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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
( ) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the transition period from June 1, 1996 to December 31, 1996
OR
( X ) 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 ID 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 March 20, 1997 was approximately $43,684,858, 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 March 20, 1997 was 29,123,239.
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 1997
Annual Meeting of Stockholders are incorporated by reference into Part III
hereof.
PART I
All statements, other than statements of historical fact, included in
this Form 10-K, including without limitation the statements under
Management s Discussion and Analysis of Financial Condition and Results of
Operations and Business , are, or may be deemed to be, forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933,
as amended (the Securities Act ), and Section 21E of the Securities
Exchange Act of 1934 (the Exchange Act ). Such forward-looking statements
involve assumptions, known and unknown risks, uncertainties, and other
factors which may cause the actual results, performance or achievements of
Metalclad Corporation (the Company ) to be materially different from any
future results, performance or potential risks and uncertainties include,
without limitation, the ability to commence operations at the Company s
hazardous waste treatment sites under development, competitive pricing and
other pressures from other businesses in the Company s markets availability
of capital, cost of labor, and other risk factors detailed herein and in
other of the Company s filings with the Securities and Exchange Commission.
The forward-looking statements are made as of the date of this Form 10-K and
the Company assumes no obligation to update the forward-looking statements
or to update the reasons actual results could differ from those projected in
such forward-looking statements. Therefore, readers are cautioned not to
place undue reliance on these forward-looking statements.
ITEM 1. BUSINESS
(a) General Development of Business
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, Irapuato, Veracruz, 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.
In January, 1997, the Company s subsidiary, Quimica Omega, S.A. de C.V.
( QUIMICA OMEGA )and BFI-Mexico reached a tentative agreement for QUIMICA
OMEGA to acquire BFI s 50% interest in the joint venture. As part of this
proposed transaction, BFI agreed to contribute certain waste transportation
equipment to QUIMICA OMEGA. In addition, BFI will also provide certain
technical and landfill management services to the Company, including the
continuing services of the general manager of the joint venture.
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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, and the development of
an aqueous waste treatment facility. ECONSA is also engaged in the
exportation for the destruction of polychlorinated biphenyls ( PCBs ).
Insulation Contracting. The Company has historically been engaged in
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 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. de C.V.
("QUIMICA OMEGA"), Consultoria Ambiental Total, S.A. de C.V. ("CATSA"),
Confinamiento Tecnico de Residues Industriales, S.A. de C.V. ("COTERIN") and
Seguridad Electrica Mexicana, S.A. ( SEM ). Each of the Mexican
subsidiaries is a corporation of variable capital (sociedad anonima de
capital variable). The Company is continuing 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
Corporation, 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 insulation
contracting customers from their headquarters in Anaheim, California. ECO-
MTLC's offices are in Newport Beach, California, and the Company's Mexican
subsidiaries' offices are located in Mexico City and the City of San Luis
Potosi.
(b) Significant Events
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.
In January, 1997, Metalclad s subsidiary, Quimica Omega, and BFI de
Mexico, S.A. de C.V. reached a tentative agreement for Quimica Omega to
acquire BFI s 50% interest in the joint venture. As part of this proposed
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sale BFI would contribute certain waste transportation equipment to Quimica
Omega. In addition, BFI will also provide certain technical and landfill
management services to the Company and ECOPSA, including continuing the
services of the current general manager, who will remain in Mexico to manage
the day-to-day affairs of the Company. This sale comes as a result of BFI s
decision to concentrate on their core businesses such as municipal and non-
hazardous solid waste collection.
In July 1996, the Company, through its Curtom-Metalclad partnership,
received a purchase order for an estimated $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 services under the agreement; however, the Company believes the
value of work ultimately performed may exceed the initial purchase order
amount during the term.
(c) Financial Information About Industry Segments
The Company, through MIC and MEC, is engaged in insulation services,
asbestos abatement services, and insulation material sales, such activities
constituting one industry segment. The development and operation of the
industrial waste treatment business, commenced in November 1991 through ECO-
MTLC and is 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) Forward Looking Statements
Statements in this report that are not strictly historical are
forward-looking statements which should be considered as subject to the
many uncertainties that exist in the Company s operations and business
environment. These uncertainties, which include economic and currency
conditions, market demand and pricing, competitive and cost factors, and the
like, are included in this Form 10-K report and filed with the Securities
and Exchange Commission.
(e) 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 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, expanded operations in Mexico to eight branches, all of
which include collection, transportation, treatment, and disposal of
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industrial wastes. Excluded from the joint venture are development
activities, ownership of disposal facilities, and international brokerage of
PCBs. Also excluded was any municipal solid waste business.
In January 1997, QUIMICA OMEGA and BFI-Mexico reached a tentative
agreement for QUIMICA OMEGA to acquire BFI-Mexico s 50% interest in the
joint venture.
With the acquisiton of BFI-OMEGA, the Company will own and control all
of its operations in Mexico, which are split into two primary divisions: (i)
the business conducted by ECONSA which involves development, ownership and
operation of landfill and treatment facilities; and (ii) the operating
activities of BFI-OMEGA which include primarily the collection,
transportation and treatment of certain hazardous and industrial waste. The
Company anticipates changing the name BFI-OMEGA to one more appropriate for
long-term operation.
Business in the United States. For over 50 years, the Company has been
engaged in insulation contracting, services, including asbestos abatement
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 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 performed 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 of political opposition
to its opening. The Company has not been able to overcome this opposition
despite repeated promises of support from the highest levels of the Mexican
government. Consequently, on October 2, 1996, the Company filed a Notice of
Intent to File Claim Under the North American Free Trade Agreement
( NAFTA ).
Following the procedure outlined by the NAFTA, the Company filed its
Notice of Claim on January 2, 1997. The Claim was filed with the
International Centre for Settlement of Investment Disputes ( ICSIP ) in
Washington, D.C. On January 13, 1997, the Secretary General of ICSIP
registered the Company s claim and notified both the United States and
Mexican governments of the registration. The rules governing these kinds of
claims allow each party to choose one arbitrator with those two to choose a
third. Once impaneled, the tribunal sets rules for discovery, time periods
4
for submissions, and generally controls the pace of the arbitration itself.
The Company s claim is one under the category of Likened to
Expropriation wherein the Company, having been denied the right to operate
its constructed and permitted facility, claims it sproperty has therefore
been, as a practical matter, expropriated, entitling the Company to the fair
market value of the facility as damages. Of course, no assurance can be
given that the efforts of the Company will be fruitful and there is always
the possibility of a negotiated settlement, which is possible according to
the wishes of the parties at any time during the arbitration process.
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
project can proceed more rapidly than prior projects provided no substantial
unanticipated obstacles arise. Substantial development activity can be
undertaken on this project. 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 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 during 1997. This project is also considered financeable.
3. Incineration. The Company continues to believe that Mexico has a
strong need for a commercial incinerator. The Company will continue to seek
commercial contracts for incineration with the hope of developing that
market to the point that a fuol-scale commercial incinerator is justified.
4. An aqueous waste treatment facility. The Company believes there is
a significant market for a facility that can treat wastes with high water
content. The Company is presently using certain technologies to eliminate
water in various wastes at its Tenango plant and believes that a full-scale
treatment facility will be justified in the future.
5. PCB Exporting. The Company has in the past exported poly
chlorinated biphenyls ( PCBs ) from Mexico to Great Britain for thermal
destruction. Since the United States, in March 1996, began allowing the
importation of PCBs for destruction, the Company has been shipping these
materials to the United States under an exclusive agreement with Rollins
Environmental of Deerpark, Texas, whereby Rollins takes responsibility for
the ultimate destruction of the materials delivered. In addition, the
Company acquired Seguridad Electrica Mexicana, SA. De C.V. ( SEM ), a
Mexican company exclusively engaged in the business of marketing PCBs for
export and destruction. The Company believes this will be a significant
market in the future.
BFI-OMEGA. In 1996, the Company undertood significant expansion of the
BFI-OMEGA operations in Mexico. Branches now exist in Puebla, Irapuato,
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Guadalajara, Aguascalientes, Tampico, San Luis Potosi, the State of Mexico
and Veracruz. It is intended that these eight branches be expanded
eventually to 20 and will serve as collection and transportation facilities
as well as the marketing arm for any treatment and disposal facilities open
by the Company.
The goal of the Company is to expand the existing business of BFI-OMEGA
to include an integrated service which will be able to satisfy all of the
requirements of industrial waste producers.
By following this business plan, BFI-OMEGA intends to capture a
significant share of the newly developing market for environmental services
in the industrial heart of Mexico. This past year, the Company has
developed a new technology for the disposing of industrial solid hazardous
waste. The material has been successfully used as an alternate fuel at two
cement plants. Steps are being taken to expand relationships at both the
Cruz Azul Cement Company and the Apasco Cement Company so that additional
liquid and solid fuel can be sent to their facilities.
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 agency 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 (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. 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.
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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 8 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.
Each of the Company's proposed landfill facilities, with an design
capacity of 160,000 tons per year, will be able to process approximately 2%
of the estimated 8 million tons of hazardous waste generated in Mexico
annually.
Competition. The Company believes it will build and operate 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.
The only substantial hazardous waste 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 other 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
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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)
Employees. As of December 31, 1996, the Company had a full-time staff
of approximately 20 employees working in its Mexican operations, including
three executive personnel, and 17 clerical workers. Additionally, 177 are
employed by BFI-OMEGA in various capacities.
Insulation Contracting Services
Background. The Company's insulation contracting services include the
installation of high and low temperature insulation on pipe, ducts,
furnaces, boilers, and various other types of equipment. Insulation
services are provided for new construction and maintenance of existing
facilities. The Company is a licensed general contractor and typically
provides project management, labor, tools, equipment and materials necessary
to complete the installation.
The Company usually performs substantially all of the work required to
complete its contracts, generally subcontracting to others the scaffolding
and painting. In a typical insulation contract, the Company obtains plans
and specifications prepared by the owner of a facility or its agent. In
projects where the customer is the owner of the facility, the Company acts
as the general contractor. The Company also works as a subcontractor for
other general contractors. Insulation contracts for new construction may
require one or more years to complete. Maintenance contracts typically
extend over a period of one or more years.
The Company's insulation contracting business has historically
included, among other things, maintenance, removal, repair, and re-
installation of insulation on existing facilities and equipment. These
activities included asbestos removal services in most cases in which the
insulation at such facilities has included asbestos-containing material
("ACM").
The Company removes all forms of ACM after first treating the asbestos
with water and a wetting agent to minimize fiber release. Dry removal is
conducted in special cases where wetting is not feasible, provided
Environmental Protection Agency ("EPA") approval is obtained. The Company's
workers also remove pipe insulation by cutting the wrapping into sections in
an enclosed containment area or utilizing special "glovebags" which provide
containment around the section of pipe insulation being removed. In some
instances, the Company performs asbestos removal and provides related re-
insulation contracting services, including insulation material sales; in
other cases, the Company performs only asbestos removal services. The
Company believes that the removal of ACM provides the best and most cost-
effective solution for most asbestos abatement projects.
Insulation Contracts. The Company obtains contracts, which ordinarily
fall within one of the types set forth below, on the basis of either
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competitive bids or direct negotiations:
Cost-plus. These contracts, sometimes referred to as "time and
materials" contracts, generally provide for reimbursement of costs incurred
by the Company and the payment of a fee equal to a percentage of the cost of
construction. They generally provide for monthly payments covering both
reimbursement for costs incurred to date and a portion of the fee based upon
the amount of work performed and are customarily not subject to retention of
fees or costs.
Fixed-price. These contracts generally require the Company to perform
all work for an agreed upon price, often by a specified date. Such
contracts usually provide for increases in the contract price if the
Company's construction costs increase due to changes in or delays of the
project initiated or caused by the customer or owner or by escalating
project labor rates. However, absent causes resulting in increases in
contract prices, the Company takes certain risks associated with its fixed
prices. Under these types of contracts the Company receives periodic
payments based on the work performed to date, less certain retentions. The
amounts retained are held by the customer pending either satisfactory
completion of the Company's work or in some cases, satisfactory completion
of the entire project.
In accordance with industry practice, most of the Company's contracts
are subject to termination or modification by the customer, with provision
for the recovery of costs incurred and the payment to the Company of a
proportionate part of its fees, in the case of a cost-plus contract, and
overhead and profit, in the case of a fixed price contract. At various
times, contracts 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
conducted by the Company. Training topics include approved work procedures,
instruction on protective equipment and personal safety, dangers of
asbestos, methods for controlling friable asbestos and asbestos
transportation and handling procedures. In addition, all full-time
employees engaged in asbestos abatement activities are required to attend a
minimum four-day course approved by EPA and the Occupational Safety and
Health Administration ("OSHA") and all supervisors of abatement projects are
required to attend a nine-hour first aid/CPR/safety course and an eight-hour
EPA/AHERA refresher course annually. Six of the Company's full-time
employees and 43 hourly employees have been trained and certified as
"competent individuals" under EPA regulations relating to the training of
asbestos abatement workers. All employees are issued detailed training
materials and the Company typically conducts a job safety analysis in the
job bidding stage.
The Company requires the use of protective equipment and sponsors
periodic medical examination of all field employees. During removal
procedures, ACM is generally wetted to minimize fiber release and filtration
devices are used to reduce contamination levels. Air monitoring to
determine asbestos fiber contamination levels is conducted on all abatement
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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
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 Roxul, Pabco, Fibrex, R.P.R. and C.W.C.I.
Although the Company purchases most of its supplies from 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
Insulation Contracting Services. The Company currently obtains most of
its insulation contracting business from existing customers and referrals
by customers, engineers, architects, and construction firms. Additional
business is obtained by referrals obtained through labor, industry, and
trade association affiliations.
Projects are also awarded through competitive bidding although major
companies frequently rely on selected bidders chosen by them based on a
variety of criteria such as adequate capitalization, bonding capability,
insurance carried, and experience. The Company is frequently invited in
this manner to bid on projects and obtains a significant amount of its
contracts through the competitive bidding process. The Company believes
that its bids are competitively priced and anticipates that in the future
its bids will continue to be competitively priced with bids submitted by
others.
The Company's marketing and sales effort emphasizes its experience,
reputation for timely performance, and knowledge of the insulation and
asbestos abatement industry. The Company is a member of the Western
Insulation Contractors Association, the National Insulation Contractors
Association, and various local business associations.
Curtom-Metalclad Joint Venture. In 1989, the Company entered into a
joint venture with a minority service firm which qualifies for preferential
contract bidding because of minority status. The joint venture, known as
"Curtom-Metalclad," submits bids for insulation and asbestos abatement
services. When contracts are obtained by the joint venture, the Company
performs the work specified in the contract as a subcontractor to the joint
venture. The Company also receives an interest in 49% of the profits or
losses of the joint venture.
Insulation Material Sales. The 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
10
potential customers involved in insulation maintenance and new construction
in an effort to have the Company specified as their supplier.
Customers. The Company's insulation customers are predominantly public
utilities, oil refiners, food processors, paper processors, manufacturers,
and engineering and construction companies. Contracts with Curtom-Metalclad
accounted for more than 60% of the Company's insulation contracting revenues
during the 7 months ended December 31, 1996 which includes work performed
for Southern California Edison. The Company anticipates that work performed
for Southern California Edison, through Curtom-Metalclad, will continue to
account for more than 25% of the Company s insulation contracting revenues.
Competition. Competition in the insulation contracting services
business is intense and is expected to remain intense in the foreseeable
future. Competition includes a few national and regional companies 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 number of its insulation
service contracts through the competitive bidding process. The Company
believes that its bids are competitively priced and anticipates that in the
future its bids will continue to be competitively priced with bids submitted
by others.
Insurance and Bonding. The Company's asbestos and general liability
insurance policy, which provides base coverage of $1,000,000 per occurrence
and excess liability coverage of $10,000,000. Although the Company has
secured bonding capacity of $5,000,000, the Company's current insulation and
asbestos abatement services customers 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
subject to regulation by federal, state, and local governmental authorities,
including OSHA and the EPA. In general, OSHA regulations set maximum
asbestos fiber exposure levels applicable to employees and the EPA
regulations provide asbestos fiber emission control standards. The EPA
requires use of accredited persons for both inspection and abatement. In
addition, a number of states have promulgated regulations setting forth such
requirements as registration or licensing of asbestos abatement contractors,
training courses for workers, notification of intent to undertake abatement
projects and various types of approvals from designated entities.
Transportation and disposal activities are also regulated. The Company
believes that similar legislation may be adopted in other states and in
11
local building codes.
OSHA has promulgated regulations specifying airborne asbestos fiber
exposure standards for asbestos workers, engineering and administrative
controls, workplace practices, and medical surveillance and worker
protection requirements. OSHA's construction standards require companies
removing asbestos on construction sites to utilize specified control methods
to limit employee exposure to airborne asbestos fibers, to conduct air
monitoring, to provide decontamination units and to appropriately supervise
operations. EPA regulations restrict the use of spray applied ACM and
asbestos insulation, establish procedures for handling ACM during demolition
and renovations, and prohibit visible emissions during removal,
transportation and disposal of ACM.
The Company believes that it is substantially in compliance with all
regulations relating to its asbestos abatement operations, and currently has
all material government permits, licenses, qualifications and approvals
required for its operations.
Backlog. The Company's backlog for insulation services at December 31,
1996, and May 31, 1996 was $4,050,000 and $4,800,000, respectively. Backlog
is calculated in terms of estimated revenues on fixed-price and cost-plus
projects in progress or for which contracts have been executed. The Company
believes that backlog as of any date is not necessarily indicative of future
revenues. The Company estimates that its entire backlog as of December 31,
1996 will be completed during the next twelve months. The majority of the
Company's present business is on cost-plus contracts for which backlog is
estimated. The Company fulfills product and supply orders promptly, and
there is no backlog in the material sales business.
Employees. As of December 31, 1996, the Company had a full-time staff
of 13 salaried employees working in insulation contracting services,
including three executive officers, one division manager, three insulation
services contract administrators, and six clerical workers. None of these
employees is represented by a labor union.
As of December 31, 1996, the Company employed approximately 185 hourly
employees for insulation contracting services, nearly all of whom are
members of the International Association of Heat and Frost Insulators and
Asbestos Workers ("AFL-CIO"). The Company is a party to agreements with
various local chapters of various trade unions. The number of hourly
employees employed by the Company fluctuates depending upon the number and
size of projects 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 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
12
or Officer
Name Age Since Current Position with the Company
--------------------------------------------------------------------------
Grant S. Kesler 53 1991 President, Chief Executive
Officer, Director
Javier Guerra Cisneros 50 1994 Director, Vice President-Mexican
Operations,
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.
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.
13
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 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 Aviation Distributors, Inc. and the
Secretary of Renaissance Golf Products, Inc., companies whose stock is
publicly traded. 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
implement and achieve the marketing strategies and objectives of the Company
while establishing and building long-term client relationships. He has
negotiated and managed contracts for both industrial and commercial work,
with concentration on refinery and utility maintenance work and hi-rise
commercial buildings. 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,
14
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
industrial 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
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 rents space, on a month-to-month basis, for its
administrative offices in Mexico City for $135 per month.
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 $400,000 of workers compensation insurance
premium for the 1990 policy year. The Company believes that SCIF has
overcharged the Company by approximately $500,000 as a result of over-
reserves for pending claims and inadequate claim investigation. In
December, 1996, the Company received an unfavorable court ruling on its
position relative to certain rights of defense against the claims of the
insurer. The Company is in the process of appealing this ruling. Although
the Company and its counsel feel strongly about its position on appeal, no
assurances can be made 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
None.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's Common Stock is traded on the Nasdaq Small Cap Market
under the symbol "MTLC." The following table sets forth, for the fiscal
15
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 29, 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
Seven Months Ended December 31, 1996
1st Fiscal Quarter Ended August 31, 1996 3 3/8 2 5/8
2nd Fiscal Quarter Ended November 30, 1996 3 1/4 1 1/2
One month period ended December 31, 1996 1 15/16 1 3/8
The Company has not paid any cash dividends on its Common Stock since
its incorporation and anticipates that, for the foreseeable future,
earnings, if any, will continue to be retained for use in its business. As
of March 20, 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.
7 Months Year Year Year 5 Months Year
Ended Ended Ended Ended Ended Ended
Dec 31, May 31, May 31, May 31, May 31, Dec 31,
1996 1996 1995 1994 1993 1992
(in thousands, except per share amounts)
Statement of Operations Data
Revenues $ 6,150 $14,902 $18,952 $16,453 $7,294 $16,316
Operating profit (loss) - Insulation (21) (854) 257 327 (552) 211
Operating loss - Waste Management (1) (1,282) (560) (9,112) (3,443) (2,816) (4,064)
Operating loss (3,243) (5,091) (13,628) (4,049) (3,368) (3,853)
Loss from continuing operations (3,280) (6,780) (15,399) (4,892) (3,643) (4,405)
Loss from discontinued operation - - - - - (126)
Net income loss (3,280) (6,780) (15,399) (4,892) (3,643) (4,531)
Earnings per share:
Net income loss per common share (.11) (.30) (1.13) (.56) (.46) (.68)
Balance Sheet Data
Total assets 14,931 17,702 10,710 18,311 5,469 7,467
16
Long-term debt (2) - - 2,050 2,662 19 233
Convertible subordinated debentures (2) 229 239 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 seven months ended
December 31, 1996, or the years ended May 31, 1996, 1995 or 1994, the
transition period from January 1, 1993 to May 31, 1993, or for the year
ended December 31, 1992.
ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This discussion and analysis contains forward-looking statements within
the meaning of Section 27A of the Securities Act and Section 21E of the
Exchange Act, which are subject to the safe harbor created by those
sections. The Company s actual future results could differ materially from
those projected in the forward-looking statements. The Company assumes no
obligation to update the forward-looking statements or such factors.
Presentation of Financial Statements
In December 1994, the Mexican government adopted a free market policy
toward the valuation of the Mexican peso. During the month of December
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, May 31, 1996 and December 31, 1996, the value of the peso was 6.15,
7.4 and 7.8, respectively. 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
$(2,158,916) at December 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
acquired 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 BFI-OMEGA, 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. The Company s
investment in this joint venture is accounted for under the equity method.
17
(See Note D.)
Results of Operations
General. The Company s revenues were generated primarily by (i)
revenues in the United States from insulation services and sales of
insulation products and related materials; and (ii) revenues in Mexico from
the collection of waste oils and solvents for recycling, rental of parts
washing machines, brokering the disposal of waste and remediation services.
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 include the costs of development of all such waste treatment
facilities in Mexico.
Seven Months Ended December 31, 1996 Compared to Seven Months Ended
December 31, 1995
Insulation Business. Total revenues for the seven months ended
December 31, 1996 was $5,519,000 compared to $6,910,000 for the same period
in 1995, a decrease of 20%. This decrease is attributable to a decline in
the overall volume of work performed under the Company s various maintenance
agreements as well as a decline in the demand for asbestos abatement
services. Income from the Curtom-Metalclad joint venture was $45,000
compared to $0 for the same period in 1995 due to the increase in Edison
work contracted through the joint venture.
Operating costs and expenses were $4,816,000 compared to $5,685,000 for
the same period in 1995, a decrease of 15% associated with the decline in
revenues. Selling, general and administrative expenses were $769,000
compared to $1,226,000 representing a decrease of 37% attributed to the
Company s efforts to control overhead costs.
Waste Management. Total revenues for the seven months ended December
31, 1996 were $632,000 versus $1,450,000 for the same period in fiscal 1996.
The revenue decline is due to the transition of continuing revenues to BFI-
OMEGA which is accounted for under the equity method. If revenues of the
joint venture were included and reflected on a peso basis, revenues for the
seven months would have been 12,823,000 pesos versus 9,255,000 pesos, an
increase of 39% over the same period in fiscal 1996.
Operating costs and expenses were $1,115,000 as compared to $1,575,000
for the same period in fiscal 1996. This reduction is also attributed to
the transition of operations to BFI-OMEGA. Landfill costs were $256,000 for
the seven months compared to $117,000 for the same period in fiscal 1996.
This increase reflects the costs associated with the Company s on-going
development activities in Mexico.
Equity in Earnings (Losses) of BFI-OMEGA was ($542,000) for the seven
months, with no comparison period. This loss is attributed to the initial
costs associated with the development of infrastructure and the start up of
new districts and sub-districts.
Corporate Expense. Corporate expense for the seven months ended
December 31, 1996 was $1,940,000 as compared to $1,790,000, an increase of
8%. This increase is attributed to (a) the initial costs of pursuing the
18
Company s claim under NAFTA and (b) a reserve established by the Company for
certain ongoing litigation.
Interest Expense. Interest expense, net, was $(37,000) for the seven
months ended December 31, 1996 compared to $(834,000) for the same period in
fiscal 1996. This reduction is due to the conversions of both the Company s
debt and convertible subordinated debentures to shares of common stock.
Other Expense. Other expense was $0 as compared to $729,000 for the
same period in fiscal 1996.
Consolidated Results. The net loss for the seven months ended December
31, 1996 was ($3,280,000) as compared to ($3,277,000), representing no
change. This comparable performance was achieved despite the start-up costs
of BFI-OMEGA, NAFTA litigation costs and litigation reserves included in the
current seven months net loss, while the seven months ended December 31,
1995 contained a one-time gain of $317,000 for donated equipment.
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,
before 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 commencement 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 $154,000 in fiscal 1996 as compared to $676,000
19
for fiscal 1995, a decrease of 90%. Landfill costs are those costs
associated with the development and general and maintenance of facilities in
Mexico, including the opening of the landfill in San Luis Potosi.
Corporate Expense. Corporate expenses for fiscal 1996 were $3,677,000
compared to $4,773,000, a decrease of 23%.
Interest Expense. 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) the conversion of all remaining debt in February 1996.
Other Expense. 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
20
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
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 $676,000 in fiscal year 1995 compared to
$2,900,000 in the prior year. Landfill costs are those development incurred
by Company at its corporate offices in Mexico related to its objectives in
Mexico, including the opening of the landfill in San Luis Potosi.
Corporate Expense. Corporate expenses for fiscal 1995 were $4,773,000
as compared to $933,000. This increase parallels the Company s increased
development activities and construction activities in Mexico.
Interest Expense. 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. The
Company realized 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
21
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 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
Company will require additional capital to develop, construct and
subsequently open the additional facilities it intends to pursue as well as
to continue its strategy with BFI-OMEGA.
Working capital at December 31, 1996 was $2,719,000 compared to
$6,787,000 at May 31, 1996. The Company had cash and cash equivalents at
December 31, 1996 of $3,074,000 and $7,344,000 at May 31, 1996.
Additionally, the Company had restricted cash deposits of $770,000 at
December 31, 1996 and $8,000 at May 31, 1996. Cash used in operations for
the seven months ended December 31, 1996 was ($2,801,000) compared to
($5,823,000) for the fiscal year ended May 31, 1996. Cash used in
operations in the seven months ended December 31, 1996 was funded primarily
by cash and cash equivalents on hand at the beginning of the fiscal year.
The Company believes that the insulation business will generate
adequate cash flows from operations to meet its future obligations and
expenses relating to such operations; however, until resolution of the
Company s appeal of certain ongoing litigation is achieved, $770,000 of its
22
cash resources will remain restricted to the Company. 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 BFI-OMEGA s operations. Furthermore, to the extent that the
Company is required to expend additional efforts to open its existing
landfill or pursue its NAFTA claim, additional general and administrative
expenses without revenues to offset such expenses are anticipated until the
landfill is opened. The Company is aware of its ongoing cash requirements
and has implemented a cash flow plan, including continued reduction in its
general and administrative expenses. Additionally, the Company has
developed an overall strategy and financing options to meet its ongoing
needs through December 31, 1997.
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.
Impact of Recently Issued Accounting Standards
Effective June 1, 1996, the Company adopted the disclosure provisions
of SFAS No. 123, Accounting for Stock-Based Compensation . SFAS No. 123
requires the Company to disclose pro forma net income and earnings per share
as if the fair value based accounting method of SFAS No. 123 had been used
to account for stock based compensation. These disclosures are included in
Note J.
In February 1997, the FASB issued SFAS No. 128 Earnings Per Share .
This statement will require that primary earnings per share (EPS) be
replaced by basic EPS. The primary difference between the two methods is
that Common Stock equivalents are not included on the basic earnings per
share calculation thereby reducing the denominator in the calculation. The
Company will be required to adopt this pronouncement in fiscal 1998.
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
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements and schedules listed in the
accompanying Index to Consolidated Financial Statements are attached hereto
and filed as a part of this Report under Item 14.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
23
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 1997 Annual Meeting Proxy Statement which will be filed with
the Securities and Exchange Commission not later than 120 days after
December 31, 1996. The Company's 1997 Annual Meeting Proxy Statement,
exclusive of the information set forth under the captions "Report of the
Compensation Committee" and "Company Performance," are incorporated herein
by this reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 402 of Regulation S-K is set forth in the
Company's 1997 Annual Meeting Proxy Statement which will be filed with the
Securities and Exchange Commission not later than 120 days after December
31, 1996. The Company's 1997 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 1997 Annual Meeting Proxy Statement which will be filed with
the Securities and Exchange Commission not later than 120 days after
December 31, 1996. The Company's 1997 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 year ended May 31, 1996, the Company agreed to pay
24
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.
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 granted 250,000 options for the
purchase of common stock of the Company exercisable at $3.00 per share.
During the seven months ended December 31, 1996, the Company paid legal
fees of $54,000 to the law firm of Gibson, Haglund & Johnson, of which Bruce
H. Haglund, general counsel and Secretary of the Company, is a principal.
During December, 1996, the Company loaned $150,000 to Mr. Javier Guerra
Cisneros, a Director and Vice President of Mexico operations. This loan is
evidenced by a promissory note bearing interest at 10% and secured by a
pledge of future salary and 300,000 shares of common stock in the Company.
In February, 1997, Mr. Guerra repaid $120,000 of this loan.
25
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 November 30, 1991
issued to F.N. Wolf & Co., Inc. (1)
10.2 Warrant to Purchase Common Stock dated February 6, 1992
issued to T. Marshall Swartwood (2)
10.3 Warrant to Purchase Common Stock dated February 6, 1992
issued to Glenn Cushman (2)
10.4 Employment Agreement, as amended, between the Company
and Grant S. Kesler dated March 7, 1995 (6)
10.5 Employment Agreement, as amended, between the Company
and T. Daniel Neveau dated March 7, 1995 (6)
10.6 Modification Agreement, as amended, between the Company
and T. Daniel Neveau dated July 15, 1996
10.7 Employment Agreement between the Company and Anthony C.
Dabbene dated July 10, 1996 (7)
10.8 Non-Qualified Stock Option Agreement between the Company
and Bruce H. Haglund dated October 17, 1991 (1)
10.9 Non-Qualified Stock Option Agreement between the Company
and T. Daniel Neveau dated October 17, 1991 (1)
10.10 Non-Qualified Stock Option Agreement between the Company
26
and Gordon M. Liddle dated October 17, 1991 (1)
10.11 Nonstatutory Stock Option Agreement between the Company
and Grant S. Kesler dated March 7, 1995 (6)
10.12 Nonstatutory Stock Option Agreement between the Company
and T. Daniel Neveau dated March 7, 1995 (6)
10.13 Nonstatutory Stock Option Agreement between the Company
and Javier Guerra Cisneros dated March 7, 1995 (6)
10.14 Nonstatutory Stock Option Agreement between the Company
and Bruce H. Haglund dated March 7, 1995 (6)
10.15 Nonstatutory Stock Option Agreement between the Company
and Douglas S. Land dated June 25, 1996.
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)
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 Consulting Agreement between Company and Chesapeake
Group, Inc. Dated January 16, 1996
10.22 Consulting Agreement between Company and Gordon M.
Liddle Dated June 1, 1996
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
(7) Filed with the Company s Annual Report on Form 10-K for the year
ended May 31, 1996
27
(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.
28
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
METALCLAD CORPORATION
By: /s/Anthony C. Dabbene
-------------------------------
Anthony C. Dabbene
Chief Financial Officer
Date: March 31, 1997
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 March 31, 1997
-------------------------- and Director
Grant S. Kesler (Principal Executive
Officer)
/s/Javier Guerra Cisneros Director March 31, 1997
--------------------------
Javier Guerra Cisneros
/s/Gordon M. Liddle Director March 31, 1997
--------------------------
Gordon M. Liddle
/s/Douglas S. Land Director March 31, 1997
--------------------------
Douglas S. Land
/s/Anthony C. Dabbene Chief Financial Officer March 31, 1997
-------------------------- (Principal Financial and
Anthony C. Dabbene Accounting Officer)
29
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 - December 31, 1996,
May 31, 1996 and 1995...............................................F-3
Consolidated Statements of Operations - Seven Months Ended
December 31, 1996 and the Years Ended May 31, 1996, 1995
and 1994............................................................F-5
Consolidated Statements of Shareholders' Equity (Deficit) -
Seven Months Ended December 31, 1996, and the Years Ended
May 31, 1996, 1995 and 1994.........................................F-6
Consolidated Statements of Cash Flows - Seven Months Ended
December 31, 1996 and the Years Ended May 31, 1996, 1995 and 1994...F-8
Notes to Consolidated Financial Statements............................F-10
Supplementary Financial Statement Schedules:
Schedule II - Valuation and Qualifying Accounts....................F-26
30
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
The Board of Directors and Shareholders of
Metalclad Corporation:
We have audited the accompanying consolidated balance sheets of Metalclad
Corporation (a Delaware Corporation) and subsidiaries as of December 31,
1996 and May 31, 1996, and the related consolidated statements of
operations, shareholders equity and cash flows for the seven months ended
December 31, 1996 and the year ended May 31, 1996. These financial
statements are the responsibility of the Company s management. Our
responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Metalclad Corporation
and subsidiaries as of December 31, 1996 and May 31, 1996, and the results
of their operations and their cash flows for the seven months ended December
31, 1996 and the year ended May 31, 1996 in conformity with generally
accepted accounting principles.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in the index of
financial statements is presented for purposes of complying with the
Securities and Exchange Commission s rules and is not part of the basic
financial statements. The December 31, 1996 and May 31, 1996 data have been
subjected to the auditing procedures applied in the audits of the basic
financial statements and, in our opinion, fairly states in all material
respects the financial data required to be set forth therein in relation to
the basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Orange County, California
March 31, 1997
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,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion
In our opinion, the financial statements referred to above present fairly,
in all material respects, the 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
March 31, 1997
F-2
Metalclad Corporation and Subsidiaries
CONSOLIDATED BALANCE SHEETS
December 31, May 31,
------------------ ---------------------------
ASSETS 1996 1996 1995
------ ------ ------
Current assets:
Cash and cash equivalents $3,074,395 $7,344,357 $ 381,406
Accounts receivable, less allowance for doubtful accounts
of $67,972 at December 1996, $66,566 at May 1996
and $44,480 at May, 1995 2,478,528 2,263.214 2,337,968
Costs and estimated earnings in excess of billings
on uncompleted contracts 174,768 56,372 343,405
Inventories 314,157 325,795 374,029
Prepaid expenses and other current assets,
including restricted certificates of deposits of
$130,000 in 1995 253,059 53,371 681,696
Receivables from related parties 240,379 140,369 197,408
---------- ---------- ----------
Total current assets 6,535,286 10,183,478 4,315,912
Property, plant and equipment, net 5,319,409 5,462,657 5,266,869
Investment and capitalized costs in unconsolidated
affiliates 1,516,878 1,169,221 87,453
Receivables from related parties, non-current - - 6,261
Deposits and other assets, including restricted certifi-
cates of deposit of $769,500 at December 31, 1996 and
$7,730 in 1995 837,516 108,842 138,946
Goodwill, less accumulated amortization of $115,390 at
December 1996, $59,917 at May 1996 and $17,469 at
May 1995 697,363 752,835 143,783
Real estate held for sale 25,000 25,000 155,515
Capitalized debenture costs, less accumulated amortization
of $456,819 in 1995 - - 595,478
---------- ---------- ----------
$14,931,452 $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
December 31, May 31,
------------------ --------------------------
1996 1996 1995
------ ------ ------
LIABILITIES AND SHAREHOLDERS EQUITY (DEFICIT)
Current liabilities:
Accounts payable $ 1,665,475 $ 1,149,586 $2,751,540
Accrued payroll, property and other taxes 493,751 359,807 596,657
Accrued expenses 1,381,972 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 45,468 69,757 113,817
Current portion of long-term debt - 36,721 1,118,947
Current portion of convertible subordinated debentures 229,533 - -
---------- ---------- ----------
Total current liabilities 3,816,199 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; 29,123,239, 28,733,229 and 15,885,628
issued and outstanding at December 1996, May 1996
and May 1995, respectively 2,912,324 2,873,323 1,588,563
Additional paid-in capital 55,582,063 54,990,952 29,044,185
Accumulated deficit (44,643,578) (41,363,763) (34,583,991)
Officers receivable collateralized by stock (576,640) (559,192) (740,000)
Cumulative foreign currency translation adjustment (2,158,916) (1,875,530) (1,482,080)
---------- ---------- ----------
11,115,253 14,065,790 (6,173,323)
---------- ---------- ----------
$14,931,452 $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
Seven Months Ended Year ended
December 31, May 31,
----------------- ----------------------------------------
1996 1996 1995 1994
------ ------ ------ ------
Revenues-Insulation
Contract revenues $5,380,297 $11,208,360 $15,404,952 $15,565,110
Material sales 138,309 230,336 272,627 286,565
Other - 6,390 46,336 397,600
---------- ---------- ---------- ----------
5,518,606 11,445,086 15,723,915 16,249,275
Operating costs and expenses - Insulation
Contract costs and expenses 4,703,458 10,160,868 13,148,231 13,606,310
Cost of material sales 112,299 173,911 200,588 219,688
Selling, general and administrative expenses 768,631 2,055,043 2,197,814 2,156,582
---------- ---------- ---------- ----------
5,584,388 12,389,822 15,546,633 15,982,580
Equity in earnings of unconsolidated
affiliate 44,915 90,817 80,013 60,360
---------- ---------- ---------- ----------
Operating income (loss) - Insulation (20,867) (853,919) 257,295 327,055
---------- ---------- ---------- ----------
Revenues - Waste Management
Collection, recycling and destruction 631,884 3,456,680 1,910,863 203,332
Landfill - - - -
Other - - 317,306 -
---------- ---------- ---------- ----------
631,884 3,456,680 2,228,169 203,332
---------- ---------- ---------- ----------
Operating costs and expenses - Waste Management
Collection, recycling and destruction 1,115,121 3,719,137 4,286,178 746,844
Landfill 256,049 154,210 675,997 2,899,589
Write-off of goodwill - - 6,377,716 -
---------- ---------- ---------- ----------
1,371,170 3,873,347 11,339,891 3,646,433
Equity in earnings of unconsolidated affiliate (542,461) (143,415) - -
---------- ---------- ---------- ----------
Operating loss - Waste Management (1,281,747) (560,082) (9,111,722) (3,443,101)
---------- ---------- ---------- ----------
Corporate expense 1,940,147 3,676,907 4,773,292 932,705
---------- ---------- ---------- ----------
Operating loss (3,242,761) (5,090,908) (13,627,719) (4,048,751)
Interest expense 37,054 960,220 1,771,394 843,653
Other expense - 728,644 - -
---------- ---------- ---------- ----------
Net loss $(3,279,815) $(6,779,772) $(15,399,113) $(4,892,404)
========== ========== =========== ==========
Weighted average number of common shares 28,910,449 22,770,516 13,682,800 8,690,676
========== ========== =========== ==========
Loss per share of common stock $(.11) $(.30) $(1.13) $(.56)
===== ===== ====== =====
The accompanying notes are an integral part of these consolidated
statements.
F-5
Metalclad Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY (DEFICIT)
Seven Months Ended December 31, 1996, and the
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)
---------- ---------- ---------- ----------- ---------- ---------- ----------
Balance at May 31, 1996 28,733,229 28,873,323 54,990,952 (41,363,763) (559,192) (1,875,530) 14,065,790
F-6
Metalclad Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY (DEFICIT) - CONTINUED
Seven Months Ended December 31, 1996 and the
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, 1996 28,733,229 2,873,323 54,990,952 (41,363,763) (559,192) (1,875,530) 14,065,790
Issuance of common stock 15,010 1,501 52,874 - - - 54,375
Common stock issued under stock
option plans and warrants 371,000 37,100 528,637 - - - 565,737
Conversion of debentures to
common stock 4,000 400 9,600 - - - 10,000
Officers loans; interest &
repayments - - - - (17,448) - (17,448)
Translation adjustment - - - - - (283,386) (283,386)
Net loss - - - (3,279,815) - - (3,279,815)
---------- ---------- ---------- ----------- ---------- ---------- ----------
Balance at December 31, 1996 29,123,239 $ 2,912,324 $55,582,063 $(44,643,578) $ (576,640) $(2,158,916) $11,115,253
========== ========== ========== =========== ========== ========== ==========
The accompanying notes are an integral part of these consolidated
statements.
F-7
Metalclad Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
Seven Months Ended Year ended
December 31, May 31,
------------------ ---------------------------------------
1996 1996 1995 1994
------- ------ ------ -------
Cash flows from operating activities:
Net loss $(3,279,815) $(6,779,772) $(15,399,113) $(4,892,404)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 282,568 359,642 1,255,116 365,842
Write-off of goodwill - - 6,377,716 -
Other - (276,095) - -
Provision for losses on accounts receivable 3,410 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) losses from unconsolidated
affiliates 497,546 - - -
Earnings in excess of distributions from
Curtom-Metalclad 88,530 27,412 (27,093) (39,204)
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable (249,632) (82,641) 97,841 109,514
(Increase) decrease in unbilled receivables (118,396) 287,033 83,921 (362,976)
(Increase) decrease in inventories 11,482 46,839 (9,442) (2,640)
(Increase) decrease in prepaid expenses
and other assets (170,123) 629,952 623,212 (737,232)
(Increase) decrease in receivables from
related parties (117,458) 97,914 (7,704) 74,172
(Decrease) increase in accounts payables
and accrued expenses 274,797 (1,411,379) 1,127,241 (548,147)
(Decrease) increase in billings over costs (24,289) (44,060) 101,097 (152,917)
--------- --------- --------- ---------
Net cash used in operating activities (2,801,380) (5,822,792) (5,731,655) (6,097,159)
--------- --------- --------- ---------
Cash flows from investing activities:
Purchases of property, plant and equipment (211,111) (735,780) (3,411,080) (1,925,973)
Investments and capitalized costs in
unconsolidated affiliates (1,024,995) (1,353,972) - -
Restricted cash (769,500) - - -
--------- --------- --------- ----------
Net cash used in investing activities $(2,005,606) $(2,089,752) $(3,411,080) $(1,925,973)
---------- ---------- ---------- ----------
The accompanying notes are an integral part of these consolidated
statements.
F-8
Metalclad Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
Seven Months Ended Year ended
December 31, May 31,
------------------ ----------------------------------
1996 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 620,112 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 620,112 14,993,938 8,158,080 8,806,956
---------- ---------- --------- ---------
Effect of exchange rates on cash (83,088) (118,443) 219,570 34,678
---------- ---------- --------- ---------
Increase (decrease) in cash and cash
equivalents (4,269,962) 6,962,951 (765,085) 818,502
---------- ---------- --------- ---------
Cash and cash equivalents at beginning of
period 7,344,357 381,406 1,146,491 327,989
---------- ---------- --------- ---------
Cash and cash equivalents at end of period $ 3,074,395 $ 7,344,357 $ 381,406 $1,146,491
========== ========== ========= =========
Supplemental disclosures of cash flow information:
Cash paid for interest $ 211,537 $ 951,968 $1,260,373 $ 898,583
========== ========= ========= =========
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 ended May 31, 1996, 125,000 shares of common stock were issued at $3.50 per share as additional
consideration for the acquisition of COTERIN (see Note C).
During fiscal year ended May 31, 1996, approximately $8.6 million in convertible subordinated debentures converted into
common stock of the Company at the induced conversion rate of $2.50 per share. Debenture conversion rate at the time of the
offer by the Company was $2.82 per share.
During fiscal year ended May 31, 1996, approximately $2.1 million in debt converted into common stock of the Company at the
conversion rate of $1.59 per share.
The accompanying notes are an integral part of these consolidated
statements.
F-9
Metalclad Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Seven Months Ended December 31, 1996
and Years Ended May 31, 1996, 1995 and 1994
NOTE A - SIGNIFICANT ACCOUNTING POLICIES
Description of Business
Metalclad Corporation (the Company ) is engaged in 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 and are amortized over five years.
Contracts in Process
Fixed price insulation installation and asbestos abatement contracts are
accounted for by the percentage-of-completion method wherein costs and
estimated earnings are included in revenues as the work is performed. If a
loss on a fixed price contract is indicated, the entire amount of the
estimated loss is accrued when known. Time and material contracts are
accounted for under a cost plus fee basis. Retentions by customers under
contract terms are due at contract completion.
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 and revenues
from PCB remediation contracts are recognized as earned; related processing
and transportation costs are recognized when incurred.
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
F-10
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
safe 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 consist of direct costs incurred in Mexico.
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 December 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.
Cash Equivalents
The Company considers all highly liquid investments with original maturities
of three months or less to be cash equivalents. The carrying amount
approximates fair value because of the short maturity of those instruments.
Restricted Cash
Restricted cash as of December 31, 1996 in the amount of $769,500 represents
funds held as collateral for an appeal bond posted by the Company associated
with litigation. All interest earned on these funds is distributed to the
Company. (See Note M.)
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.
Loss Per Share
In February 1997, the FASB issued SFAS No. 128 Earnings per Share . This
statement will require that primary earnings per share (EPS) be replaced by
basic EPS. The primary difference between the two methods is that common
stock equivalents are not included in the basic earnings per share
calculation thereby reducing the denominator in the calculation. The
Company will be required to adopt this pronouncement in fiscal 1998.
Stock Based Compensation
Effective January 1, 1996, the Company adopted the disclosure provisions of
SFAS No. 123, Accounting for Stock-Based Compensation . SFAS No. 123
requires the Company to disclose proforma net income and earnings per share
F-11
as if the fair value based accounting method of SFAS No. 123 had been used
to account for stock based compensation. These disclosures are included in
Note J.
Liquidity
The Company has experienced recurring losses as it develops operations and
facilities in the emerging Mexican market. The Company believes that its
working capital, in conjunction with its management and cash flow
strategies, is sufficient to sustain operations for a reasonable time.
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 approximately 7.8 Mexican
Pesos to the U.S. Dollar at December 31, 1996. The resulting translation
adjustments are 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.
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
Effective June 1, 1996, the Company has implemented the Financial Accounting
Standards Board (FASB) Statement No. 121 Accounting for the Impairment of
Long Lived Assets and for Long-Lived Assets to Be Disposed of . This
statement requires that long-lived assets and certain identifiable
intangibles to be held and used be reviewed for impairment whenever events
or changes in circumstances indicate that the carrying value of an asset may
not be recoverable. The Company has conducted this review and believes that
no impairment currently exists and no material adjustments are necessary to
the valuation of its assets.
Landfill
Included in property, plant and equipment at December 31, 1996 is
approximately $3,875,000 representing the Company s investment in its
F-12
hazardous waste treatment facility in Mexico. Additionally, the Company has
recorded goodwill of approximately $697,000 associated with this facility.
The Company has been granted all necessary federal governmental
authorizations to open and operate the facility but, as yet, has not
received the support of the state and local governments. Consequently, on
October 2, 1996, the Company filed a Notice of Intent to File Claim Under
the North American Free Trade Agreement ( NAFTA ). The Claim was filed with
the International Centre for Settlement of Investment Disputes ( ICSID ) in
Washington, D.C. On January 13, 1997, the Secr3tary General of ICSID
registered the Company s claim and notified both the United States and
Mexican governments of the registration. The Company s claim is one under
the category of Likened to Expropriation wherein the Company claims,
having been denied the right to operate its constructed and permitted
facility, its property has therefore been, as a practical matter,
expropriated, entitling the Company to the fair market value of the facility
as damages. No assurance can be given the efforts of the Company will be
fruitful and there is always the possibility of a negotiated settlement,
which is possible according to the wishes of the parties at any time during
the arbitration process.
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), Quimica Omega, S.A. de
C.V. (QUIMICA OMEGA) and Seguridad Electrica Mexicana, S.A. ( SEM ).
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
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 moneys
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
F-13
Quimica shareholders. In May, 1995, the Company wrote off goodwill in the
amount of $6,377,000 associated with this transaction.
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.
On April 9, 1996, the Company and BFI-MEXICO, formed BFI-OMEGA as a 50%-50%
owned joint venture corporation. Effective with this agreement, BFI-OMEGA
assumed management of QUIMICA OMEGA S operations and implemented a
transition to BFI-OMEGA. The joint venture commenced operations under the
BFI-OMEGA name in July, 1996. As of December 31, 1996, the Company had
capitalized costs of $516,000 representing direct costs of forming the joint
venture. These costs are being amortized over five years commencing July,
1996.
In January 1997, QUIMICA OMEGA and BFI-MEXICO reached a tentative agreement
for QUIMICA OMEGA to acquire BFI s 50% interest in the joint venture. As
part of this proposed transaction, BFI would contribute certain waste
transportation equipment to QUIMICA OMEGA. In addition, BFI will also
provide certain technical and landfill management services to the Company
and ECOPSA, including the continuing services of the general manager of the
joint venture.
NOTE D - INVESTMENTS IN UNCONSOLIDATED AFFILIATES
BFI-OMEGA
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. In
July, 1996, the joint venture commenced operations as BFI-OMEGA.
The following is unaudited summarized financial information for BFI-OMEGA,
presented in U.S. dollars:
Balance Sheets
(Unaudited)
Seven Months Year
Ended Ended
December 31, 1996 May 31, 1996
----------------- ------------
Cash $ 261,520 $1,662,946
Accounts receivable 639,113 -
Prepaid expenses 13,363 88,952
Other assets 228,228 40,870
Property, plant and equipment 549,078 34,400
---------- ---------
Total assets $1,691,302 $1,827,168
========== =========
F-14
Accounts payable and accrued
expenses $ 682,843 $ -
Common stock 2,332,085 2,065,872
Accumulated deficit (1,323,626) (238,704)
---------- ---------
Total liabilities and equity $1,691,302 $1,827,168
========= =========
Statements of Operations
(Unaudited)
December 31, 1996 May 31, 1996
----------------- ------------
Revenues $ 872,427 $ -
Cost of Sales (872,674) -
Expenses (1,084,675) (238,704)
--------- --------
Loss from operations $(1,084,922) $ (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
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 following is unaudited summarized financial information for Curtom-
Metalclad:
Balance Sheets
(Unaudited)
December 31, May 31,
----------- -------------------------
1996 1996 1995
------ ------ ------
Cash $ 7,207 $ 214,183 $ 215,349
Accounts receivable 717,648 219,058 370,952
--------- --------- --------
Total assets $ 724,855 $ 433,241 $ 586,301
========= ========= ========
Accounts payable $ 691,332 $ 310,054 $ 407,826
Curtom-equity 17,097 63,146 91,022
Metalclad-equity 16,426 60,041 87,453
--------- --------- --------
Total liabilities and partners
capital $ 724,855 $ 433,241 $ 586,301
========= ========= ========
F-15
Statements of Operations
(Unaudited)
Seven Months Year
Ended Ended
December 31, May 31,
----------- ---------------------------------
1996 1996 1995 1994
------ ------ ------ ------
Revenue $3,427,699 $1,417,601 $2,505,697 $3,219,203
Costs of sales (3,335,786) (1,231,613) (2,341,019) (2,956,198)
Expenses (904) (646) (1,386) (17,997)
---------- ---------- ---------- ----------
Income from operations $ 91,099 $ 185,342 $ 163,292 $ 245,008
========= ========= ========= =========
NOTE E - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following:
December 31, May 31,
----------- -------------------------
1996 1996 1995
------ ------ ------
Buildings $ 93,690 $ 98,857 $ 115,615
Land 239,955 273,172 337,880
Machinery and equipment 1,524,616 1,702,036 1,541,634
Automotive equipment 505,667 484,415 607,879
Leasehold improvements 4,454 45,159 41,596
--------- ---------- ---------
2,368,382 2,603,639 2,644,604
Less accumulated depreciation
and amortization (924,614) (901,304) (702,004)
--------- ---------- ---------
1,443,768 1,702,335 1,942,600
Hazardous waste treatment
facilities 3,875,641 3,760,322 3,324,269
--------- ---------- ---------
$5,319,409 $ 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 the year ended
May 31, 1996, this note was paid in its entirety.
NOTE G - DEBT
Long-term debt consists of the following:
F-16
December 31, May 31,
----------- --------------------------
1996 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 - 36,721 292,529
--------- ---------- ---------
- 36,721 3,169,184
Less current portion - 36,721 1,118,947
--------- ---------- ---------
$ - $ - $2,050,237
========= ========= =========
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
In November 1993, the Company issued $3,840,000 of convertible subordinated
debentures due in 60 months, bearing interest at 9% and convertible into
shares of common stock at the rate of $5.50 per share subject to certain
adjustments. During the year ended May 31, 1994, the Company also issued an
F-17
additional $732,359 principal amount of convertible subordinated debentures
due in 60 months, bearing interest at 8%, and convertible into shares of
common stock at the rates of $4.00 and $5.00 per share subject to certain
adjustments.
In August 1995, the Company offered to convert all outstanding debentures
into shares of common stock at a conversion price below the stated price on
the debentures. As of May 31, 1996, approximately $8,600,000 of these
debentures converted at the rate of $2.50 per share and the Company
recognized a charge of $729,000 due to the lower conversion price offer. As
of December 31, 1996 the remaining debentures outstanding, all bearing
interest at 8% per annum, were $229,533. All such amounts are due in fiscal
1997.
The Company has reserved an aggregate of approximately 91,800 shares of the
Company s common stock for issuance upon conversion of the remaining 8%
debentures.
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 December
31, 1996, May 31, 1996 and 1995 are as follows:
December 31, May 31,
----------- --------------------------
1996 1996 1995
------ ------ ------
Assets:
Allowances established against
realization of certain assets $ 12,000 $ 13,000 $ 16,000
Net operating loss carryforwards 7,331,000 6,606,000 4,357,000
Accrued liabilities and other 259,000 183,000 179,000
--------- --------- ---------
7,602,000 6,802,000 4,552,000
Valuation allowance (7,602,000) (6,802,000) (4,552,000)
--------- --------- ---------
$ - $ - $ -
========= ========= =========
The difference between the actual income tax benefit and the tax benefit
computed by applying the statutory Federal income tax rate to the net loss
before income taxes is attributable to the inability to recognize currently
the future benefit of net operating loss carryforwards.
At December 31, 1996, the Company has available for U.S. Federal and
California income tax purposes net operating loss carryforwards of
approximately $16,002,000 and $7,002,000, respectively. These carryforward
amounts expire in the years 2000 through 2011 and 1997 through 2001,
respectively. At December 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 loss and investment
credit carryforwards may be restricted in the future due to changes in the
ownership of the Company. The Company also has Mexican net operating loss
F-18
carryforwards of approximately $2,913,000 which may be utilized to offset
future taxable income. These Mexican losses are subject to a ten year tax
carryforward period and expire in the years 2001 through 2006.
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 December 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 December 31, 1996, there were options
outstanding under the 1992 Plan for 707,000 shares (of which 390,000 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 December 31, 1996, there were options outstanding under the
1993 Plan for 619,000 shares (of which 468,500 shares were vested), and
116,000 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
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. In
September, 1996, the Company rescinded its granting of 3,195,000 of these
options and deferred issuance of 1,300,000 of these options pending
shareholder approval. During the seven months ended December 31, 1996, the
Company granted options to purchase 300,000 shares of common stock,
inclusive of options for 250,000 shares at $3.00 associated with the BFI-
OMEGA transaction. (See Note N.)
F-19
The following is a summary of options granted:
Seven months ended Year ended
December 31, May 31,
---------------------- ----------------------------------------------------------
1996 1996 1995
----- ----- -----
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
Options outstanding
at beginning of the
year 7,904,250 $3.07 4,487,500 $2.17 2,246,000 $2.08
Granted 300,000 3.00 5,040,000 3.56 2,412,500 2.25
Exercised (161,000) 1.38 (1,547,000) 2.10 (30,000) 1.87
Canceled (3,195,000) 3.63 (76,000) 2.25 (141,000) 2.25
---------- ----- ---------- ----- ---------- -----
Options outstanding
at end of the year 4,848,250 $2.75 7,904,250 $3.07 4,487,500 $2.17
Options Exercisable 2,982,000 2,855,750 2,247,334
Of the 300,000 options granted during the seven months ended December 31,
1996, 50,000 were issued at fair market value and 250,000 were issued below
fair market value, with the Company recording a charge of $125,000
representing the discount.
The following significant assumptions were utilized to calculate the fair
value information presented utilizing the Black-Scholes Multiple Option
Approach:
December, 1996 May, 1996
-------------- ---------
Risk free interest rate 6.10% 6.10%
Expected life 1.2 years 4.7 years
Expected volatility 1.05 1.05
Expected dividends - -
Weighted average fair value of
Options granted 3.36 3.54
Options Outstanding Options Exercisable
--------------------------------------------------------------------------- -----------------------------------
Weighted
average Weighted Weighted
Number remaining average Number average
Range of outstanding contractual exercise exercisable exercise
exercise prices as of 12/31/95 life in years price as of 12/31/95 price
--------------- --------------- -------------- --------- -------------- --------
F-20
$2.250 - $2.250 2,778,250 6.98 $2.2500 2,212,000 $2.2500
$2.500 - $2.500 200,000 9.37 $2.5000 200,000 $2.5000
$3.000 - $3.000 430,000 9.03 $3.0000 430,000 $3.0000
$3.625 - $3.625 1,350,000 9.01 $3.6250 50,000 $3.6250
$4.500 - $4.500 90,000 9.01 $4.5000 90,000 $4.5000
--------------- --------- ---- ------- --------- -------
$2.250 - $4.500 4,848,250 7.86 $2.7515 2,982,000 $2.4600
=============== ========= ==== ======= ========= =======
As the Company has adopted the disclosure requirement of SFAS 123, the
following table shows pro forma net loss and loss per share as if the fair
value based accounting method had been used to account for stock based
compensation cost.
Seven Months For the Year
Ended Ended
December 31, 1996 May 31, 1996
----------------- ------------
Net Loss $(3,280,000) $(6,780,000)
Pro forma compensation expense (355,000) (1,023,000)
---------- ----------
Pro forma net loss $(3,635,000) $(7,803,000)
========== ==========
Pro forma loss per share $(.13) $(.34)
===== =====
The effects of applying FASB 123 in this pro forma disclosure are not
indicative of future amounts.
Stock Purchase Warrants
In connection with various debt offerings, stock placements and services
provided, the Company has issued various stock purchase warrants. All such
warrants were issued at prices which approximated or exceeded fair market
value of the Company s common stock at the date of grant and are exercisable
at dates varying from one to five years.
Summarized information for stock purchase warrants follows:
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
Issued - -
Exercised (210,000) 1.51-2.00
---------- -----------
Warrants outstanding at December 31, 1996 7,155,385 $1.51-5.00
==========
F-21
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.
The Company realized net cash proceeds of $16,500,000 from the
aforementioned year ended May 1996 transactions. Additionally, debt
totaling $10,700,000, representing debentures, was converted into equity.
During the seven months ended December 31, 1996, the Company issued a total
of 390,000 shares, with 161,000 being the result of option exercises,
210,000 being the result of warrants being exercised, 4,000 from a debenture
conversion and 15,000 from a previously accrued award. The Company realized
net proceeds of $620,000 from these transactions.
NOTE K - EMPLOYEE BENEFIT PLANS
Effective January 1, 1990, the Company established a contributory profit
sharing and thrift plan for all salaried employees. Discretionary matching
contributions are made by the Company based upon participant contributions,
within limits provided for in the plan. No contributions were made in the
seven months ended December 31, 1996 or the years ended May 31, 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
$127,000, $296,000, $320,000 and $384,000 for the seven months ended
December 31, 1996 and for the years ended May 31, 1996, 1995 and 1994,
respectively.
NOTE L - SIGNIFICANT CUSTOMERS
Sales for the seven months ended December 31, 1996 to Curtom-Metalclad were
approximately $3,445,000, including $3,345,000 performed at Edison plants
under Edison s strategic alliance program. The Company had trade accounts
receivable of $1,602,000 from Curtom-Metalclad as of December 31, 1996.
Sales to Southern California Edison and Curtom-Metalclad were approximately
$2,417,000 and $1,267,000, respectively, in the year ended May 31, 1996.
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 the year ended May 31, 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.
F-22
Sales to Brown & Root, Curtom-Metalclad, Southern California Edison and
Texaco 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 $168,722, $404,647, $373,371 and $343,350 for the
seven months ended December 31, 1996 and for the years ended May 31, 1996,
1995, and 1994, respectively. Future minimum non-cancelable lease
commitments are as follows:
Year ending December 31, 1997 $188,817
1998 116,493
1999 45,147
-------
$350,457
=======
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 $400,000 from the
California State Compensation Insurance Fund for the policy year ended
September 30, 1990. Management believes that the assessment is improperly
computed and is based upon inappropriate modification rates.
In December, 1996, the Company received an unfavorable court ruling on its
position relative to certain rights of defense against the claims of the
insurer. In order to appeal the decisions of the court, the Company
stipulated to a judgment of $513,000, representing principal and interest on
claims, and has posted an appeal bond in the amount of $769,500 so as to
continue its legal proceedings on appeal. The bonding company has required
collateral in the form of an escrow account in the amount of the bond, which
the Company established in December, thereby restricting the Company s use
of these funds. Although the Company and its counsel feel strongly about
its position on appeal, no assurances can be made that the outcome will be
favorable to the Company.
NOTE N - RELATED PARTY TRANSACTIONS
Receivables from related parties are comprised of the following:
F-23
December 31, May 31,
1996 1996 1995
-------- -------- --------
Metalclad Pacific - note receivable $ - $ 16,680 $ 31,261
Metalclad Pacific - other 10,000 17,926 17,926
Loans to executive officers,
directors and employees 230,379 105,763 154,482
-------- -------- --------
$240,379 $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 $54,000, $283,000, $280,000, and
$216,000 for the seven months ended December 31, 1996 and years ended May
31, 1996, 1995 and 1994, respectively.
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 positions. As a result, the Company
and Mr. Neveau renegotiated 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 remaining obligation
to Mr. Neveau. As of December 31, 1996, $175,000 remained accrued by the
Company.
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.
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 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.
In December, 1996, the Company loaned $150,000 to Mr. Javier Guerra
Cisneros, a Director and Vice President of Mexico Operations. The loan is
F-24
collateralized by 300,000 shares of stock of the Company and is represented
by a promissory note bearing interest at 10%. In February, Mr. Guerra
repaid $120,000 of this note.
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).
Segments of Business by Industry
Seven Months Year
Ended Ended
December 31, May 31,
----------------- -----------------------------------------
1996 1996 1995 1994
------ ------ ------ ------
Gross sales
Insulation $ 5,518,606 $11,445,086 $ 15,723,915 $16,249,275
Waste management 631,884 3,456,680 2,228,169 203,332
--------- --------- ----------- ---------
Total $ 6,150,490 $14,901,766 $ 17,952,084 $16,452,607
========== ========== =========== ==========
Operating profit (loss)
Insulation $ (20,867) $ (853,919) $ 257,295 $ 327,055
Waste management (1,281,747) (560,082) (9,111,722) (3,443,101)
Corporate expense $(1,940,147) $(3,676,907) $ (4,773,292) $ (932,705)
---------- ---------- ----------- ---------
Total $(3,242,761) $(5,090,908) $(13,627,719) $(4,048,751)
---------- ---------- ----------- ---------
Interest expense, net (37,054) (960,220) (1,771,394) (843,653)
Other expense - (728,644) - -
---------- ---------- ----------- ----------
Net Loss $(3,279,815) $(6,779,772) $(15,399,113) $(4,892,404)
========== ========== =========== ==========
Identifiable assets
Insulation $ 3,321,304 $ 3,264,649 $ 4,572,010 $ 5,605,407
Waste management 6,899,214 6,962,264 4,808,400 10,464,032
Corporate 4,710,934 7,475,120 1,329,807 2,241,161
---------- ---------- ----------- ----------
Total $14,931,452 $17,702,033 $ 10,710,217 $18,310,600
========== ========== =========== ==========
Capital expenditures
Insulation $ 31,028 $ 29,792 $ 489,915 $ 16,301
Waste management 180,083 705,988 2,921,165 1,909,672
---------- ---------- ---------- ----------
Total $ 211,111 $ 735,780 $ 3,411,080 $ 1,925,973
========== ========== =========== ===========
Depreciation and amortization
Insulation $ 132,026 $ 154,555 $ 1,032,011 $ 159,076
Waste management 150,542 205,087 223,105 206,766
---------- ---------- ---------- ----------
Total $ 282,568 $ 359,642 $ 1,255,116 $ 365,842
========== ========== =========== ==========
F-25
NOTE P - UNAUDITED INTERIM INFORMATION
The following condensed financial information for the seven month period
ended December 31, 1996 is unaudited and is being presented for comparative
purposes.
Seven Months Ended December 31,
1996 1995
------ ------
Revenues - Insulation Business $5,518,606 $6,910,000
Revenues - Waste Management 631,884 1,450,860
Operating Loss - Insulation Business (20,867) (1,269)
Operating Loss - Waste Management (1,281,747) 76,086
Corporate Expense 1,940,147 1,789,007
Interest Expense 37,054 834,149
Other Expense - 728,644
Net Loss (3,279,815) (3,276,983)
Net Loss Per Share $(.11) $(.17)
===== =====
F-26
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
Seven months ended December 31, 1996
Deducted from asset accounts:
Allowance for doubtful accounts $66,566 $ 4,044 $ 0 $ 0 $ (2,638)(A) $67,972
Allowance for excess and
obsolete inventory 25,000 289 0 0 0 25,289
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
EX-99.1
2
NON-STATUTORY
STOCK OPTION AGREEMENT
of
METALCLAD CORPORATION
THIS NON-STATUTORY STOCK OPTION AGREEMENT, hereinafter referred to as
the "Option" or the "Agreement," is made as of the 25th day of June, 1996,
between METALCLAD CORPORATION, a Delaware corporation (hereinafter
referred to as the "COMPANY") and DOUGLAS S. LAND (the "OPTIONEE"), whose
employment address is: The Chesapeake Group, Inc., 598 Madison Avenue,
6th Floor, New York, New York 10022.
The Board of Directors of the COMPANY hereby grants an option on
250,000 shares of common stock of the COMPANY ("Common Stock") to the
OPTIONEE at the price and in all respects subject to the terms,
definitions and provisions of the Agreement.
1. Option Price. The option price is $3.00 per share.
2. Exercise of Option.
2.1 Right to Exercise. The options shall be exercisable by the
OPTIONEE, his personal representative, or his assignee, in whole or in
part in accordance with the terms of this Agreement and is presently
exercisable; expiring on December 31, 2006.
2.2 Method of Exercise. This Option shall be exercisable by a
written notice which shall:
(a) State the election to exercise the Option, the number
of shares in respect of which it is being exercised, the person in whose
name the shares are to be issued (if the shares are issued to
individuals), the names, addresses and Social Security Numbers of such
persons; and
(b) Contain such representations and agreements as to the
holder's investment intent with respect to such shares of Common Stock as
are required by law may be satisfactory to the COMPANY's counsel; and
(c) Be signed by the person or persons entitled to
exercise the Option and, if the Option is being exercised by any person or
persons other than the OPTIONEE, be accompanied by proof, satisfactory to
counsel for the COMPANY, of the right of such person or persons to
exercise the Option; and
(d) Be accompanied by a payment for the purchase price of
those shares with respect to which the Option is being exercised in the
form of a certified or bank cashier's or teller's check. The certificate
or certificates for shares of Common Stock as to which the Option shall be
exercised shall be registered in the name of the person or persons
exercising the Option.
2.3 Restrictions on Exercise. As a condition to his exercise
of this Option, the COMPANY may require the person exercising this Option
to comply with applicable laws or regulations.
3. Transferability of Option. This Option may be transferred in any
manner by will or the laws of descent or distribution and may be exercised
during the lifetime of the OPTIONEE by an assignee of the OPTIONEE.
4. Stock Subject to the Option. The COMPANY shall set aside 250,000
shares of the Common Stock which it now holds as authorized and unissued
shares. If the Option should expire or become unexercisable for any
reason without having been exercised in full, the unpurchased shares which
were subject thereto shall be free from any restrictions occasioned by
this Option Agreement. If the COMPANY has been listed on a stock
exchange, the COMPANY will not be required to issue or deliver any
certificate or certificates for shares to be issued hereunder until such
shares have been listed (or authorized for listing upon official notice of
issuance) upon each stock exchange on which outstanding shares of the same
class may then be listed and until the COMPANY has taken such steps as
may, in the opinion of counsel for the CORPORATION, be required by law and
applicable regulations, including the rules and regulations of the
Securities and Exchange Commission, and state blue sky laws and
regulations, in connection with the issuance or sale of such shares, and
the listing of such shares on each such exchange. The COMPANY will use
its best efforts to comply with any such requirements forthwith upon the
exercise of the Option.
5. Adjustments Upon Changes in Capitalization. If all or any
portion of the Option is exercised subsequent to any stock dividend,
split-up, capitalization, combination or exchange of shares, merger,
consolidation, acquisition of property or stock, separation,
reorganization, or other similar change or transaction of or by the
COMPANY, as a result of which shares of any class shall be issued in
respect of outstanding shares of the class covered by the Option or shares
of the class covered by the Option shall be changed into the same or a
different number of shares of the same or another class or classes, the
person or persons so exercising such an Option shall receive, for the
aggregate option price payable upon such exercise of the Option, the
aggregate number and class of shares equal to the number and class of
shares he or she would have had on the date of exercise had the shares
been purchased for the same aggregate price at the date the Option was
granted and had not been disposed of, taking into consideration any such
stock dividend, split-up, recapitalization, combination or exchange of
shares, merger, consolidation, acquisition of property or stock,
separation, reorganization, or other similar change or transaction;
provided, however, that no fractional share shall be issued upon any such
exercise, and the aggregate price paid shall be appropriately reduced on
account of any fractional share not issued. Provided, however, any shares
which are issued at or about this option price or pursuant to a warrant or
options whose exercise price is at or above the exercise price provided in
the agreement shall not be considered to be diluted for the purpose of
this agreement and no adjustment will be made.
6. Notices. Each notice relating to this Agreement shall be in
writing and delivered in person or by certified mail to the proper
address. Each notice shall be deemed to have been given on the date it is
received. Each notice to the COMPANY shall be addressed to it at its
principal office, at 3737 Birch Street, Suite 300, Newport Beach,
California 92660, to the attention of the Secretary of the COMPANY. Each
notice to the OPTIONEE or other person or persons then entitled to
exercise the Option shall be addressed to the OPTIONEE or such other
person or persons at the OPTIONEE's address set forth in the heading of
this Agreement. Anyone to whom a notice may be given under this Agreement
may designate a new address by notice to that effect.
7. Benefits of Agreement. This Agreement shall inure to the benefit
of and be binding upon each successor of the COMPANY. All obligations
imposed upon the OPTIONEE and all rights granted to the COMPANY under this
Agreement shall be binding upon the OPTIONEE's heirs, legal
representatives, and successors. This Agreement shall be the sole and
exclusive source of any and all rights which the OPTIONEE, his heirs,
legal representatives, or successors may have in respect to the Plan or
any options or Common Stock granted or issued thereunder, whether to him,
or herself, or to any other person.
8. Resolution of Disputes. Any dispute or disagreement which should
arise under, or as a result of, or in any way relate to, the
interpretation, construction or application of this Agreement will be
determined by the Board of Directors of the COMPANY. Any determination
made hereunder shall be final, binding, and conclusive for all purposes.
IN WITNESS WHEREOF, the COMPANY and the OPTIONEE have caused this
Agreement to be executed as of the day, month and year first above-
written.
COMPANY: METALCLAD CORPORATION
a Delaware corporation
/s/Grant S. Kesler
By: ------------------------------
GRANT S. KESLER, President
(CORPORATE SEAL)
/s/Douglas S. Land
OPTIONEE: ---------------------------------
DOUGLAS S. LAND
EX-99.2
3
{Letterhead}
The Chesapeake Group
Investment and Merchant Banking
An Affiliate of Economic Analysis Group, Ltd.
January 16, 1996
Strictly Private & Confidential
Mr. Grant Kesler
Chief Executive Officer
Metalclad Corporation
3737 Birch Street
Newport Beach, CA 92660
Dear Mr. Kesler,
This letter ( the Agreement ) outlines the terms under which Chesapeake
Group Inc. ( Chesapeake ) would be engaged to act as financial consultant
to the Metalclad Group of Companies ( Metalclad ) in connection with
transactions involving its Mexican Waste Operations ( Mexico ).
1. Services
Chesapeake shall assist Metalclad in working on its Mexican business
and identifying and designing financial and business structures relating
to transactions involving its Mexican Waste Operation. This engagement
shall relate to any transaction in which Metalclad has any substantive
Mexican relationship including those in which Metalclad is a prospective
or actual buyer, seller, developer, investor, manager, or operator
( Transactions ).
2. Advisory Fees
Metalclad will compensate Chesapeake for the services according to
the following schedule.
A. Fees for services through 1995 $100,000
B. Monthly retainer beginning 1996 $8,000
3. Transaction Fees
In addition to the advisory fee defined in paragraph two above,
Metalclad will compensate Chesapeake for individual Transactions based on
the schedule (Schedule I) to be provided on an ongoing basis and updated
by Metalclad and Chesapeake and attached to this agreement.
4. Termination
Chesapeake s services hereunder may be terminated by either party at
the end of the twenty-fourth month of this agreement without liability or
continuing obligation to Chesapeake or Metalclad, except for any
compensation earned or otherwise to be paid to Chesapeake pursuant to this
Agreement and any expenses incurred by Chesapeake to the date of
termination. The date of termination will be 30 days from the date of a
termination notice being posted. In the event that a termination notice is
not served, it will continue in force on a month-by-month basis
thereafter.
5. Survival
Chesapeake shall have an ongoing interest based on fees earned as
defined in paragraphs 2 and 3 for a period of 24 months following
termination with respect to any transaction identified on Schedule I.
6. Additional Services
If Metalclad requests Chesapeake to perform services not contemplated
by this Agreement or if the terms and conditions of Chesapeake s
assignment change. Chesapeake s compensation will be determined through
negotiations with Metalclad conducted in good faith. Such additional
services will include work to be undertaken by Erik Buchakian, Matthew
Root, or other Chesapeake consultants required by Metalclad.
7. Confidentiality
All information learned by Chesapeake pursuant to this engagement
will be treated by its officers, employees and agents as confidential and
such information will only be disclosed to those parties and affiliates
who need to know it and will be used solely for the purposes of
undertaking this engagement.
At the request of Metalclad, Chesapeake undertakes that it will hold
specified information for its exclusive use and that it will not release
such information to any other party without the prior written approval of
the relevant party.
This confidentiality undertaking shall not apply to any part of the
information provided hereunder which is or becomes generally available to
the public without breach of this Agreement. Chesapeake agrees that the
provisions of this section will survive for a period of three years and
remain operative regardless of any termination or completion of its
services hereunder.
8. Indemnification
Metalclad will indemnify Chesapeake and each of their directors,
officers, employees and agents against any and all losses, claims,
liabilities, relating to or arising from the arrangements hereby or
requested pursuant hereto provided that the same shall not have arisen
from negligence or willful default. In addition, no claims will be made
against Chesapeake by Metalclad in respect of any loss or damage which may
be suffered relating to or arising from the arrangements contemplated
hereby or requested pursuant hereto provided that the same shall not have
arisen from negligence or willful default. This paragraph shall survive
any termination of the Agreement and arrangements contained in this
letter. Chesapeake s liability to Metalclad under this Agreement,
including liability for negligence, shall be limited to the amount of any
fees received by it under the Agreement.
Metalclad agrees to reimburse Chesapeake for all reasonable expenses
(including reasonable fees and expenses of Counsel) which are incurred by
it in connection with investigating, preparing or defending any such
action or claim, whether or not in connection with pending or threatened
litigation, in which Chesapeake is a party.
9. Counterparts
This Agreement may be executed in two or more counterparts, each of
which shall be deemed an original, but all of which shall constitute one
and the same instrument.
If you are in agreement with the terms and conditions of this Agreement,
please sign and return an executed copy to Chesapeake.
Yours sincerely,
For and on behalf of Chesapeake
/s/Douglas S. Land
Douglas S. Land
Managing Director
Chesapeake Group, Incorporated
I hereby accept the terms set out in this letter.
For an on behalf of Metalclad
/s/Grant Kesler
Grant Kesler
Chief Executive Officer
Metalclad Corporation
Schedule I
Transaction Fees
1. BFI, INTERNATIONAL - In addition to the advisory fee payable to
Chesapeake under the terms of paragraph 2, Metalclad will pay Chesapeake
the following transaction fee relating to the negotiation of a joint
venture with BFI, International.
a. Structuring Fee: $75,000 payable on February 1, 1996;
(Not subject to closing)
Plus
b. Success Fee at Closing: 5% of the value of the transaction
up to $2.5 million and 2.5% of the value thereafter with a minimum cash
fee of $250,000 and a maximum cash fee of $500,000, payable at the closing
of the transaction. The total amount of the Success Fee in excess of
$500,000 shall be payable in stock based on the low bid during the two
weeks prior to closing.
/s/Grant S. Kesler
Agreed on Behalf
of Metalclad
January 16, 1996
EX-99.3
4
CONSULTING AGREEMENT
This Agreement is entered into as of the 1st day of June, 1996, by
and between METALCLAD CORPORATION, a Delaware corporation (hereinafter the
Company ), and GORDON M. LIDDLE (hereinafter Consultant ) under the
following terms and conditions:
RECITALS:
WHEREAS, it is in the best interest of the Company to retain the
services of Consultant to consult with the officers of the Company on
matters concerning the business of Metalclad Corporation, upon the terms
and conditions hereinafter set forth; and
WHEREAS, the compensation payable to Consultant will consist of
monthly cash payments; and
WHEREAS, in connection with the engagement of Consultant by the
Company, the Company desires to restrict Consultant s rights to compete
with the business of the Company;
NOW, THEREFORE, in consideration of the mutual promises, covenants
and agreements hereinafter set forth, the parties hereto agree as follows:
1. TERM
The term of this Agreement shall be for a period of 19 months,
commencing on the effective date of this Agreement subject however, to
prior termination as provided hereinbelow, in Paragraph 5 and 6.
2. COMPENSATION; COMMITMENT OF TIME; INDEPENDENT CONTRACTOR STATUS
2.1 The Company shall pay Consultant during the term hereof a
consulting fee at the rate of $5,000.00 per month, which compensation
shall be paid to Consultant in equal semi-monthly installments.
2.2 Consultant shall be required to devote such time to the
performance of his duties as Consultant deems necessary to accomplish the
tasks to be performed by him as outlined in Exhibit A, a copy of which
is attached hereto and incorporated herein by this reference. Consultant
shall be responsible for the performance of the services set forth in
Exhibit A, but shall determine the method, details, and means for the
performance of such services. At the end of each fiscal quarter during
the term of this Agreement, Consultant shall provide a memorandum to the
Company describing in reasonable detail the status of the services
rendered during the previous fiscal quarter and a report on the business
of the Company during such period.
2.3 Consultant shall be an independent contractor with respect to
the engagement contemplated by this Agreement. Consultant shall be
responsible for all self-employment taxes and other taxes as are required
with respect to compensation paid by a corporation to an independent
contractor.
3. COVENANT NOT TO COMPETE
During the term of this Agreement, Consultant shall not, without the
express written consent of the Company, engage in any activity competitive
with and/or adverse to the Company s business or practice (whether alone,
as a partner, or as an officer, director, employee or shareholder of any
other corporation, or a trustee or fiduciary or any other representative
of any other entity).
4. SERVICES
4.1 Consultant agrees to devote sufficient time (subject to the
limitations set forth in this Paragraph 4) to the performance of those
duties and accomplishment of those goals set forth in Exhibit A .
Consultant shall report and shall be responsible to the Board of Directors
and Chief Executive Officer of the Company. Consultant agrees that he
will serve the Company faithfully, diligently, competently and to the best
of his ability until the termination of his engagement hereunder.
4.2 The parties agree that the services to be rendered by Consultant
pursuant to this Agreement are contemplated to be performed primarily at
the offices of Consultant. However, Consultant agrees to perform periodic
on-site evaluations at the business offices of the Company or of any
subsidiary as Consultant deems reasonably necessary.
5. EFFECTIVE DATE
The effective date of this Agreement shall be June 1, 1996.
6. TERMINATION
6.1 This Agreement shall terminate upon the occurrence of any of the
following events:
(a) Upon the expiration of the term of this Agreement, pursuant
to Paragraph 1 hereof.
(b) Whenever the Company and Consultant shall mutually agree to
termination in writing.
(c) Upon the death of Consultant.
(d) Upon the disability of the Consultant due to physical
disability or other incapacity which renders Consultant unable to perform
the duties required of him for 60 calendar days and upon 30 days written
notice by the Company.
(e) For cause upon the occurrence of any of the following:
(i) Consultant s personal dishonesty directly relating to
his engagement;
(ii) Consultant s willful misconduct in the carrying out of
his duties;
(iii) Consultant s breach of a fiduciary duty involving
personal profit;
(iv) Consultant s intentional or habitual failure to
perform stated duties;
(v) Consultant s willful violation of any law, rule or
regulation resulting in a felony conviction by a court of competent
jurisdiction;
(vi) Consultant s material breach of any provisions of this
Agreement.
(f) Upon Consultant s breach of any of the terms of this
Agreement, Consultant shall receive written notice of the breach which
notice shall be set forth the term(s) of this Agreement which was (were)
breached and recommendations from 120 days from the date of notice, then
at the Company s option, this Agreement shall be terminated on the day
immediately following the period in which Consultant was to cure the
breach.
6.2 Upon termination for any of the foregoing causes, the Consultant
shall be entitled to receive 100% of only the compensation which
Consultant would otherwise be entitled to as of the date of this
termination.
7. TERMINATION WITHOUT CAUSE
The Company may terminate Consultant, without cause, upon 90 days
written notice to Consultant. In the event of termination without cause,
the Consultant shall be entitled to a severance allowance payable in the
manner in which Consultant received his compensation under this Agreement
for the period remaining under this Agreement if it were to continue for
its full term. The severance allowance shall be equal to 100% of the
compensation which Consultant would otherwise be entitled to if this
Agreement were to continue for its full term.
8. EXPENSES
8.1 Consultant shall be entitled to reimbursement of all reasonable
expenses actually incurred in the course of his engagement. Commuting
expenses Consultant shall submit to the Company a standardized expense
report form, provided by the Company, and shall attach thereto receipts
for all expenditure. Automobile expenses shall be reimbursed at a maximum
mileage rate allowed by the Internal Revenue Service.
8.2 The Company shall reimburse employee within 15 days after
submission by Consultant of his expense report.
9. THE COMPANY S AUTHORITY
Consultant agrees to observe and comply with the reasonable rules and
regulation so the Company as adopted by the Company s Board of Directors
either orally or in writing respecting performance of his duties and to
carry out and perform orders, directions and policies stated by the Board
of Directors, to him from time to time, either orally or in writing.
10. NON-TRANSFERABILITY
This Agreement shall not be transferable or assignable by Consultant,
nor shall Consultant s interest herein be transferred or assigned by
operation of law, and any assignment or attempted assignment, transfer,
mortgage, hypothecation, or pledge of this Agreement or his interest
herein by Consultant, shall be null and void.
11. NOTICES
All notices, requests, demands and other communications provided for
by this Agreement shall be in writing and (unless otherwise specifically
provided herein) shall be deemed to have been given at the time when ailed
in any general or branch United States Post Office, enclosed in a
registered or certified postpaid envelope, addressed to the parties stated
below or to such changed address as such party may have fixed by notice:
TO THE COMPANY: Chief Executive Officer
Metalclad Corporation
3737 Birch Street, Suite 300
Newport Beach, California 92660
COPY TO: Bruce H. Haglund, Esq.
Gibson, Haglund & Johnson
2010 Main Street, Suite 400
Irvine, California 92714
CONSULTANT: Gordon M. Liddle
4100 South 4400 West
West Valley City, Utah 84120
12. ENTIRE AGREEMENT
This Agreement supersedes any and all Agreements, whether oral or
written, between the parties hereto, with respect to the employment of
Consultant by the Company and contains all of the covenants and Agreements
between the parties with respect to the rendering of such serves in any
manner whatsoever. Each party to this Agreement acknowledges that no
representations, inducements, promises or agreements, orally or otherwise,
have been made by any party, or anyone acting on behalf of any party,
which are not embodied herein, and that no other agreement, statement or
promise with respect to such employment not contained in this Agreement
shall be valid or binding. Any modification of this Agreement will be
effective only if it is in writing and signed by all the parties hereto.
13. PARTIAL INVALIDITY
If any provision in this Agreement is held by a court of competent
jurisdiction to be invalid, void, or unenforceable the remaining
provisions shall nevertheless continue in full force and effect without
being impaired or invalidated in any way.
14. ATTORNEYS FEES
If any action in law or equity, including an action for declaratory
relief, is brought to enforce or interpret the provisions of this
Agreement, the prevailing party shall be entitled to reasonable attorneys
fees and costs, which may be set by the court in the same action or in a
separate action brought for that purpose, in addition to any other relief
to which that party may be entitled.
15. GOVERNING LAW
This Agreement will be governed by and construed in accordance with
the laws of the State of California.
16. BINDING NATURE
This Agreement shall be binding upon and inure to the benefit of the
parties hereto and their respective representatives, heirs, successors and
assigns.
17. WAIVER
No waiver of any of the provisions of this Agreement shall be deemed,
or shall constitute a waiver of any other provision, whether or not
similar, nor shall any waiver constitute a continuing waiver. No waiver
shall be binding unless executed in writing by the party making the
waiver.
18. CORPORATE APPROVALS
The Company represents and warrant that the execution of this
Agreement by their respective corporate officers named below have been
duly authorized by the Board of Directors of the Company, is not in
conflict with any Bylaw or other agreement and will be a binding
obligation of the Company enforceable in accordance with its terms.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement
as of the date above written.
THE COMPANY
METALCLAD CORPORATION
By: /s/Grant S. Kesler
Grant S. Kesler,
Chief Executive Officer
CONSULTANT
/s/Gordon M. Liddle
GORDON M. LIDDLE
EX-27
5
ARTICLE 5 FIN. DATA SCHEDULE FOR FORM 10-K
5
1,000
7-MOS
Dec-31-1996
Jun-01-1996
Dec-31-1996
3074
0
2545
66
314
6535
6244
925
14931
3816
0
2912
0
0
8203
14931
6150
5653
6955
8896
0
0
(37)
(3280)
0
(3280)
0
0
0
(3280)
(.11)
(.11)