yet determined whether it will implement the fair value-based accounting
method or continue accounting for stock options under APB Opinion No. 25.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
NOTE B - REALIZATION OF ASSETS
Landfill
Included in property, plant and equipment at May 31, 1996 is approximately
$3,760,000 representing the Company s investment in its hazardous waste
treatment facility in Mexico. Additionally, the Company has recorded
goodwill of approximately $750,000 associated with this facility. The
Company has been granted all necessary federal governmental authorizations
to open and operate the facility but, as yet, has not received the support
of the state and local governments. The financial statements do not
include any adjustments relating to the recoverability of the carrying
amount of this asset that might be necessary should the Company be unable
to open and operate the facility.
NOTE C - WASTE MANAGEMENT BUSINESS
During the year ended May 31, 1994, the Company formed a Mexican holding
company, Ecosistemas Nacionales, S.A. de C.V. (ECONSA), to ultimately hold
the common stock of Ecosistemas del Potosi, S.A. de C.V. (ECOPSA),
Confinamiento Tecnico de Residuos Industriales, S.A. de C.V. (COTERIN),
Consultoria Ambiental Total, S.A. de C.V. (CATSA), and Quimica Omega, S.A.
de C.V. (QUIMICA OMEGA).
COTERIN
In September 1993, the Company entered into an agreement to acquire 94% of
COTERIN which owns a permitted landfill which was operated as a waste
transfer station prior to the acquisition. In January, 1996 the original
agreement was amended whereby the Company paid an additional $200,000 in
cash plus 125,000 shares of common stock in the Company in exchange for a
reduction in certain future contingent payments based on the landfill
F-12
opening to $300,000 and a reduction in the royalty payment to 1% of gross
revenues. In addition, the Company acquired the remaining shares of
COTERIN that it did not own, essentially vesting 100% of the ownership of
the landfill to the Company. The Company has the obligation to remediate
the landfill due to its prior use as a transfer station, conditional upon
the landfill opening. The agreement with the sellers jointly obligates
them to compensate COTERIN for the costs of remediation in excess of
$500,000 in total or $100,000 annually. This obligation can be offset by
any monies that may be due the sellers from the Company.
QUIMICA OMEGA
On May 5, 1994, the Company acquired all of the issued and outstanding
common and preferred stock of QUIMICA OMEGA in exchange for 2,800,000
restricted shares of the Company s common stock. QUIMICA OMEGA specializes
in the collection of hazardous waste for recycling and disposal at
landfills or cement kilns, which supplement their fuel requirements with
fuels reblended by QUIMICA OMEGA. The transaction has been accounted for
as a purchase. The purchase price of $6,300,000 was based upon
management s estimate of the fair value of the Company s common stock
issued to the Quimica shareholders.
Under the terms of the agreement, the former shareholders of QUIMICA OMEGA
agreed to vote their common shares in agreement with the chairman and
president of the Company, except on matters affecting change in ownership,
for a period of three years.
The Company s business plan with respect to the QUIMICA OMEGA acquisition
contemplated growth through the opening of new branch offices in other
Mexican states. The recession and economic uncertainty in Mexico resulting
from a peso devaluation and other political changes made it infeasible to
pursue that plan and the Company pursued other directions, which resulted
in a partnership with BFI-Mexico.
On April 9, 1996, the Company and BFI-Mexico, formed BFI-OMEGA as a 50%-50%
owned joint venture corporation. Pursuant to a shareholders agreement
between the parties, the Company will contribute its business assets
relating to certain waste collection, treatment, and disposal activities to
BFI-OMEGA as its initial capital contribution to the venture. BFI-Mexico
will contribute a transportable hazardous waste incinerator to BFI-OMEGA as
its initial capital contribution to the venture. Effective with this
agreement, BFI-Omega assumed management of Quimica Omega s business, with
the full transfers of assets, personnel and permits anticipated to be
completed in the Company s second quarter ended November 30, 1996. The
Company estimates that approximately $1.2 million in assets will be
transferred to BFI. As of May 31, 1996, the Company capitalized costs of
$516,000 representing direct costs of forming the joint venture. No
adjustments have been made to the financial statements to reflect the
pending contributions and transfers to the joint venture.
NOTE D - INVESTMENTS IN UNCONSOLIDATED AFFILIATES
BFI-OMEGA
F-13
In April 1996, the Company, through its Mexican subsidiary QUIMICA OMEGA,
formed a 50%-50% jointly owned company with BFI-Mexico to provide full
range of industrial waste collection, transportation, recycling, treatment
and disposal services in Mexico. This Company, known as BFI-OMEGA is
accounted for under the equity method. As of May 31, 1996, BFI-OMEGA had
not commenced revenue generating activities but was primarily involved in
the management of QUIMICA OMEGA and the transition to BFI-OMEGA operations.
The following is unaudited financial information for BFI-OMEGA, presented
in U.S. dollars, as of May 31, 1996:
Balance Sheet
(Unaudited)
May 31,
1996
---------
Cash $1,662,946
Prepaid expenses 88,952
Other assets 40,870
Property, plant and equipment 34,400
---------
Total assets $1,827,168
=========
Common stock $2,065,872
Retained earnings (238,704)
---------
Total liabilities and equity $1,827,168
=========
Statement of Operations
(Unaudited)
May 31,
1996
---------
Revenues $ -
Cost of Sales -
Expenses 238,704
---------
Loss from operations $ (238,704)
=========
Curtom-Metalclad
In 1989, the Company entered into a joint venture with a minority service
firm ( Curtom-Metalclad ) to perform industrial insulation and industrial
F-14
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.
The Company s 49% interest in the undistributed profits of Curtom-
Metalclad amounted to $60,041 and $87,453 at May 31, 1996 and 1995,
respectively.
The following is unaudited summarized financial information for Curtom-
Metalclad:
Balance Sheet
(Unaudited)
May 31,
1996 1995
------- -------
Cash $214,183 $215,349
Accounts receivable 219,058 370,952
------- -------
Total assets 433,241 586,301
======= =======
Accounts payable 310,054 407,826
Curtom-equity 63,146 91,022
Metalclad-equity 60,041 87,453
------- -------
Total liabilities and partners capital $433,241 $586,301
======= =======
Statement of OperationS
(Unaudited)
Year Ended May 31,
1996 1995 1994
--------- --------- ---------
Revenue $1,417,601 $2,505,697 $3,219,203
Costs of sales (1,231,613) (2,341,019) (2,956,198)
Expenses (646) (1,386) (17,997)
--------- --------- ---------
Income from operations $ 185,342 $ 163,292 $ 245,008
========= ========= =========
F-15
NOTE E - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following at May 31,:
1996 1995
---------- ---------
Buildings $ 98,857 $ 115,615
Land 273,172 337,880
Machinery and equipment 1,702,036 1,541,634
Automotive equipment 484,415 607,879
Leasehold improvements 45,159 41,596
---------- ---------
2,603,639 2,644,604
Less accumulated depreciation and amortization (901,304) (702,004)
---------- ---------
1,702,335 1,942,600
Hazardous waste treatment facilities 3,760,322 3,324,269
---------- ---------
$5,462,657 $5,266,869
========== =========
NOTE F - REAL ESTATE HELD FOR SALE
Real estate held for sale was acquired in 1986 as settlement on amounts
owing from an affiliate. The real estate is carried at the lower of the
cost or fair value less estimated costs to sell. During fiscal 1996 the
Company wrote down the value of this property. This property was
collateral on the Company s note payable to supplier (Note G). During
fiscal 1996, this note was paid in its entirety.
NOTE G - DEBT
Long-term debt consists of the following at May 31,:
1996 1995
---------- ---------
Note payable to CVD Financial $ - $2,784,988
Note payable to supplier, collateralized
by real estate held for sale (Note F) - 91,667
Equipment notes, payable monthly through
various dates in 1996 - 292,529
---------- ---------
- 3,169,184
Less current portion - 1,118,947
---------- ---------
$ - $2,050,237
========= =========
F-16
In September 1993, the Company obtained a loan in the amount of $2,500,000
from a financial institution pursuant to the terms of a promissory note
due on September 1, 1995. The note bore interest at the prime rate plus
7% and was collateralized by all of the assets of the Company, including
its shares of certain subsidiaries. In connection with this financing the
Company issued the financial institution a five-year warrant to purchase
375,000 shares of common stock at a price of $4.50.
In September 1994, the Company obtained a short-term loan in the amount of
$525,000 from the same financial institution pursuant to the terms of a
promissory note due on November 30, 1994. The note accrued interest at
the prime rate plus 7%. In connection with this financing the Company
issued the financial institution a five-year warrant to purchase 75,000
shares of common stock at a price of $2.625 per share.
In May 1995, the Company re-negotiated the terms of this financing
agreement and extended the maturity date of previous borrowings and
accrued interest totaling approximately $2,800,000 to June 30, 1996. In
connection with this re-negotiation, the Company issued the institution
87,578 shares of common stock, issued the institution a five-year warrant
to purchase 600,000 shares of common stock at a price of $1.908 per share,
and lowered the exercise price on all previously issued warrants to $1.59
per share, which approximated or exceeded the fair market value of the
Company s common stock as of the measurement date. The agreement with the
financial institution contained covenants which gave the lender the right
to convert the debt into shares of common stock at the rate of $1.59 per
share. The Company paid the institution an additional $100,000 for an
extension of the payment date for the loan.
In February 1996, the lender exercised its option to convert 100% of the
outstanding loan balance of $1,924,797 into 1,210,564 shares of the
Company s common stock at the conversion rate of $1.59 per share.
NOTE H - CONVERTIBLE SUBORDINATED DEBENTURES
During 1992, the Company issued $4,662,999 convertible subordinated
debentures bearing interest at 8%, due in 60 months, and convertible into
common stock at the rate of $4.00 per share, subject to certain
adjustments. $100,000 of the 8% debentures and $867 of accrued interest
were converted into 25,216 shares of common stock in December 1992.
During the five-month period ended May 31, 1993, the Company issued an
additional $819,677 of the 8% debentures, net of offering costs, and an
additional $650,000 of the 8% debentures were converted into 162,500
shares of common stock.
In November 1993, the Company issued an additional $3,840,000 of
convertible subordinated debentures due in 60 months, bearing interest at
9% and convertible into shares of common stock at the rate of $5.50 per
share subject to certain adjustments. During the year ended May 31, 1994,
the Company also issued an additional $732,359 principal amount of
convertible subordinated debentures due in 60 months, bearing interest at
F-17
8%, and convertible into shares of common stock at the rates of $4.00 and
$5.00 per share subject to certain adjustments.
In August 1995, the Company offered to convert all outstanding debentures
into shares of common stock at a conversion price below the stated price
on the debentures. As of May 31, 1996, approximately $8,600,000 of these
debentures converted at the rate of $2.50 per share and the Company
recognized a charge of $729,000 due to the lower conversion price offer.
As of May 31, 1996 the remaining debentures outstanding, all bearing
interest at 8% per annum, was $239,533.
The Company has reserved an aggregate of approximately 85,300 shares of
the Company s common stock for issuance upon conversion of the remaining
8% debentures.
Future maturities of the remaining debentures are as follows at May 31,
1996:
1997 $200,000
1998 39,533
-------
Total $239,533
=======
NOTE I - INCOME TAXES
There was no provision for income taxes for the periods presented due to
losses incurred. The major deferred tax asset (liability) items at May
31, 1996 and 1995 are as follows:
1996 1995
--------- ---------
Assets:
Allowances established against realization
of certain assets $ 13,000 $ 16,000
Net operating loss carryforwards 6,606,000 4,357,000
Accrued liabilities 211,000 199,000
--------- ---------
6,830,000 4,572,000
Valuation allowance (6,802,000) (4,552,000)
--------- ---------
28,000 20,000
Liabilities:
Fixed asset depreciation (28,000) (20,000)
--------- ---------
$ - $ -
========= =========
The difference between the actual income tax benefit and the tax benefit
F-18
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 May 31, 1996, the Company has available for U.S. Federal and California
income tax purposes net operating loss carryforwards of approximately
$14,112,000 and $6,060,000, respectively, which expire in the years 2000
through 2010. At May 31, 1996, the Company has available investment
credits of approximately $32,300 to offset future U.S. Federal income tax
liability. The ultimate utilization of the net operating and investment
credit carryforwards may be restricted due to changes in the ownership of
the Company. The Company also has Mexico tax net operating losses of
approximately $4,144,000 which may be utilized to offset future Mexico
taxable income. These Mexico tax losses are subject to a five year tax
carryforward period and expire in the years 1997 through 2000.
The Company has recorded a valuation allowance for that portion of the
deferred tax asset that the Company does not believe to be realizable.
NOTE J - SHAREHOLDERS EQUITY
Stock Options
In 1988, the Company adopted an incentive stock option plan (300,000
shares authorized). Under the incentive stock option plan, options may be
granted to employees at a price which is not less than 100% of the fair
market value on the date of grant. Options granted under the incentive
stock option plan vest over a three-year period commencing six months from
the date of grant and are exercisable for five years from the date of
grant. At May 31, 1996, there were options outstanding under the
incentive stock option plan for 10,000 shares (all of which are vested),
and 90,500 options are available for grant. The incentive stock option
plan will expire 10 years from the date of adoption.
On August 18, 1992, the Company adopted an omnibus stock option plan (the
1992 Plan ) which authorized the issuance of 1,600,000 options to acquire
the Company s common stock. At May 31, 1996, there were options
outstanding under the 1992 Plan for 1,479,000 shares (of which 331,000
were vested), and 121,000 options available for grant. These options will
expire 10 years from the date of grant.
On March 24, 1993, the Company adopted an omnibus stock option plan (the
1993 Plan ) which authorized the issuance of 1,000,000 options to acquire
the Company s common stock. The terms of the 1993 Plan are the same as
the 1992 Plan. At May 31, 1996, there were options outstanding under the
1993 Plan for 834,000 shares (of which 418,500 shares were vested), and
166,000 options available for grant. These options expire 10 years from
the date of the grant.
During fiscal 1995, the Board of Directors approved the grant to various
officers, directors, and employees of the Company of nonstatutory stock
options to purchase an aggregate of 2,412,500 shares of common stock. The
options were granted at exercise prices equal to or exceeding the fair
F-19
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.
During fiscal 1996, the Board of Directors approved the grant to various
officers, directors and employees of the Company of non-statutory stock
options to purchase an aggregate of 5,040,000 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
Company has deferred issuance of 4,635,000 of these granted options
pending shareholder approval to increase the number of authorized shares
of common stock.
Summarized information for stock options follows:
Number Price
of Shares Per Share
---------- -----------
Options outstanding at May 31, 1993 2,547,500 $1.375-4.00
Granted 110,000 2.65-4.50
Canceled (370,000) 4.00
Exercised (41,500) 2.25
---------- -----------
Options outstanding at May 31, 1994 2,246,000 1.375-4.50
Granted 2,412,500 2.25
Canceled (141,000) 2.25
Exercised (30,000) 2.25
---------- -----------
Options outstanding at May 31, 1995 4,487,500 1.375-4.50
Granted 5,040,000 2.50-4.50
Canceled (76,250) 2.25
Exercised (1,547,000) 1.375-2.25
---------- -----------
7,904,250 $1.375-4.50
Options outstanding at May 31, 1996 ========== ===========
Options available for future grants at May 31, 1996 totaled 556,500
shares. Options issued and exercisable at May 31, 1996 totaled 2,512,000
at $1.375 - $3.625 per share. Options granted during fiscal 1996 include
4,635,000 at $3.625 that are pending shareholders approval of an increase
in the number of authorized shares.
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 follows:
F-20
Number Price
of Warrants Per Share
----------- ----------
Warrants outstanding at May 31, 1994 1,229,085 $1.51 - $2.25
Issued 4,000,500 1.50 - 2.25
Exercised - -
---------- ------------
Warrants outstanding at May 31, 1995 5,229,585 1.51 - $2.25
Issued 4,690,636 1.91 - 5.00
Exercised (2,554,836) 1.51 - 2.25
---------- ------------
Warrants outstanding at May 31, 1996 7,365,385 $1.59 - $5.00
========== ============
Common Stock
During the fiscal year ended May 31, 1996, the Company issued 3,525,000
shares in conversion of approximately $8,600,000 of its 8% and 9%
debentures (see Note H). In addition, the Company issued 1,500,000 shares
as the result of the exercise of stock options, at prices ranging from
$1.375 to $2.25 per share. Shares totaling 4,044,000 were issued in
private placements at prices ranging from $1.05 to $4.00 per share.
Approximately 2,450,000 shares were issued as a result of the exercise of
warrants, at prices ranging from $1.51 to $2.25. Shares totaling
1,210,564 were issued in conversion of the CVD debt (see Note G) at a
conversion price of $1.59 per share.
T h e Company realized net cash proceeds of $16,500,000 from the
aforementioned fiscal 1996 transactions. Additionally, debt totaling
$10,700,000, representing debentures, was converted into equity.
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 1996, 1995 and 1994, respectively.
Additionally, the Company participates in several multi-employer plans,
which provide defined benefits to union employees of its participating
companies. The Company makes contributions determined in accordance with
the provisions of negotiated labor contracts. The contributions were
$296,000, $320,000 and $384,000.for the years ended May 31, 1996, 1995
and 1994, respectively.
F-21
NOTE L - SIGNIFICANT CUSTOMERS
S a l e s to Southern California Edison and Curtom-Metalclad were
approximately $2,417,000 and $1,267,000, respectively, in 1996. The
Company had trade accounts receivable from Edison and Curtom-Metalclad of
approximately $104,000 and $271,000, respectively, as of May 31, 1996.
Sales to Brown & Root and Curtom-Metalclad were approximately $3,894,000
and $2,296,000, respectively in 1995. The Company had trade accounts
receivable from Brown & Root and Curtom-Metalclad of approximately
$194,000 and $408,000, respectively, as of May 31, 1995.
Sales to Brown & Root, Curtom-Metalclad, Southern California Edison and
T e x a co were approximately $3,107,000, $2,855,000, $2,346,000 and
$1,131,000, respectively, in 1994.
NOTE M - COMMITMENTS AND CONTINGENT LIABILITIES
The Company has employment agreements with its executive officers. These
agreements continue until terminated by the executive or the Company and
provide for minimum salary levels, as adjusted for cost of living changes.
These agreements include incentive bonuses based upon specified management
goals, and a covenant against competition with the Company extending for a
period of time after termination for any reason.
The Company leases its facilities under non-cancelable operating lease
agreements which expire at various dates through 1999. Total rent expense
under operating leases was $404,647, $373,371 and $343,350 for the years
ended May 31, 1996, 1995, and 1994, respectively. Future minimum non-
cancelable lease commitments are as follows:
Year ending May 31,1997 $237,351
1998 141,211
1999 102,376
-------
$480,938
=======
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. Throughout its history, the Company has maintained
insurance policies that typically respond to these claims. Based on the
opinion 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.
The Company has contested an assessment of approximately $330,000 from the
California State Compensation Insurance Fund for the policy year ended
September 31, 1990. Management believes that the assessment is improperly
computed and is based upon inappropriate modification rates. The Company
intends to pursue this claim vigorously. No amount has been accrued at
May 31, 1996.
F-22
NOTE N - RELATED PARTY TRANSACTIONS
Receivables from related parties are comprised of the following for the
year ended May 31,:
1996 1995
-------- --------
Metalclad Pacific - note receivable $ 16,680 $ 31,261
Metalclad Pacific - other 17,926 17,926
Loans to executive officers, directors and
employees 105,763 154,482
-------- --------
$140,369 $203,669
======= =======
Loans to executive officers, directors and employees are represented by
promissory notes, due on demand and bear interest at 6%.
An officer of the Company is a partner in a law firm which has received
payments for legal fees of approximately $283,000 for the year ended May
31, 1996, $280,000 for the year ended May 31, 1995, and $216,000 for the
year ended May 31, 1994.
During fiscal 1995 the Company loaned $370,000 each to Grant S Kesler and
T. Daniel Neveau, officers of the Company. Each loan is collateralized by
300,000 shares of Company stock. The loans accrued interest at 7% over
prime which was 9% at May 31, 1995. In February 1996, Messrs. Kesler and
Neveau each repaid $150,000 to the Company. In March 1996, the notes were
amended to modify the loan principal between Messrs. Kesler and Neveau as
well as to adjust the interest rates, effective March 1, to a variable
rate based upon the Company s quarterly investment rate. The amendment
also stipulates that the notes must be re-paid by May 31, 1997.
In June 1996, Mr. Neveau, Chairman of the Board, Senior Vice President,
and a Director of the Company, resigned his position effective the next
scheduled shareholders meeting. As a result, the Company and Mr. Neveau
r e n e gotiated the terms of his employment agreement relative to
compensation, benefits and stock options. As of May 31, 1996, the Company
accrued $275,000, representing the Company s estimate of its remaining
obligation to Mr. Neveau.
During the fiscal year ended May 31, 1996, the Company agreed to pay
consulting fees of $51,000 to Gordon M. Liddle, a director of the Company.
These fees are for services in connection with management oversight and
other consulting to the Company. Additionally, the Company has entered
into an 18-month consulting agreement with Mr. Liddle for on-going
consulting services at a rate of $5,000 per month. As of May 31, 1996,
the Company accrued $51,000 for this expense.
During the fiscal year ended May 31, 1996, the Company entered into an
agreement with The Chesapeake Group, whose Managing Director is Douglas S.
Land, a director of the Company. The agreement engages Chesapeake as a
financial consultant to the Company in matters pertaining to its Mexican
waste operations. During the period ended May 31, 1996, the Company
F-23
agreed to pay to Chesapeake $100,000 for consulting services rendered
during calendar year 1995 and $8,000 per month for on-going consulting
services. In addition, the Company agreed to pay a transaction fee for
the successful closing of the BFI-OMEGA joint venture, of $325,000 plus
the granting of 250,000 options for the purchase of common stock of the
Company exercisable at $3.00 per share. As of May 31, 1996, the Company
had accrued $315,000 of this cost.
During 1992, the Company sold certain of its net assets of discontinued
operations to a related party. In exchange for the assets, the Company
received a note for $100,000 from the related party that is guaranteed by
an employee of the Company. As of May 31, 1996 and 1995, $16,680 and
$31,261, respectively, was outstanding under this note. The note is non-
interest bearing and is due in 1996. No gain or loss was recognized on
this transaction.
NOTE O - SEGMENT INFORMATION
The following segment information is provided for the Company s two
primary segments: commercial insulation (located in the United States)
and waste management (located in Mexico).
F-24
Segments of Business by Industry
Year Ended May 31,
1996 1995 1994
---------- ---------- ----------
Gross sales
Commercial insulation $11,535,903 $ 15,803,928 $ 16,309,635
Waste management 3,313,265 2,228,169 203,332
---------- ---------- ----------
Total $14,849,168 $ 18,032,097 $ 16,512,967
========== =========== ===========
Operating profit (loss)
Commercial insulation $ (853,919) $ 257,295 $ 327,055
Waste management (4,236,989) (13,885,014) (4,375,806)
---------- ---------- ----------
Total $(5,090,908) $(13,627,719) $ (4,048,751)
========== =========== ===========
Interest expense, net $ (960,220) $ (1,771,394) $ (843,653)
Other expense (728,644) - -
---------- ---------- ----------
Net Loss $(6,779,772) $(15,399,113) $ (4,892,404)
========== =========== ===========
Identifiable assets
Commercial insulation $ 3,264,649 $ 4,572,010 $ 5,605,407
Waste management 6,962,264 4,808,400 10,464,032
Corporate 7,475,120 1,329,807 2,241,161
---------- ---------- ----------
Total $17,702,033 $ 10,710,217 $ 18,310,600
========== =========== ===========
Capital expenditures
Commercial insulation $ 29,792 $ 489,915 $ 16,301
Waste management 705,988 2,048,475 1,909,672
---------- ---------- ----------
Total $ 735,780 $ 2,538,390 $ 1,925,973
========== =========== ===========
Depreciation and amortization
Commercial insulation $ 154,555 $ 1,032,011 $ 159,076
Waste management 205,087 223,105 206,766
---------- ---------- ----------
Total $ 359,642 $ 1,255,116 $ 365,842
========== =========== ===========
F-25
Metalclad Corporation and Subsidiaries
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Additions
Balance at Charged to Charged to Balance at
Beginning Costs and Other End of
Description of Period Expenses Accounts Deductions Other Period
Year ended May 31, 1996:
Deducted from asset accounts:
Allowance for doubtful accounts $44,480 $30,894 $ 0 $ 6,521 $(2,287)(A) $66,566
Allowance for excess and
obsolete inventory 25,000 0 0 0 0 25,000
Year ended May 31, 1995:
Deducted from asset accounts:
Allowance for doubtful accounts $72,983 $ 0 $ 0 $ 0 $(28,503)(B) $44,480
Allowance for excess and
obsolete inventory 25,000 0 0 0 0 25,000
Year ended May 31, 1994:
Deducted from asset accounts:
Allowance for doubtful accounts $33,000 $14,777 $ 0 $ 4,777 $29,983(C) $72,983
Allowance for excess and
obsolete inventory 25,000 0 0 0 0 25,000
---------------------------------
(A) Exchange rate effect
(B) Represents net change in valuation account
(C) Represents the May 31, 1994 allowance for doubtful account balance for Quimica Omega
F-26
EX-27
2
ARTICLE 5 FIN. DATA SCHEDULE FOR FORM 10-K
5
1,000
12-MOS
May-31-1996
Jun-01-1995
May-31-1996
7344
0
2298
0
326
10183
5463
0
17702
3397
240
57864
0
0
(43798)
17702
14895
14849
10335
19940
729
0
960
(6780)
0
(6780)
0
0
0
(6780)
(.30)
0