SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
11: ( X ) QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2001
OR
18: ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
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
incorporation or organization) Identification No.)
2 Corporate Plaza, Suite 125, Newport Beach, CA 92660
(Address of Principal Executive Office) (Zip Code)
Registrant's telephone number, including area code
(949) 719-1234
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 ( ).
As of June 30, 2001, the registrant had 7,448,015 shares
outstanding of its Common Stock, $.10 par value.
METALCLAD CORPORATION AND SUBSIDIARIES
TABLE OF CONTENTS
Page
----
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets at June 30, 2001
(unaudited) and December 31, 2000. . . . . . . . . 1-2
Consolidated Statements of Operations for the
three months and six months ended June 30,
2001 (unaudited) and June 30, 2000
73: (unaudited). . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Consolidated Statements of Cash Flows for the
six months ended June 30, 2001 (unaudited) and
June 30, 2000 (unaudited). . . . . . . . . . . . . . . . . . 4-5
Notes to Consolidated Financial Statements . 6
ITEM 2. MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS. . . . . . 7
PART II. OTHER INFORMATION. . . . . . . . . . . . .. . . . . . 12
ITEM 1. LEGAL PROCEEDINGS. . . . . . . . . . . .. . . . . . 12
ITEM 2. CHANGES IN SECURITIES . . . . . . . . . .. . . . 13
ITEM 4. SUBMISSION OF MATTERS TO A VOTE
OF SECURITY HOLDERS. . . . . . . . . . . . . 13
ITEM 5. OTHER INFORMATION. . . . . . . . . . . . . . . . . . . 14
SIGNATURES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
PART I
FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
METALCLAD CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 30, December 31,
2001 2000
------------- ------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 1,324,853 $ 354,345
Accounts receivable, less allowance for
doubtful accounts of $50,000 at
September 30, 2001 and December 31,
2000 1,896,303 3,965,975
Costs and estimated earnings in excess of
billings on uncompleted contracts 59,305 82,920
Inventories 162,543 114,129
Prepaid expenses and other current assets 326,180 137,486
Receivables from related parties, net 218,939 95,814
---------- ----------
Total current assets 3,988,123 4,850,669
Property, plant and equipment, net 375,754 336,497
Assets of discontinued operations 4,946,549 4,905,754
Note receivable-sale of Mexican assets 779,402 779,402
Other assets 24,311 25,765
---------- ----------
$10,114,139 $10,898,087
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $1,106,321 $2,166,727
Current liabilities--discontinued operations 166,483 90,139
Accrued expenses 711,595 722,369
Billings in excess of costs and estimated
earnings on uncompleted contracts 57,332 26,724
Current portion of long-term debt 87,871 62,451
Note payable-bank revolving credit line 1,000,000 -
Convertible zero coupon notes - 1,029,194
---------- ----------
Total current liabilities 3,129,602 4,097,604
Long-term debt, less current portion 174,767 123,489
Convertible subordinated debentures - 310,000
---------- ----------
Total liabilities 3,304,369 4,531,093
---------- ----------
Shareholders' equity:
Preferred stock, par value $10; 1,500,000
shares authorized; none issued - -
Common stock, par value $.10; 80,000,000
shares authorized; 7,448,015 and
6,581,114 issued and outstanding at
September 30, 2001 and December 31,
2000, respectively 744,801 658,111
Additional paid-in capital 68,496,871 67,659,747
Accumulated deficit (60,352,295) (59,871,257)
Officers' receivable (524,184) (524,184)
Accumulated other comprehensive income (1,555,423) (1,555,423)
---------- ----------
6,809,770 6,366,994
---------- ----------
$10,114,139 $10,898,087
========== ==========
See Notes to Consolidated Financial Statements
METALCLAD CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Nine Months Ended Three Months Ended
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
2001 2000 2001 2000
---------- ---------- ---------- ----------
Revenues--Insulation
Contract revenues $14,508,774 $12,160,415 $3,313,995 $4,025,152
Other 11,449 10,008 - 739
---------- ---------- --------- ---------
14,520,223 12,170,423 3,313,995 4,025,891
---------- ---------- --------- ---------
Operating costs and
expenses--Insulation
Contract costs and
expenses 12,522,155 10,755,011 2,729,162 3,625,244
Selling, general and
administrative
expenses 1,152,548 1,079,475 407,450 358,476
---------- ---------- --------- ---------
13,674,703 11,834,486 3,136,612 3,983,720
---------- ---------- --------- ---------
Gross operating profit 845,520 335,937 177,383 42,171
Corporate expense (823,010) (1,537,378) (155,359) (664,705)
---------- --------- --------- ---------
Operating profit (loss) 22,510 (1,201,441) 22,024 (622,535)
Interest expense (103,874) (192,858) (19,844) (61,952)
Other income (expense),net 2,293 9,627 213 8,855
---------- ---------- --------- ---------
Income (loss) from
continuing operations (79,071) (1,384,672) 2,393 (684,486)
Loss from discontinued
operations (401,967) (63,187) (130,159) -
---------- ---------- --------- ---------
Net income (loss) ($ 481,038) ($1,447,859) ($ 127,766) ($ 684,486)
========= ========== ========= =========
Weighted average number
of common shares 7,084,676 5,193,941 7,448,015 5,341,057
========= ========== ========= =========
Earnings (loss) per share
of common stock, continuing
operations--basic & diluted ($.01) ($.27) $.00 ($.13)
==== ==== === ====
Loss per share of common
stock, discontinued
operations-basic &
diluted ($.06) ($.01) ($.02) $.00
==== ==== === ===
Loss per share of common
stock--basic & diluted ($.07) ($.28) ($.02) ($.13)
==== ==== === ====
See Notes to Consolidated Financial Statements
METALCLAD CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For Nine Months Ended
Sept. 30, Sept. 30,
2001 2000
------------ -----------
Cash flows from operating activities:
Net loss $ (481,038) ($1,447,859)
Adjustments to reconcile net loss to
net cash used in operating activities:
Loss from discontinued operations 401,967 63,187
Depreciation and amortization 95,307 72,745
Loss on disposal of fixed assets 1,592 -
Issuance of stock for interest 13,813 -
Changes in operating assets & liabilities:
Decrease (increase) in accounts receivable 2,069,672 (848,624)
Decrease (increase) in unbilled receivables 23,615 (40,032)
Decrease (increase) in inventories (48,414) 12,731
Decrease in prepaid expenses and other assets (188,694) (84,810)
Decrease (increase) in receivables from
related parties (23,125) 20,427
(Decrease) increase in accounts payable and
accrued expenses (1,071,180) 1,054,920
Increase in billings over costs 30,608 4,003
Increase (decrease) in other assets 1,454 (2,679)
--------- ---------
Net cash provided by (used in) continuing
operations 825,577 (1,195,991)
Net cash used in discontinued operations (366,416) (384,806)
--------- ---------
Net cash provided by (used in) operating
activities 459,161 (1,580,797)
--------- ---------
Cash flows from investing activities:
Capital expenditures (137,657) (81,127)
Proceeds from sale of assets 1,500 -
--------- ---------
Net cash used in investing activities (136,157) (81,127)
--------- ---------
Cash flows from financing activities:
Proceeds from long-term borrowings 1,202,438 266,975
Payments on long-term borrowings (1,154,934) (36,052)
Borrowings by officers, secured by stock (net) - (22,160)
Proceeds from sale of stock and warrants 600,000 -
Proceeds from exercise of warrants - 2,195,889
--------- ---------
Net cash provided by financing activities 647,504 2,404,652
--------- ---------
Increase (decrease) in cash and cash equivalents 970,508 742,728
Cash and cash equivalents at beginning of period 354,345 769,176
--------- ---------
Cash and cash equivalents at end of period $1,324,853 $1,511,904
========= =========
Supplemental disclosures of cash flow
information:
Cash paid for interest $ 261,200 $ 88,499
========= =========
Disclosure of noncash investing and financing activities:
During the nine months ended September 30, 2000,
the Company converted approximately $845,000 of
zero coupon notes payable into 430,000 shares
of common stock.
During the nine months ended September 30, 2001,
the Company converted approximately $324,000 of
convertible subordinated debentures, principal
and interest into 266,900 shares of common stock.
See Notes to Consolidated Financial Statements
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Period Ended June 30, 2001
(Unaudited)
1. The accompanying unaudited consolidated financial
statements of Metalclad Corporation and its subsidiaries (the
"Company") have been prepared in accordance with the instructions
to Form 10-Q and do not include all of the information and footnotes
required by generally accepted accounting principles for complete
financial statements. In the opinion of management all adjustments
(which consist only of normal recurring adjustments) necessary for
a fair presentation have been included. Operating results for the
nine months ended September 30, 2001 are not necessarily
indicative of what results will be for the year ending December 31,
2001. These statements should be read in conjunction with the
consolidated financial statements and notes thereto, and the report
of independent auditors which was qualified due to substantial
doubt about the Company's ability to continue as a going concern,
included in the Company's Form 10-K for the year ended December
31, 2000.
2. Included in net assets of discontinued operations at
September 30, 2001 and December 31, 2000 is approximately
$4,780,000 and $4,816,000, respectively. These assets represent
the Company's net investment in its completed hazardous waste
treatment facility in the State of San Luis Potosi, Mexico, known as
"El Confin". Upon payment of the NAFTA award by Mexico, the
landfill will become the property of the Mexican government and
its net asset value will be written off by the Company. For the nine
months ended September 30, 2001, the Company has expensed
$402,000 in costs, primarily consisting of legal fees. (See Part II,
Item 5 and Note 7.)
3. In March, 2001, the Company initiated an effort to raise
additional capital in support of its defense of its NAFTA award and
for working capital for its headquarter's operations. The privately-
placed financing offering consisted of an investment unit, priced at
$1.00, comprised of one share of common stock and one common
stock purchase warrant exercisable at $1.50. The Company's goal
was to raise $600,000. As of September 30, 2001, $600,000 of
proceeds from this financing was received.
4. During the quarter ended March 31, 2001, the Company
and the holder of its Five-Year Zero Coupon Notes reached
agreement under the terms of the notes, to apply the maximum
interest rate of 15% (default rate) to the outstanding notes, effective
February 1, 2001. This was in lieu of any formal review or redemption
options available to the holder.
In June 2001, a notice of redemption was received by the
Company from the holders of the zero coupon convertible notes and
the Company subsequently secured bank financing to redeem the
notes. On July 16th, the Noteholders were paid in full all principal
and interest due, totaling $1,098,000, and the notes were cancelled.
These notes bore interest at the rate of 15%.
On July 16, 2001, the Company secured new bank financing
in the form of a $1,000,000 60-day bridge loan, bearing a floating rate
of interest based upon the bank's reference rate plus 1%. As of the
closing on July 16th, the interest rate was 7.75%. The bridge loan is
secured by the assets of the Company's insulation subsidiary and
guaranteed by the Company.
On September 16, 2001, the $1,000,000 bridge loan was
converted to an accounts receivable revolving line of credit. The
interest rate is based on the bank's reference rate plus .25%.
During the period, this interest rate ranged between 6.75% and
6.25%.
5. In June 2001, the Board of Directors approved the granting
of options to purchase 425,000 shares of common stock exercisable
at $2.00 per share, vesting over a three-year period as follows:
Mr. Kesler, 200,000 shares; Mr. Dabbene, 150,000 shares; Mr. Pacini,
25,000 shares; Mr. Talbot, 25,000 shares; and Mr. Haglund, 25,000
shares. Additionally, under the Company's Formula Award Rider to
the 2000 Omnibus Stock Option and Incentive Plan, the members of
the Compensation Committee each received option awards, as of
June 1, 2000, for 20,000 shares of common stock, exercisable at
$2.00 per share and vesting over a three-year period. On June 1,
and June 6, 2001, the quoted market price of the Company's
common stock was $1.60 and $1.50, respectively.
6. The gain or loss per share amounts for the nine months
ended September 30, 2001 and September 30, 2000 were computed
by dividing the net gain or loss by the weighted average shares
outstanding during the applicable period. A calculation of dilutive
potential common shares was performed in accordance with the
treasury stock method, which assumes that proceeds from the
exercise of all warrants and options are used to repurchase common
stock at market value. Upon calculation of the weighted average
stock price for the quarter ended September 30, 2001, it was
determined that the options and warrants were anti-dilutive for the
periods presented.
7. On October 26, 2001, the Company completed the
settlement agreement with the United Mexican States. All
documents have been signed and Mexico has taken possession
of the landfill facility. In return, the Company received payment of
US $16,002,433. This closes all present NAFTA related claims
proceedings. (See Part II, Item 5.)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATION
All statements, other than statements of historical fact,
included in this Form 10-Q, including without limitation the
statements under "Management's Discussion and Analysis
of Financial Condition and Results of Operations" are, or may
be deemed to be, "forward-looking statements" within the
meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act
of 1934. Such forward-looking statements involve assumptions,
known and unknown risks, uncertainties, and other factors
which may cause the actual results, performance or achievements
of Metalclad Corporation (the "Company") to be materially different
from any future results, performance or achievements expressed
or implied by such forward-looking statements contained in this
Form 10-Q. Such potential risks and uncertainties include, without
limitation, competitive pricing and other pressures from other
businesses in the Company's markets, economic conditions
generally and in the Company's primary markets, availability
of capital, cost of labor, and other risk factors detailed herein
and in other of the Company's filings with the Securities and
Exchange Commission. The forward-looking statements are
made as of the date of this Form 10-Q 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.
Results of Operations
General. The Company's revenues are generated in
the United States from insulation and asbestos abatement services
and, prior to 1998, the collection of waste oils and solvents for
recycling, placement and servicing of parts washing machines,
brokering the disposal of waste and remediation services in Mexico.
From November 1991 to 1998, the Company was
actively involved in doing business in Mexico. The Company's
initial focus was the development of facilities for the treatment,
storage and disposal of industrial hazardous waste.
During the fourth quarter of 1998, the Company determined
that its efforts at building its business in Mexico would not be allowed
to succeed. The Company's investment in El Confin resulted in an
arbitration under the NAFTA treaty, its investment in Aguascalientes
had been blocked just prior to the project's completion, and its other
businesses were impacted due to the loss of these projects and the
synergy they would have provided. Consequently, the Company
committed to a plan to discontinue its Mexican operations to minimize
future losses and halted any further investment in Mexico.
In October 1999, the Company completed a sale of its
ongoing Mexican operations and development assets, specifically
excluding the landfill assets associated with its NAFTA claim.
Three Months Ended September 30, 2001 and 2000:
Insulation Business. Total revenues from the insulation
business for the three months ended September 30, 2001 were
$3,314,000 as compared to $4,026,000 for the comparable period
ended September 30, 2000, a decrease of 18%. This decrease is
primarily due to the seasonality of work with major customers.
Total operating expenses for the three months ended September
30, 2001 were $3,137,000 as compared to $3,984,000 for the
comparable period ended September 30, 2000, a decrease of 21%.
This decrease is in line with the decrease in revenues.
Contract Revenues. Contract revenues for the three months
ended September 30, 2001 were $3,314,000 as compared to
$4,025,000 for the three months ended September 30, 2000, a
decrease of 18%. This decrease is attributed to the seasonality
of work with our client base and as a result of the California summer
energy shortages, requiring power plants to delay their summer
maintenance outages.
Contract and Material Costs. Contract and material costs
and expenses were $2,729,000 for the three months ended
September 30, 2001 as compared to $3,625,000 for the three
months ended September 30, 2000, a decrease of 25%. This
decrease is consistent with the Company's decrease in revenues.
Selling, General and Administrative Costs. Selling,
general and administrative costs for the three months ended
September 30, 2001 were $407,000 as compared to $358,000
for the comparable period ended September 30, 2000, an increase
of 14%, primarily due to increased marketing efforts.
Discontinued Operations. Effective October 8, 1999, the
Company sold its interests in Administracion Residuos Industriales,
S.A. de C.V., Ecosistemas Nacionales, S.A. de C.V. and Ecosistemas
El Llano, S.A. de C.V. The Company also intends to dispose of its
interests in Ecosistemas del Potosi, S.A. de C.V. and Confinamiento
Tecnico de Residuos Industriales, S.A. de C.V., pending resolution
of the NAFTA claim. For the three months ended September 30,
2001, the Company has expensed $130,000 in fees for the continuing
costs of the NAFTA proceedings. This amount has been expensed
to discontinued operations for the three months ended September 30,
2001. It is believed that future costs, if any, will not be material.
Corporate Expense. Corporate expenses were $155,000
for the three months ended September 30, 2001 as compared to
$665,000 for the three months ended September 30, 2000, a
decrease of 77%. This decrease is due primarily to a reduction
in legal fees associated with litigation, which was settled in the
year ended 2000.
Interest Expense. Interest expense for the three months
ended September 30, 2001 was $20,000 as compared to interest
expense of $62,000 for the three months ended September 30, 2000.
This decrease is due to the reduction in outstanding loan balances from
September 2000 to September 2001, primarily as a result of conversions
of debt to equity and the refinancing of debt.
Consolidated Results
The Company experienced a net loss of $128,000 for the
three months ended September 30, 2001 as compared to a net loss
of $684,000 for the comparable period ended September 30, 2000,
a decrease of 81%. Net income from continuing operations was
$2,000 for the three months ended September 30, 2001 as compared
to a net loss from continuing operations of $684,000 for the comparable
period ended September 30, 2000, primarily due to lower legal costs
associated with completed litigation and higher gross operating
profits as a result of improved margins in the insulation business.
Nine Months Ended September 30, 2001 and 2000:
Insulation Business. Total revenues from the insulation
business for the nine months ended September 30, 2001 were
$14,520,000 as compared to $12,170,000 for the comparable
period ended September 30, 2000, an increase of 19%. This
increase is primarily due to increased work with a major customer
and the addition of several new clients. Total expenses for the
nine months ended September 30, 2001 were $13,675,000 as
compared to $11,834,000 for the comparable period ended
September 30, 2000, an increase of 16%. This increase is in
line with the increase in revenues.
Contract Revenues. Contract revenues for the nine
months ended September 30, 2001 were $14,509,000 as compared
to $12,160,000 for the nine months ended September 30, 2000, an
increase of 19%. This increase is attributed to the Company's efforts
to diversify its client base, including its entry into the commercial
insulation market.
Contract and Material Costs. Contract and material costs
and expenses were $12,522,000 for the nine months ended
September 30, 2001 as compared to $10,755,000 for the nine
months ended September 30, 2000, an increase of 16%. This
increase is consistent with the Company's increase in revenues.
Selling, General and Administrative Costs. Selling,
general and administrative costs for the nine months ended
September 30, 2001 were $1,153,000 as compared to $1,079,000
for the comparable period ended September 30, 2000, an increase
of 7%, due to the increased volume of work in the period and
increased marketing efforts.
Discontinued Operations. Effective October 8, 1999, the
Company sold its interests in Administracion Residuos Industriales,
S.A. de C.V., Ecosistemas Nacionales, S.A. de C.V. and Ecosistemas
El Llano, S.A. de C.V. The Company also intends to dispose of its
interests in Ecosistemas del Potosi, S.A. de C.V. and Confinamiento
Tecnico de Residuos Industriales, S.A. de C.V., pending resolution of
the NAFTA claim. As of December 31, 2000, the Company's remaining
provision for anticipated costs to complete the ongoing NAFTA claim
process was $16,000. For the nine months ended September 30,
2001, the Company has expensed, net of this accrual, $402,000 in
costs, primarily consisting of legal fees for the NAFTA proceedings.
This net amount has been expensed to discontinued operations for
the nine months ended September 30, 2001. It is believed that future
costs, if any, will not be material.
Corporate Expense. Corporate expenses were $823,000
for the nine months ended September 30, 2001 as compared to
$1,537,000 for the nine months ended September 30, 2000, a
decrease of 46%. This decrease is due primarily to a reduction
in legal fees associated with prior litigation related to the warrant
ratched provision, previously disclosed, which was settled in the
year ended 2000.
Interest Expense. Interest expense for the nine months
ended September 30, 2001 was $104,000 as compared to interest
expense of $193,000 for the nine months ended September 30, 2000.
This decrease is due to the reduction in outstanding loan balances from
September 2000 to September 2001, primarily as a result of conversions
of debt to equity and the refinancing of debt.
Consolidated Results
The Company experienced a net loss of $481,000 for the
nine months ended September 30, 2001 as compared to a net loss
of $1,448,000 for the comparable period ended September 30, 2000,
a decrease of 67%. The net loss from continuing operations was
$79,000 for the nine months ended September 30, 2001 as compared
to a net loss of $1,385,000 for the comparable period ended September 30,
2000, primarily due to lower legal costs associated with completed
litigation and higher gross operating profits as a result of an increased
volume of work in the insulation business.
Liquidity and Capital Resources
690:
During the nine months ended September 30, 2000, the
Company received approximately $934,000 from the exercise of
warrants in exchange for issuing 291,000 new shares of common
stock.
During the nine months ended September 30, 2001, the
Company received approximately $600,000 for the issuance of
600,000 investment units, consisting of one share of common
stock and one common stock purchase warrant exercisable at $1.50.
(See Note 3.)
The Company had positive working capital at September 30,
2001 of $859,000 compared to positive working capital of $753,000
at December 31, 2000. The Company had cash and cash equivalents
at September 30, 2001 of $1,325,000 and $354,000 at December 31,
2000. Cash provided by continuing operations for the nine months
ended September 30, 2001 was $826,000 compared to cash used
of $1,196,000 for the nine months ended September 30, 2000. Cash
used by discontinued operations for the nine months ended September 30,
2001 was $366,000 compared to $385,000 for the nine months ended
September 30, 2000. Cash used in operating activities for the nine
months ended September 30, 2001 was funded primarily by proceeds
from the sale of stock and warrants during the period and the collection
of accounts receivable.
For the nine months ended September 30, 2001 the Company
generated cash flow from continuing operations of $826,000, including
$2,853,000 in positive cash flow related to the insulation business due
primarily to a higher volume of work in the first nine months of 2001
versus 2000 and the collection of accounts receivable. The offsetting
negative cash flow is related to corporate activities, the Company's
NAFTA claim, along with general and administrative expenses without
revenues to offset such expenses. On October 26, 2001, the Company
completed the settlement agreement with the United Mexican States
and received payment of US $16,002,433. (See Part II, Item 5, Other
Information.)
PART II
OTHER INFORMATION
ITEM 1 LEGAL PROCEEDINGS
Litigation
In the ordinary course of its insulation business, certain parties
have filed a substantial number of claims against the Company for actual
and punitive damages. Presently, the number of these claims exceed 300.
The potential aggregate value of the claims is in the range of $1,000,000 to
$5,500,000. The Company continues to have adequate insurance coverage
with financially sound carriers responding to these claims and does not
foresee any significant financial exposure resulting from these claims.
Throughout its history, the Company has maintained insurance policies
that typically respond to these claims. Based on the advice of counsel, it
is management's opinion that these actions, individually and in the aggregate,
will not have a significant adverse impact on the Company's financial position
or results of operations.
On January 2, 1997 the Company filed a claim against the United
Mexican States under the provisions of the North American Free Trade
Agreement. The Company alleged that since it was not being allowed to
operate its legally authorized and completed landfill facility in San Luis
Potosi, Mexico, it had been effectively expropriated. On August 30, 2000,
the tribunal issued its decision. It ruled that Mexico had indirectly
expropriated the Company's investment in its completed landfill facility.
The tribunal awarded $16,685,000 with interest, accruing at 6% per
annum compounded monthly, beginning October 15, 2000. On
October 27, 2000, the United Mexican States filed a petition with
the Supreme Court of British Columbia, Canada, seeking to
have the award set aside by the court under the Commercial
Arbitration Act of Canada. On November 14, 2000, the filing
was amended to also seek a setting aside of the award
under the International Commercial Arbitration Act. A hearing
on the case was completed on March 2, 2001. On May 2, 2001
the Supreme Court of British Columbia issued its ruling, which
upheld a finding of expropriation and upheld an award of
damages to the Company, although modifying the interest
calculation. On May 24, 2001, the Company was advised
that Mexico would appeal again, this time to the British
Columbia Court of Appeal. The appeal was joined with a
cross-appeal by the Company and filed before the end
of May 2001. On June 4, 2001, the United Mexican States
made a written offer of settlement for $15,626,260 plus
interest of $2,599 per day after June 1, 2001. The Company
accepted the offer on June 11, 2001 provided that the payment
be made without reduction or offset. On October 26, 2001, the
Company completed the settlement agreement with the United
Mexican States. All documents have been signed and Mexico
has taken possession of the landfill facility. In return, the
Company received payment of US $16,002,433.
This closes all NAFTA related claims proceedings.
In October 1999, the Company completed a sale of its operating
businesses and its development project located in Aguascalientes, Mexico.
The sale specifically excluded those Mexican assets involved in the NAFTA
claim. Under the terms of the sale the Company received an initial cash
payment of $125,000. Furthermore, the sale terms stipulate payment of up
to $5,000,000, in stages, as various benchmarks are achieved in the operation
of the business as well as the buyer's assumption of all liabilities. To date,
the Company believes that the buyer has not achieved any of the milestones
necessary to trigger additional payments. Moreover, the Company believes
that the buyer is in default of its agreement with the Company under the
indemnity provisions and may have committed fraud in attempting to assign its
interest in the companies purchased to a former employee of Metalclad. The
Company has engaged counsel and believes it has a cause of action against
the buyer and the former Company employee and the Orange County,
California based parent of the buyer as a result of representations said
parent made relative to giving the buyer financial support in its acquisition
of the companies purchased. The defendants are now moving for an arbitration
proceeding in Mexico, which would stay the actions in California pending its
completion. The Company believes strongly in the merits of its case, but
cannot assure its outcome. If the Company is not successful in this
litigation, it would result in writing off the $779,000 note receivable, which
was recorded at the date of sale.
ITEM 2. CHANGES IN SECURITIES
During the nine months ended September 30, 2001 the Company sold
600,000 investor units consisting of one share of common stock and one
common stock purchase warrant, for a potential total of 1,200,000 common
shares if all the warrants are exercised. These shares are unregistered
and were sold pursuant to Rule 506 of Regulation D under the Securities
Act of 1933. The Company received $600,000 in connection with this
transaction.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On September 25, 2001, the Company held its Annual Meeting of
Shareholders in Newport Beach, California. The following matters were
presented for the approval of the shareholders with the results presented:
a. The election of five members to the Board of Directors of the Company,
to serve until the next annual meeting. The results of the shareholders' votes
were as follows:
For Against Abstain
--------- ------- -------
Grant S. Kesler 6,387,508 94,380 -
Anthony C. Dabbene 6,387,968 94,380 -
Bruce H. Haglund 6,387,943 94,380 -
Raymond J. Pacini 6,387,943 94,380 -
J. Thomas Talbot 6,387,968 94,380 -
b. To ratify the appointment of Moss Adams LLP as the independent
public accountants of the Company for the year ended December 31, 2001.
The results were as follows:
For Against Abstain
--------- ------- -------
6,400,821 66,730 16,274
ITEM 5. OTHER INFORMATION
On October 26, 2001, the Company completed the settlement
agreement with the United Mexican States. All documents have been
signed and Mexico has taken possession of the landfill facility. In return,
the Company received payment of US $16,002,433. This closes all present
NAFTA related claims proceedings.
Listed below are the financial statements, pro forma financial
information and exhibits filed as a part of this report:
-Unaudited Pro forma Condensed Consolidated Balance
Sheets as of September 30, 2001
-Unaudited Pro forma Condensed Consolidated Statement of
Operations for the Nine Months Ended September 30, 2001
-Notes to Unaudited Pro forma Condensed Consolidated
Financial Statements
The pro forma data is presented for informational purposes
and may not be indicative of the future results of operations and financial
position of the Company or what the results of operations and financial
position of the Company would have been had the disposition occurred
immediately prior to the periods indicated.
These pro forma condensed consolidated financial statements
should be read in conjunction with the historical consolidated financial
statements and the related notes thereto of Metalclad Corporation, which
are hereby incorporated by reference.
METALCLAD CORPORATION AND SUBSIDIARIES
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
AS OF SEPTEMBER 30, 2001
(Unaudited)
As reported
in Form 10Q Pro forma
as of Pro forma as of
Sept. 30, 2001 Adjustments Sept. 30, 2001
-------------- ----------- --------------
ASSETS
Current Assets:
Cash and cash equivalents $ 1,324,853 $16,002,433(1) $17,327,286
Accounts receivable, net 1,896,303 - 1,896,303
Inventories 162,543 - 162,543
Receivables from related
parties 218,939 - 218,939
Other current assets 385,485 - 385,485
---------- ---------- ----------
Total current assets 3,988,123 16,002,433 19,990,556
Property, plant and
equipment, net 375,754 - 375,754
Net assets of discontinued
operations 4,946,549 (4,946,549)(2) -
Note receivable-sale of
Mexican assets 779,402 - 779,402
Other assets 24,311 - 24,311
---------- ---------- ----------
$10,114,139 $11,055,884 $21,170,023
========== ========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,106,321 $ - $1,106,321
Other accounts payable 166,483 2,300,000(3,5) 2,466,483
Accrued expenses/income
taxes 711,595 - 711,595
Current portion of long-
term debt 145,203 - 145,203
Note payable-bank revolving
credit line 1,000,000 - 1,000,000
---------- ---------- ----------
Total current liabilities 3,129,602 2,300,000 5,429,602
Long-term debt, less current
portion 174,767 - 174,767
---------- ---------- ----------
3,304,369 2,300,000 5,604,369
Shareholders' equity:
Common stock 744,801 - 744,801
Additional paid in capital 68,496,871 - 68,496,871
Accumulated deficit (60,352,295) 7,200,461(1,2,3,4,5)(53,151,834)
Officers' receivable (524,184) - (524,184)
Accumulated other compre-
hensive income (1,555,423) 1,555,423(4) -
---------- ---------- ----------
6,809,770 8,755,884 15,565,654
---------- ---------- ----------
$10,114,139 $11,055.994 $21,170,023
========== ========== ==========
587:
589: See Notes to Unaudited Pro Forma Condensed Consolidated Financial Statements
METALCLAD CORPORATION AND SUBSIDIARIES
PRO FORMA CONDENSED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001
(Unaudited)
As reported in
Form 10Q for the Pro forma for the
nine months ended Pro forma nine months ended
Sept. 30, 2001 Adjustments Sept. 30, 2001
----------------- ----------- -----------------
Revenue:
Contract revenues $14,508,774 $ - $14,508,774
Other income 11,449 - 11,449
---------- ---------- ----------
14,520,223 - 14,520,223
Operating Costs and
Expenses:
Contract costs and
expenses 12,522,155 - 12,522,155
Selling, general
and admin. 1,152,548 - 1,152,548
---------- ---------- ----------
Operating income-
Insulation business 845,520 - 845,520
Corporate expense (823,010) - (823,010)
---------- ---------- ----------
Operating profit (loss) 22,510 - 22,510
Interest (expense)/income (103,874) - (103,874)
Other income (expense) 2,293 - 2,293
---------- ---------- ----------
Loss from continuing
operations before
income taxes $ (79,071) $ - $ (79,071)
========== ========== ==========
Weighted average
number of shares 7,084,6766
Gain(loss) per share
of common stock,
continuing operations-
basic and diluted ($0.01)
===== ==== =====
See Notes to Unaudited Pro Forma Condensed Consolidated Financial Statements
METALCLAD CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 Unaudited Pro Forma Adjustments:
(1) Record NAFTA cash settlement of $16,002,433.
(2) To write-off the balance of Net Assets of Discontinued Operations
due to the transfer of title condition of the final NAFTA settlement. These
assets are comprised of capitalized landfill costs in the US in the amount of
$2,185,950, fixed assets recorded in Mexico in the amount of $2,275,509 and
US goodwill net of accumulated Mexican entity losses of approximately
$485,090. This $4,946,549 is net of approximately $15.5 million in previously
expensed costs associated with the facility.
(3) To accrue certain estimated legal, compensation and administrative
costs, of $2,100,000 associated with the NAFTA settlement, which were
contingent upon settlement and receipt of the NAFTA award.
(4) Adjustment to record the recognition of the accumulated foreign
currency translation losses of $1,555,423 associated with the net assets
included in NAFTA settlement.
(5) To accrue estimated income taxes in the amount of $200,000
associated with Federal and State Alternative Minimum Tax.
SIGNATURES
Pursuant to the requirements 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
Date: November 6, 2001
By: /s/Anthony C. Dabbene
--------------------------------
Anthony C. Dabbene
Chief Financial Officer
(Principal Accounting Officer)