UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
(Mark
One)
x
|
|
ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF
1934
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For
the
fiscal year ended December 31, 2007
Commission
File Number 0-2000
Entrx
Corporation
(Exact
name of registrant as specified in its charter)
Delaware
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|
95-2368719
|
(State
or other jurisdiction of
incorporation
or organization)
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|
(I.R.S.
Employer ID No.)
|
|
|
|
800
Nicollet Mall, Suite 2690
Minneapolis,
Minnesota
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55402
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(Address
of Principal Executive Office)
|
|
(Zip
Code)
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Registrant's
telephone number, including area code (612) 333-0614
Securities
registered pursuant to Section 12(b) of the Act:
Title
of each class
|
|
Name
of each exchange
on
which registered
|
None
|
|
None
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Securities
registered pursuant to Section 12(g) of the Act:
Common
Stock – $.10 Par Value
(Title
of Class)
|
Check
whether the issuer is not required to file reports pursuant to Section
13
or 15(d) of the Exchange Act. o
|
Check
whether the issuer (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
o
Check
if
there is no disclosure of delinquent filers in response to Items 405 of
Regulation S-B in this form, and no disclosure will be contained, to the best
of
registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of the Form 10-KSB or any amendment to
this Form 10-KSB. o
Indicate
by checkmark whether the registrant is a shell company (as defined by Rule
12b-2
of the Exchange Act). Yes o No x
The
Company’s revenues from operations for the fiscal year ended December 31, 2007
totaled $22,358,764.
The
aggregate market value of the common stock held by nonaffiliates of the
registrant as of February 26, 2008 was approximately $1,627,849 based on the
average of the closing bid and asked price of the registrant’s common stock on
such date. The number of shares outstanding of the registrant’s common stock, as
of February 26, 2008 was 7,656,147.
Transitional
Small Business Issuer Format (Check One): Yes o
No x
All
statements, other than statements of historical fact, included in this Form
10-KSB, including without limitation the statements under “Management’s
Discussion and Analysis or Plan of Operation” and “Description of 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, 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 Entrx 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-KSB. Such potential risks and uncertainties include, without
limitation; the outcome of existing litigation; competitive pricing and other
pressures from other businesses in the Company’s markets; the accuracy of the
Company’s estimate of future liability for asbestos-related injury claims; the
adequacy of insurance, including the adequacy of insurance to cover current
and
future asbestos-related injury claims; the valuation of the Company’s
investments; collectibility of a loan due from an affiliate of a former officer
and principal shareholder; economic conditions generally and in the Company’s
primary markets; availability of capital; the adequacy of the Company’s cash and
cash equivalents; the cost of labor; the accuracy of the Company’s cost analysis
for fixed price contracts; 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-KSB 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. You
can
identify these forward-looking statements by forward-looking words such as
“may,” “will,” “expect,” “anticipate,” “believe,” “intend,” “estimate,”
“continue,” and similar words.
References
to “we”, “us”, “our”, “the registrant”, “Entrx” and “the Company” in this annual
report on Form 10KSB shall mean or refer to Entrx Corporation and its
consolidated subsidiary, Metalclad Insulation Corporation, unless the context
in
which those words are used would indicate a different
meaning.
ITEM
1. DESCRIPTION
OF BUSINESS
General
The
Company, incorporated originally in 1947 as an Arizona corporation, was
reincorporated in Delaware on November 24, 1993. In June 2002, the Company
changed its name from Metalclad Corporation to Entrx Corporation. We conduct
our
business operations primarily through a wholly owned subsidiary, Metalclad
Insulation Corporation, a California corporation.
For
over
30 years, the Company and its predecessors have been providing insulation and
asbestos abatement services, primarily on the West Coast. We currently provide
these services through Metalclad Insulation Corporation to a wide range of
industrial, commercial and public agency clients.
Our
principal executive offices are located at 800 Nicollet Mall, Suite 2690,
Minneapolis, Minnesota 55402, and our telephone number is (612) 333-0614.
Metalclad Insulation Corporation’s principal facilities are located at 1818 East
Rosslynn, Fullerton, California 92831.
Insulation
Services
Background.
Our
insulation services include the installation of high- and low-temperature
insulation on pipe, ducts, furnaces, boilers, and various other types of
equipment. We also maintain and repair existing insulation systems, generally
under one or multi-year maintenance contracts. Our customers include refineries,
utilities, chemical plants, manufacturing facilities, commercial properties,
office buildings and various governmental facilities. This may include complete
removal of existing insulation during the repair operations. The removed
insulation may or may not be asbestos containing. We also fabricate specialty
items for the insulation industry, and occasionally sell insulation material
and
accessories to our customers. Metalclad Insulation Corporation is a licensed
general and specialty contractor and typically provides project management,
labor, tools, equipment and materials necessary to complete its installation
projects.
We
perform substantially all of the work required to complete most contracts,
while
generally subcontracting to others the scaffolding, painting and other trades
not performed by Metalclad Insulation. In a typical insulation project, we
obtain plans and specifications prepared by the owner of a facility or its
agent. In projects where the customer is the owner of the facility, we may
act
as the general contractor. We may also work as a subcontractor for other general
contractors. Projects for the installation of insulation in new construction
may
require one or more years to complete.
If
a
project involves the removal of asbestos containing materials, we first treat
the materials with water and a wetting agent, and take other like precautions,
to minimize fiber release. Dry removal is conducted in special cases where
wetting is not feasible, provided Environmental Protection Agency ("EPA")
approval is obtained. Our workers also remove asbestos laden 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 where
the insulation is 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.
Insulation
Contracts.
We
normally enter into service contracts on either a “cost plus” or “fixed-price”
basis, either through competitive bids or direct negotiations.
Cost
plus
contracts, sometimes referred to as "time and materials" contracts, generally
provide for reimbursement of our costs incurred on a particular project,
including labor and materials, plus the payment of a fee normally equal to
a
percentage of these costs. These contracts generally provide for monthly
payments covering both reimbursements 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
contracts generally require that we perform all work for an agreed upon price,
often by a specified date. Such contracts usually provide for increases in
the
contract price if our construction costs increase due to changes in or delays
of
the project initiated or caused by the customer or owner. However, absent causes
resulting in increases in contract prices, we take certain risks, including
the
risk that our costs associated with the project exceed the agreed upon price.
In
such cases, generally accepted accounting principles require that we recognize
the full amount of the expected loss at the point where contract costs are
expected to exceed contract revenues. Our failure to accurately predict the
extent of the effort required and cost of labor on one insulation removal
project commenced on April 18, 2005 and subsequent revisions in our estimates
of
costs to complete, resulted in the recognition of losses of $566,000 in 2006
and
an additional loss of $127,000 in 2007. Under these fixed-price contracts we
normally receive periodic payments based on the work performed to a particular
date, less certain retentions. The amounts retained are held by the customer
pending either satisfactory completion of our work or, in some cases,
satisfactory completion of the entire project.
In
accordance with industry practice, most of our contracts are subject to
termination or modification by the customer, with provision for the recovery
of
costs incurred and the payment to us of a proportionate part of our fees in
the
case of a cost-plus contract, and overhead and profit in the case of a fixed
price contract. Such termination or modification occurs in the regular course
of
our business due to changes in the work to be performed as determined by the
customer throughout the term of a project. No single termination or modification
has had or is expected to have a material adverse impact on our
business.
Operations
and Employee Safety.
All
contract work is performed by trained personnel, and supervised by project
managers trained and experienced in both construction and asbestos abatement.
Each employee involved in asbestos abatement must complete a general training
and safety program conducted by the Company or union affiliation. 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 employees
engaged in asbestos abatement activities are required to attend a minimum
four-day course approved by the EPA and the Occupational Safety and Health
Administration ("OSHA"), and all supervisors of abatement projects are required
to attend an eight-hour first aid/CPR/safety course and an eight-hour EPA/AHERA
refresher course annually. At December 31, 2007, two of our full-time salaried
employees and 68 hourly employees had 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. We
typically conduct a job safety analysis in the job bidding
stage.
We
require the use of protective equipment on all projects, and sponsor periodic
medical examinations of all of our hourly field employees. During removal
procedures, asbestos containing material is generally treated to minimize fiber
release, and filtration devices are used to minimize contamination levels.
Air
monitoring to determine asbestos fiber contamination levels is conducted on
all
abatement projects involving the removal of friable asbestos. We have a
comprehensive policy and procedure manual that covers all activities of an
asbestos abatement project, and the specific responsibilities and implementation
of 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 review findings, and to include updated information regarding industry
practices. To separate our responsibilities and limit our liability, we utilize
unaffiliated third party laboratories for asbestos sampling analysis, and
licensed independent waste haulers for the transportation and disposal of
asbestos waste.
Materials
and Supplies.
We
purchase our insulating and asbestos abatement materials and supplies used
in
our insulation services from a number of national manufacturers, and we are
not
dependent on any one source.
Marketing
and Sales
Insulation
Contracting Services.
We
currently obtain most of our insulation contracting business from existing
customers, and through referrals by customers, engineers, architects, and
construction firms. Additional business is obtained by referrals obtained
through labor, industry and trade association affiliations.
Projects
are often 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. We are frequently invited to bid on projects, and obtain a
significant amount of our contracts through the competitive bidding process.
Our
marketing and sales effort emphasizes our experience, reputation for timely
performance, and knowledge of the insulation and asbestos abatement industry.
We
are a member of the Western Insulation Contractors Association and various
local
business associations.
Curtom-Metalclad
Joint Venture.
In 1989,
Metalclad Insulation Corporation entered into a joint venture with a minority
service firm, known as Curtom Building & Development Corporation (“Curtom
Building”). Metalclad Insulation Corporation owns a 49% interest in the joint
venture. The joint venture, known as "Curtom-Metalclad," submited bids for
insulation and asbestos abatement services. When contracts were obtained by
the
joint venture, we performed the work specified in the contract as a
subcontractor to the joint venture. The joint venture agreement, as amended,
provides that Curtom-Metalclad will receive 2.5% of revenues obtained by
Metalclad Insulation Corporation as a subcontractor, of which 80% will be
distributed to Curtom Building and 20% will be retained by Curtom-Metalclad.
We
retain the remaining revenues. Sales for the year ended December 31, 2007 for
Curtom-Metalclad projects were approximately $1,738,000 or 7.8% of our revenue,
compared to $3,383,000 or 17.3% of revenue in 2006. While the revenues and
gross
profit from the subcontracts we performed for Curtom-Metalclad were significant
to us in the past, we do not anticipate any significant revenues through
Custom-Metalclad after 2008. Curtom-Metalclad has no material assets,
liabilities or earnings. We believe the termination of the Curtom-Metalclad
joint venture and the loss of revenues that joint venture generated, would
not
have a material adverse affect on us. In accordance with FIN 46R “Consolidation
of Variable Interest Entities”, we have consolidated Curtom-Metalclad since we
have determined we are the primary beneficiary.
Customers.
Our
customers are generally either industrial or commercial. The industrial
customers are predominately public utilities (power, natural gas and water/water
treatment), major oil companies for oil refineries and petrochemical plants,
chemical and food processors, other heavy manufacturers, and
engineering/construction companies. The commercial customers are primarily
government agencies, schools, hospitals, commercial and light manufacturing
companies, and general or mechanical construction contractors. During 2007,
Jacobs Field Services North America, Inc. and ARB, Inc accounted for 17.4%
and
17.9% of our revenues, respectively. We cannot project whether a significant
portion of our revenues will be derived from these customers in 2008. It is
often the case in our business that a customer that represented over 10% of
our
revenues in one year would not represent over 10% of our revenues in the
following year. (See Note 13 to the Consolidated Financial
Statements.)
Competition. Competition
in the insulation contracting services business is intense and is expected
to
remain intense in the foreseeable future. Competition includes a few national
and regional companies that provide integrated services, and many regional
and
local companies that provide insulation and asbestos abatement specialty
contracting services similar to the Company. Many of the national and regional
competitors providing integrated services are well established and have
substantially greater marketing, financial, and technological resources than
we
do. The regional and local specialty contracting companies, which compete with
us, either provide one service or they provide integrated services by
subcontracting part of their services to other companies. We believe that the
primary competitive factors for our services are price, technical performance
and reliability. We obtain a significant number of our insulation service
contracts through the competitive bidding process. We believe that our bids
are
generally competitively priced. Our policy is to bid all projects with the
expectation of a reasonable gross profit.
Backlog.
Our
backlog for insulation services at December 31, 2007 and December 31, 2006
was
approximately $12,629,000 and $11,305,000, 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. Approximately 74% of our backlog
is
under cost-plus contracts. Our backlog as of any date is not necessarily
indicative of future revenues. We estimate that our entire backlog as of
December 31, 2007 will be completed during the next eighteen months.
Insurance
and Bonding.
General
Liability.
Our
combined general liability and contractor pollution insurance policy provides
base coverage of $1,000,000 per occurrence and excess liability coverage of
$10,000,000.
Performance
Bonds. While
our
current insulation and asbestos abatement services customers generally do not
require performance bonds, an increasing number of customers have requested
such
bonds. While the changes in the bonding industry have made it more difficult
to
obtain performance bonds, we believe that our current bonding arrangements
are
adequate for our anticipated future needs.
Asbestos
Insurance Coverage.
Prior
to 1975, we were engaged in the sale and installation of asbestos-related
insulation materials, which has resulted in numerous claims of personal injury
allegedly related to asbestos exposure. Many of these claims are now being
brought by the children and close relatives of persons who have died, allegedly
as a result of the direct or indirect exposure to asbestos. To date all of
our
asbestos-related injury claims have been paid and defended by our insurance
carriers.
Based
on
the general trend of reducing asbestos-related injury claims made against the
Company over the past seven years, we project that 738 asbestos-related injury
claims will be made against the Company in the future, in addition to the 222
claims existing as of December 31, 2007, totaling 960 claims. Multiplying the
average indemnity paid per resolved claim over the past seven years of $19,700,
by 960, we project the probable future indemnity to be paid on those claims
to
be equal to approximately $19 million. In addition, multiplying an estimated
cost (which cost is included within the limits of our insurance coverage) of
defense per resolved claim of approximately $13,500 by 960, we project the
probable future defense costs to equal approximately $13 million. See Item
3 -
“Legal Proceedings - Asbestos-related Claims.”
There
are
numerous insurance carriers which have issued a number of policies to us over
a
period extending from approximately 1967 through approximately 1985 that still
provide coverage for asbestos-related injury claims. After approximately 1985
the policies were issued with provisions which purport to exclude coverage
for
asbestos related claims. The terms of our insurance policies are complex, and
coverage for many types of claims is limited as to the nature of the claim
and
the amount of coverage available. It is clear, however, under California law,
where the substantial majority of the asbestos-related injury claims are
litigated, that all of those policies cover any asbestos-related injury
occurring during the 1967 through 1985 period when these policies were in
force.
We
have
engaged legal counsel to review all of our known insurance policies, and to
provide us with the amount of coverage which such counsel believes to be
probable under those policies for current and future asbestos-related injury
claims against us. Such legal counsel has provided us with its opinion of the
minimum probable coverage available to satisfy asbestos-related injury claims,
which significantly exceeds our estimated $36,000,000 liability for such claims
at December 31, 2007.
On
February 23, 2005 ACE Property & Casualty Company ("ACE"), Central National
Insurance Company of Omaha ("Central National") and Industrial Underwriters
Insurance Company ("Industrial"), which are all related entities, filed a
declaratory relief lawsuit (“the ACE Lawsuit”) against Metalclad Insulation
Corporation (“Metalclad”) and a number of Metalclad's other liability insurers,
in the Superior Court of the State of California, County of Los Angeles. ACE,
Central National and Industrial issued umbrella and excess policies to
Metalclad, which has sought and obtained from the plaintiffs both defense and
indemnity under these policies for the asbestos lawsuits brought against
Metalclad during the last four to five years. The ACE Lawsuit seeks declarations
regarding a variety of coverage issues, but is centrally focused on issues
involving whether historical and currently pending asbestos lawsuits brought
against Metalclad are subject to either an "aggregate" limits of liability
or
separate "per occurrence" limits of liability. Whether any particular asbestos
lawsuit is properly classified as being subject to an aggregate limit of
liability depends upon whether or not the suit falls within the "products"
or
"completed operations" hazards found in most of the liability policies issued
to
Metalclad. Resolution of these classification issues will determine if, as
ACE
and Central National allege, their policies are nearing exhaustion of their
aggregate limits and whether or not other Metalclad insurers who previously
asserted they no longer owed any coverage obligations to Metalclad because
of
the claimed exhaustion of their aggregate limits, in fact, owe Metalclad
additional coverage obligations. The ACE Lawsuit also seeks to determine the
effect of the settlement agreement between the Company and Allstate Insurance
Company entered into in June 2004 on the insurance obligations of various other
insurers of Metalclad, and the effect of the “asbestos exclusion” in the
Allstate policy. The ACE Lawsuit does not seek any monetary recovery from
Metalclad. Nonetheless, we anticipate that we will incur attorneys fees and
other associated litigation costs in defending the lawsuit and any counter
claims made against us by any other insurers, and in prosecuting any claims
we
may seek to have adjudicated regarding our insurance coverage. In addition,
the
ACE Lawsuit may result in our incurring costs in connection with obligations
we
may have to indemnify Allstate under the settlement agreement discussed under
“Insurance Policy Settlement” below. Allstate, in a cross-complaint filed
against Metalclad Insulation Corporation in October, 2005, asked the court
to
determine the Company’s obligation to assume and pay for the defense of Allstate
in the ACE Lawsuit under the Company’s indemnification obligations in the
settlement agreement. The Company does not believe that it has any legal
obligation to assume or pay for such defense.
In
2003
and 2004 the Judiciary Committee of the United States Senate considered
legislation to create a privately funded, publicly administered fund to provide
the necessary resources for an asbestos injury claims resolution program, and
is
commonly referred to as the “FAIR” Act. In 2005, a draft of the “FAIR” Act was
approved by the Judiciary Committee, but the bill was rejected by the full
Senate in February 2006, when a cloture motion on the bill was withdrawn. An
amended version of the 2006 “FAIR” Act (S 3274) was introduced in the Senate in
May 2006, but has not been scheduled for a vote. A similar bill was introduced
in the House (HR 1360) in March 2005, but was referred to a subcommittee in
May
2005. The latest draft of the “FAIR” Act calls for the fund to be funded
partially by asbestos defendant companies, of which the Company is one, and
partially by insurance companies. The bill could be voted on by the Senate
or
the House at any time in the future. The impact, if any, the “FAIR” Act will
have on us if passed cannot be determined at this time although the latest
draft
of the legislation did not appear favorable to us.
Insurance
Policy Settlement.
In June
2004, Metalclad Insulation Corporation, our wholly owned subsidiary, and Entrx
Corporation, entered into a Settlement Agreement and Full Policy Release (the
“Agreement”) releasing Allstate Insurance Company from its policy obligations
for a broad range of claims arising from injury or damage which may have
occurred during the period March 15, 1980 to March 15, 1981, under an umbrella
liability policy (the “Policy”). The Policy provided limits of $5,000,000 in the
aggregate and per occurrence. Allstate claimed that liability under the Policy
had not attached, and that regardless of that fact, an exclusion in the Policy
barred coverage for virtually all claims of bodily injury from exposure to
asbestos, which is of primary concern to Metalclad Insulation Corporation.
Metalclad Insulation Corporation took the position that such asbestos coverage
existed. The parties to the Agreement reached a compromise, whereby Metalclad
Insulation Corporation received $2,500,000 in cash, and Metalclad Insulation
Corporation and Entrx Corporation agreed to indemnify and hold harmless Allstate
from all claims which could be alleged against the insurer respecting the
policy, limited to $2,500,000 in amount. Based on past experience related to
asbestos insurance coverage, we believe that the Agreement we entered into
in
June 2004, will result in a probable loss contingency for future insurance
claims based on the indemnification provision in the Agreement. Although we
are
unable to estimate the exact amount of the loss, we believe at this time the
reasonable estimate of the loss will not be less than $375,000 or more than
$2,500,000 (the $2,500,000 represents the maximum loss we would have based
on
the indemnification provision in the Agreement). Based on the information
available to us, no amount in this range appears at this time to be a better
estimate than any other amount. The $375,000 estimated loss contingency noted
in
the above range represents 15% of the $2,500,000 we received and is based upon
our attorney’s informal and general inquiries to an insurance company of the
cost for us to purchase an insurance policy to cover the indemnification
provision we entered into. We recorded a reserve of $375,000 at the time we
entered into the Agreement and nothing has come to our attention that would
require us to record a different estimate at December 31, 2007.
Employees.
As
of
December 31, 2007, we had two part-time salaried employees in our executive
offices and 15 full-time salaried employees in our insulation business in
California, for a total of 17 employees. These included three executive
officers, project managers/estimators, purchasing, accounting, and office
staff.
As
of
December 31, 2007, our subsidiary, Metalclad Insulation Corporation, employed
approximately 220 hourly employees for insulation and asbestos/lead abatement
contracting services, nearly all of whom are members of Local No. 5 -
International Association of Heat and Frost Insulators and Asbestos Workers
("AFL-CIO") or Laborers Local Union 300, which makes hourly employees available
to us. Metalclad Insulation Corporation is a party to agreements with local
chapters of various trade unions. The number of hourly employees employed by
us
fluctuates depending upon the number and size of projects that we have under
construction at any particular time. It has been our experience that hourly
employees are generally available for our projects, and we have continuously
employed a number of hourly employees on various projects over an extended
period of time. We consider our relations with our hourly employees and the
unions representing them to be good, and have not experienced any recent work
stoppages due to strikes by such employees. Additionally, the trade union
agreements we are a party to include no strike, no work stoppage provisions.
In
August, 2004 a new “Basic Agreement” was signed with Local No. 5 of the
International Association of Heat and Frost Insulators and Asbestos Workers
that
expires in September 2008. We anticipate that a new agreement will be reached
prior to the expiration of the current agreement. The “Basic Agreement” included
a “Maintenance Agreement” as an addendum. Approximately 95% of our hourly
employees are covered by the Local No. 5 agreement. A new agreement with the
Laborers Local 300 was signed in January 2007 and expires in December 2009.
Approximately 5% of our hourly employees are covered by the Labors Local 300
agreement.
Government
Regulation
Insulation
Services and Material Sales Regulation. As
a
general and insulation specialty contractor, we are subject to regulation
requiring us to obtain licenses from several state and municipal agencies.
Other
than licensing, our 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.
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 asbestos containing material (“ACM”) and asbestos insulation, establish
procedures for handling ACM during demolition and renovations, and prohibit
airborne fiber emissions during removal, transportation and disposal of
ACM.
We
believe that we are substantially in compliance with all regulations relating
to
our asbestos abatement operations, and currently have all material government
permits, licenses, qualifications and approvals required for our
operations.
ITEM
2. DESCRIPTION
OF PROPERTY
Our
executive offices are located in Minneapolis, Minnesota, which consists of
approximately 2,400 square feet leased at a current rate of $2,000 per month,
on
a month-to-month basis.
Our
wholly owned subsidiary, Metalclad Insulation Corporation, is housed in a
facility in Fullerton, California. This facility consists of approximately
27,100 square feet of office and warehouse space. The Company has leased this
facility through December 31, 2011 at a monthly rate of $13,500 per month with
yearly rent increases of approximately 3% per year. The lease contains an option
for the Company to renew for an additional five years as defined in the
agreement.
An
inactive subsidiary of the Company, Ecosistemas del Potosi SA de CV, owns an
approximately 92-hectare parcel (approximately 227 acres) of land in Santa
Maria
del Rio near San Luis Potosi, Mexico. We are presently attempting to dispose
of
this property. Such sale or disposition will not have a material effect on
the
Company as the land has a value of less than $15,000.
We
believe that the properties currently owned and leased by us are adequate for
our operations for the foreseeable future.
ITEM
3. LEGAL
PROCEEDINGS
Asbestos-related
Claims
Prior
to
1975, we were engaged in the sale and installation of asbestos-related
insulation materials, which has resulted in numerous claims of personal injury
allegedly related to asbestos exposure. Many of these claims are now being
brought by the children and close relatives of persons who have died, allegedly
as a result of the direct or indirect exposure to asbestos. To date all of
our
asbestos-related injury claims have been paid and defended by our insurance
carriers.
The
number of asbestos-related cases which have been initiated naming us (primarily
our subsidiary, Metalclad Insulation Corporation) as a defendant decreased
from
351 in 2003, to 265 in 2004 and to 199 in 2005, but increased in 2006 to 232.
The number decreased to 163 in 2007. At December 31, 2003, 2004, 2005, 2006
and
2007, there were, respectively, approximately 853, 710, 507, 404 and 222 cases
pending. These claims are currently defended and covered by insurance.
Set
forth
below is a table for the years ended December 31, 2003, 2004, 2005, 2006 and
2007, which sets forth for each such period the approximate number of
asbestos-related cases filed, the number of such cases resolved by dismissal
or
by trial, the number of such cases resolved by settlement, the total number
of
resolved cases, the number of filed cases pending at the end of such period,
the
total indemnity paid on all resolved cases, the average indemnity paid on all
settled cases and the average indemnity paid on all resolved
cases:
|
|
2003
|
|
|
2004
|
|
|
2005
|
|
|
|
2006
|
|
|
2007
|
|
New
cases filed
|
|
|
351
|
|
|
|
265
|
|
|
|
199
|
|
|
|
|
232
|
|
|
|
163
|
|
Defense
judgments and dismissals
|
|
|
311
|
|
|
|
311
|
|
|
|
294
|
(3)
|
|
|
|
253
|
|
|
|
292
|
(3)
|
Settled
cases
|
|
|
175
|
|
|
|
97
|
|
|
|
108
|
|
|
|
|
82
|
|
|
|
53
|
|
Total
resolved cases (1)
|
|
|
486
|
|
|
|
408
|
|
|
|
402
|
(3)
|
|
|
|
335
|
|
|
|
345
|
(3)
|
Pending
cases (1)
|
|
|
853
|
|
|
|
710
|
|
|
|
507
|
(2,3)
|
|
|
|
404
|
|
|
|
222
|
(3)
|
Total
indemnity payments
|
|
$
|
10,618,700
|
|
|
$
|
6,366,750
|
|
|
$
|
8,513,750
|
|
|
|
$
|
4,858,750
|
|
|
$
|
7,974,500
|
|
Average
indemnity paid on settled cases
|
|
$
|
60,678
|
|
|
$
|
65,637
|
|
|
$
|
78,831
|
|
|
|
$
|
59,253
|
|
|
$
|
150,462
|
|
Average
indemnity paid on all resolved cases
|
|
$
|
21,849
|
|
|
$
|
15,605
|
|
|
$
|
21,178
|
(2)
|
|
|
$
|
14,504
|
|
|
$
|
23,114
|
|
(1) |
Total
resolved cases includes, and the number of pending cases excludes,
cases
which have been settled but which have not been closed for lack of
final
documentation or payment.
|
(2) |
The
average indemnity paid on resolved cases does not include, and the
number
of pending cases includes, a jury award rendered on March 22, 2005
and a
judgment on that award rendered on April 4, 2005, finding Metalclad
Insulation Corporation liable for $1,117,000 in damages, which is
covered
by insurance. The judgment is being appealed by our
insurer.
|
(3) |
Of
the decrease from 710 cases pending at December 31, 2004 to 507 cases
pending at December 31, 2005, were 80 cases which had been previously
counted in error and are included in “Defense judgments and dismissals”
and “Total resolved cases”, so that the actual decrease over the year
ended December 31, 2005 was 123 cases. Included in the decrease from
404
cases pending at December 31, 2006 to 222 cases pending at December
31,
2007, were 53 cases which had been previously counted in error and
are
included in “Defense judgments and dismissals” and “Total resolved cases”,
so that the actual decrease for the year ended December 31, 2007
was 129
cases.
|
The
number of asbestos-related claims made against the Company since 2003, as well
as the number of cases pending at the end of each of those years, has reflected
a general downward trend from 2003 through 2007. We believe that it is probable
that this general trend will continue, although such continuance cannot be
assured. The average indemnity paid on all resolved claims has fluctuated over
the past five-year period ended December 31, 2007 from a high of $23,114 in
2007, to a low of $14,504 in 2006, with an average indemnity payment of $19,250
over the same five-year period.
We
believe that the sympathies of juries, the aggressiveness of the plaintiffs’ bar
and the declining base of potential defendants as the result of business
failures, have tended to increase payments on resolved cases. This tendency,
we
believe, has been mitigated by the declining pool of claimants resulting from
death, and the likelihood that the most meritorious claims have been ferreted
out by plaintiffs’ attorneys and that the newer cases being brought are not as
meritorious nor do they have as high a potential for damages as do cases which
were brought earlier. We have no reason to believe, therefore, that the average
future indemnity payments will increase materially in the future.
In
addition, direct defense costs per resolved claim increased from $8,514 in
2003
to $16,700 in 2007. We believe that these defense costs increased as a result
of
a change in legal counsel in 2004, and the more aggressive defense posture
taken
by new legal counsel since that change. We do not believe that the defense
costs
will increase materially in the future, and are projecting those costs to be
approximately $13,500 per claim.
Based
on
the general trend of reducing asbestos-related injury claims made against the
Company over the prior six calendar years, we projected in our Form 10-KSB
filed
with the Securities and Exchange Commission for the year ended December 31,
2006
that there would be 924 asbestos-related injury claims made against the Company
after December 31, 2006. The 924, in addition to the 404 claims existing as
of
December 31, 2006, totaled 1,328 current and future claims. Multiplying the
average indemnity per resolved claim over the past six years of $19,131, times
1,328, we projected the probable future indemnity to be paid on those claims
after December 31, 2006 to be equal to approximately $25 million. In addition,
multiplying an estimated cost of defense per resolved claim of approximately
$13,500 times 1,328, we projected the probable future defense costs to equal
approximately $18 million. Accordingly, our total estimated future
asbestos-related liability at December 31, 2006 was $43 million.
As
of
December 31, 2006, we projected that approximately 186 new asbestos-related
claims would be commenced, and approximately 237 cases would be resolved, in
2007, resulting in an estimated 353 cases pending at December 31, 2007. Although
the actual number of claims made in 2007 was 163 and the number of cases pending
as of December 31, 2007 was 222, slightly less than we anticipated, we do not
believe the differences are significant enough to re-evaluate our estimate.
In
addition, our future defense costs could be greater than projected, and such
increase could partially offset any lower projection of liability which would
result from such re-evaluation. Since we projected that an aggregate of 738
new
cases would be commenced after December 31, 2007, and that 148 of these cases
would be commenced in 2008, we estimated that an aggregate of 590 new cases
would be commenced after December 31, 2008. Accordingly, we have projected
the
cases pending and projected to be commenced in the future at December 31, 2008,
would be 897 cases. Multiplying 897 claims times the approximate average
indemnity paid and defense costs incurred per resolved claim from 2002 through
2006 of $32,600, we estimated our liability for current and future
asbestos-related claims at December 31, 2008 to be approximately $29,000,000.
This amounts to a $7,000,000 reduction from the $36,000,000 liability we
estimated as of December 31, 2007, or a $1,750,000 reduction per quarter in
2008.
We
have
determined that it is probable that we have sufficient insurance to provide
coverage for both current and future projected asbestos-related injury claims.
This determination assumes that the current trend of reducing asbestos-related
injury claims will continue and that the average indemnity and direct legal
costs of each resolved claim will not materially increase. The determination
also assumes that the insurance companies live up to what we believe is their
obligation to continue to cover our exposure with regards to these claims.
Several affiliated insurance companies have brought a declaratory relief action
against our subsidiary, Metalclad, as well as a number of other insurers, to
resolve certain coverage issues.
We
intend
to re-evaluate our estimate of future liability for asbestos claims at the
end
of each fiscal year, or whenever actual results are materially different from
our estimates, integrating our actual experience in that fiscal year with that
of prior fiscal years since 2002. We estimate that the effects of economic
inflation on either the average indemnity payment or the projected direct legal
expenses will be approximately equal to a discount rate applied to our future
liability based upon the time value of money. It is probable that we have
adequate insurance to cover current and future asbestos-related claims, although
such coverage cannot be assured.
Although
defense costs are included in our insurance coverage, we expended $174,000,
$304,000, $188,000, $215,000 and $296,000 in 2003, 2004, 2005, 2006 and 2007,
respectively, to administer the asbestos claims and defend the ACE Lawsuit
discussed below. These amounts were primarily fees paid to attorneys to monitor
the activities of the insurers, and their selected defense counsel, and to
look
after our rights under the various insurance policies.
On
February 23, 2005 ACE Property & Casualty Company ("ACE"), Central National
Insurance Company of Omaha ("Central National") and Industrial Underwriters
Insurance Company ("Industrial"), which are all related entities, filed a
declaratory relief lawsuit (“the ACE Lawsuit”) against Metalclad Insulation
Corporation (“Metalclad”) and a number of Metalclad's other liability insurers,
in the Superior Court of the State of California, County of Los Angeles. ACE,
Central National and Industrial issued umbrella and excess policies to
Metalclad, which has sought and obtained from the plaintiffs both defense and
indemnity under these policies for the asbestos lawsuits brought against
Metalclad during the last four to five years. The ACE Lawsuit seeks declarations
regarding a variety of coverage issues, but is centrally focused on issues
involving whether historical and currently pending asbestos lawsuits brought
against Metalclad are subject to either an "aggregate" limits of liability
or
separate "per occurrence" limits of liability. Whether any particular asbestos
lawsuit is properly classified as being subject to an aggregate limit of
liability depends upon whether or not the suit falls within the "products"
or
"completed operations" hazards found in most of the liability policies issued
to
Metalclad. Resolution of these classification issues will determine if, as
ACE
and Central National allege, their policies are nearing exhaustion of their
aggregate limits and whether or not other Metalclad insurers who previously
asserted they no longer owed any coverage obligations to Metalclad because
of
the claimed exhaustion of their aggregate limits, in fact, owe Metalclad
additional coverage obligations. The ACE Lawsuit also seeks to determine the
effect of the settlement agreement between the Company and Allstate Insurance
Company on the insurance obligations of various other insurers of Metalclad,
and
the effect of the “asbestos exclusion” in the Allstate policy. The ACE Lawsuit
does not seek any monetary recovery from Metalclad. Nonetheless, we anticipate
that we will incur attorneys fees and other associated litigation costs in
defending the lawsuit and any counter claims made against us by any other
insurers, and in prosecuting any claims we may seek to have adjudicated
regarding our insurance coverage. In addition, the ACE Lawsuit may result in
our
incurring costs in connection with obligations we may have to indemnify Allstate
under a settlement agreement (See “Item 1 - Description of Business - Insurance
and Bonding - Insurance Policy Settlement”). Allstate, in a cross-complaint
filed against Metalclad Insulation Corporation in October, 2005, asked the
court
to determine the Company’s obligation to assume and pay for the defense of
Allstate in the ACE Lawsuit under the Company’s indemnification obligations in
the settlement agreement. The Company does not believe that it has any legal
obligation to assume or pay for such defense.
In
2003
and 2004 the Judiciary Committee of the United States Senate considered
legislation to create a privately funded, publicly administered fund to provide
the necessary resources for an asbestos injury claims resolution program, and
is
commonly referred to as the “FAIR” Act. In 2005, a draft of the “FAIR” Act was
approved by the Judiciary Committee, but the bill was rejected by the full
Senate in February 2006, when a cloture motion on the bill was withdrawn. An
amended version of the 2006 “FAIR” Act (S 3274) was introduced in the Senate in
May 2006, but has not been scheduled for a vote. A similar bill was introduced
in the House (HR 1360) in March 2005, but was referred to a subcommittee in
May
2005. The latest draft of the “FAIR” Act calls for the fund to be funded
partially by asbestos defendant companies, of which the Company is one, and
partially by insurance companies. The bill could be voted on by the Senate
or
the House at any time in the future. The impact, if any, the “FAIR” Act will
have on us if passed cannot be determined at this time although the latest
draft
of the legislation did not appear favorable to us.
Claim
Against Former Employee, Etc.
In
October 1999, we completed the sale of our operating businesses and development
project located in Aguascalientes, Mexico. That sale specifically excluded
those
Mexican assets involved in the Company’s NAFTA claim which was settled in 2001.
Under the terms of the sale we received an initial cash payment of $125,000
and
recorded a receivable for $779,000, which has been fully reserved. On November
13, 2000, the Company filed a complaint in the Superior Court of California
against a former employee, the U.S. parent of the buyer and its representative
for breach of contract, fraud, collusion and other causes of action in
connection with this sale seeking damages in the form of a monetary award.
An
arbitration hearing was held in September, 2002 in Mexico City, as requested
by
one of the defendants. This arbitration hearing was solely to determine the
validity of the assignment of the purchase and sale agreement by the buyer
to a
company formed by the former employee defendant. The Superior Court action
against the U.S. parent was stayed pending the Mexican arbitration. On April
8,
2003, the arbitrator ruled that the assignment was inexistent, due to the
absence of our consent. In June 2003, the Court of Appeal for the State of
California ruled that the U.S.
parent was also entitled to compel a Mexican arbitration of the claims raised
in
our complaint. We are now prepared to pursue our claim in an arbitration
proceeding for the aforementioned damages. No assurances can be given on the
outcome.
In
a
related action, a default was entered against us in December, 2002, in favor
of
the same former employee referred to in the foregoing paragraph by the Mexican
Federal Labor Arbitration Board, for an unspecified amount. The former employee
was seeking in excess of $9,000,000 in damages as a result of his termination
as
an employee. The default was obtained without the proper notice being given
to
us, and was set aside in the quarter ended June 30, 2003. The Mexican Federal
Labor Arbitration Board rendered a recommendation on December 13, 2004, to
the
effect that the former employee was entitled to an award of $350,000 from Entrx
in connection with the termination of his employment. The award is in the form
of a recommendation which has been affirmed by the Mexican Federal Court, but
is
only exercisable against assets of the Company located in Mexico. The Company
has no material assets in Mexico. The award does not represent a collectible
judgment against the Company in the United States. Since the Company has no
material assets in Mexico, the likelihood of any liability based upon this
award
is remote, and we therefore believe that there is no potential liability to
the
Company at December 31, 2007 or 2006. The Company intends to continue to pursue
its claims against the same employee for breach of contract, fraud, collusion
and other causes of action in connection with the 1999 sale of one of the
Company’s operating businesses in Mexico.
On
May
31, 2006, we entered into a Settlement Agreement with Ventana Global
Environmental Organizational Partnership, L.P. and North America Environmental
Fund, L.P. (collectively referred to as “Ventana”) whereby Ventana agreed to pay
Entrx Corporation $1,250,000 in exchange for the dismissal with prejudice by
Entrx Corporation of the law suit (the “Ventana Action”) filed by Entrx
Corporation against Ventana and others in Orange County, California Superior
Court in November 2000. Entrx Corporation and Ventana also entered into a mutual
release of all claims each may have had against the other. In addition, Entrx
Corporation released Carlos Alberto de Rivas Oest and Geologic de Mexico S.A.
de
C.V., which were parties related to Ventana, and against whom Entrx Corporation
had claims pending in Mexico. The Settlement Agreement does not limit claims
that Entrx had or currently has against Javier Guerra Cisneros and Promotora
Industrial Galeana, S.A. de C.V., which Entrx Corporation continues to pursue
in
Mexico. Javier Guerra Cisneros and Promotora Industrial Galeana, S.A. de C.V.
were involved with the transactions which were the subject of the Ventana
Action. Entrx Corporation received approximately $925,000 net after payment
of
legal fees and expenses associated with the Ventana Action and the Settlement
Agreement.
ITEM
4. SUBMISSION
OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
PART
II
ITEM
5. MARKET
FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Market
for Common Stock
Since
February 16, 2005 our common stock has traded on the pink sheets under the
symbol ENTX.PK. The following table sets forth, for the fiscal periods
indicated, the high and low bid prices
for the Common Stock as reported by Nasdaq or as quoted over-the-counter and
recorded in the pink sheets. The bid prices represent prices between
broker-dealers and do not include retail mark-ups and mark-downs or any
commissions to the dealer. These bid prices may not reflect actual
transactions.
|
|
Bid
Price
|
|
|
|
High
|
|
Low
|
|
Fiscal
Year Ended December 31, 2006
|
|
|
|
|
|
|
|
Quarter
Ended March 31, 2006
|
|
$
|
0.24
|
|
$
|
0.13
|
|
Quarter
Ended June 30, 2006
|
|
|
0.25
|
|
|
0.15
|
|
Quarter
Ended September 30, 2006
|
|
|
0.35
|
|
|
0.18
|
|
Quarter
Ended December 31, 2006
|
|
|
0.23
|
|
|
0.11
|
|
|
|
|
|
|
|
|
|
Fiscal
Year Ended December 31, 2007
|
|
|
|
|
|
|
|
Quarter
Ended March 31, 2007
|
|
$
|
0.47
|
|
$
|
0.16
|
|
Quarter
Ended June 30, 2007
|
|
|
0.34
|
|
|
0.17
|
|
Quarter
Ended September 30, 2007
|
|
|
0.38
|
|
|
0.16
|
|
Quarter
Ended December 31, 2007
|
|
|
0.46
|
|
|
0.28
|
|
As
of
February 26, 2008, the closing bid price
for
the common shares in the pink sheets was $0.27.
Shareholders
of Record
As
of
February 26, 2008, the approximate number of record holders of our Common Stock
was 1,500.
Dividends
We
have
not paid any cash dividends on our Common Stock since our incorporation, and
anticipate that, for the foreseeable future, earnings, if any, will continue
to
be retained for use in our business.
Unregistered
Sales of Securities
The
following table sets forth certain information regarding the sale of common
stock by the Company during the calendar year 2007 in transactions which were
not registered under the Securities Act of 1933 (the “Act”).
Date
of
Sale
|
|
Number of
Shares
Sold
|
|
Person(s)
to Whom Sold
|
|
Consideration
Paid
|
|
Exemption
from Registration
Relied
Upon Under the Act(1)
|
3/9/2007
|
|
115,000
Shares
|
|
Members
of the Board of Directors of Entrx Corporation (4 members) and
Metalclad
Insulation Corporation (1 member)
|
|
Services
as directors, valued at $0.16 per share
|
|
Section
4(2) of the Securities Act of 1933, as a transaction not involving
a
public offering.
|
(1)
|
Each
member of the Board of Directors of Entrx Corporation, the chief
executive
officer of Entrx and the Director of Metalclad Insulation Corporation
are
deemed to be “accredited investors” by reason of their offices.
|
ITEM
6. MANAGEMENT'S
DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Summary.
Our
revenues increased from $19,517,000 in 2006 to $22,359,000 in 2007. Gross margin
percentage increased from 14.8% in 2006 to 17.9% in 2007. Revenues increased
primarily due to the Company obtaining new insulation services contracts, and
hiring additional project managers which allows the Company to bid on more
projects. The gross margin percentage increased for 2007 as compared with 2006
due to the Company recording an anticipated loss of $566,000 on a single project
in 2006 which negatively impacted the gross margin in 2006. We anticipate that
our revenues will continue to increase in 2008 due to the increase in our
backlog at December 31, 2007 as compared to December 31, 2006, and anticipate
that gross margin percentages in 2008 will approximate those in
2007.
We
had
net income of $622,000 in 2007. We had net income of $2,052,000 in 2006
primarily due to the operating income at Metalclad Insulation Corporation,
a
$1,725,000 gain recorded on the sale of a building, land and building
improvements and $1,025,000 of income related to the settlement of lawsuits.
An
additional allowance of $1,084,000 on a shareholder note receivable partially
offset the net income.
In
an
effort to increase shareholder value and to diversify from our insulation
services business, we have made equity investments in several companies that
are
not in the insulation services business and which we believed had the ability
to
provide acceptable return on our investments. We have investments in the common
stock of Catalytic Solutions, Inc., and the common stock of Clearwire
Corporation, which we value at $450,000 and $540,000, respectively. Both of
these companies are in the early stages of their business development. Our
investments represent less than 5% ownership in each company and represent
approximately 2.2% and 2.3% of the Company’s total assets at December 31, 2007
and 2006, respectively. Catalytic Solutions, Inc. manufactures and delivers
proprietary technology that improves the performance and reduces the cost of
catalytic converters. Catalytic’s common stock is traded on the AIM market in
London under the symbol “CTS”. Clearwire Corporation is a provider of
non-line-of-sight plug-and-play broadband wireless access systems. Clearwire’s
common stock is traded on the NASDAQ market under the symbol “CLWR”. We also own
190,566 shares of the common stock of VioQuest Pharmaceuticals, Inc., the common
stock of which is publicly traded on the NASD Bulletin Board under the symbol
“VQPH”. Of the 190,566 shares, 75,000 shares are subject to options exercisable
by one current and two former members of our Board of Directors at $1.25 per
share. Any or all of these investments could be impaired in the future. See
“Liquidity and Capital Resources.”
Our
subsidiary, Metalclad Insulation Corporation, continues to be engaged in
lawsuits involving asbestos-related injury or potential injury claims. The
163
claims made in 2007 were down from the 232 claims made in 2006. The average
indemnity payment on all resolved claims during each of the past five years
has
fluctuated from a high of $23,114 in 2007, to a low of $14,504 in 2006. These
claims are currently defended and covered by insurance. We have projected that
our future liability for currently outstanding and estimated future
asbestos-related claims was approximately $43,000,000 at December 31, 2006
and
approximately $36,000,000 at December 31, 2007. We have determined that it
is
probable that we have sufficient insurance to provide coverage for both current
and future projected asbestos-related injury claims. This determination assumes
that the recent trend of reducing asbestos-related injury claims will continue,
and that the average indemnity and direct legal costs of each resolved claim
will not materially increase. The determination also assumes that the insurance
companies live up to what we believe is their obligation to continue to cover
our exposure with regards to these claims. Several affiliated insurance
companies have brought a declaratory relief action against our subsidiary,
Metalclad, as well as a number of other insurers, to resolve certain coverage
issues. (See Item 3, “Legal Proceedings - Asbestos-related Claims”) In addition,
we paid approximately $296,000 and $215,000 in 2007 and 2006, respectively,
in
legal fees to assess and monitor the asbestos-related claims, assess, to monitor
our insurance coverage and insurance company activities involving the defense
and payment of these claims, and to defend the ACE Lawsuit. We anticipate that
this cost will continue.
Results
of Operations
General.
Our
revenues have been generated primarily from insulation services and sales of
insulation products and related materials in the United States.
Year
Ended December 31, 2007 Compared to Year Ended December 31,
2006.
Revenue.
Total
revenues were $22,358,000 in 2007 as compared to $19,517,000 for 2006, an
increase of 14.6%. The increase from 2007 to 2006 was primarily a result of
the
Company obtaining new insulation services contracts, and hiring additional
project managers which allowed the Company to bid on more projects in 2007
and
which ultimately increased the number of jobs in which we were the winning
bidder.
Cost
of Revenue and Gross Margin. Total
cost of revenue for the year ended December 31, 2007 was $18,353,000 as compared
to $16,638,000 for the year ended December 31, 2006, an increase of 10.3%.
The
gross margin as a percentage of revenue was approximately 17.9% for the year
ended December 31, 2007 compared to 14.8% for the year ended December 31, 2006.
The increase in the gross margin percentage during the year ended December
31,
2007 as compared with the year ended December 31, 2006 is primarily the result
of the Company recording a charge of $566,000 related to an anticipated loss
on
a project during the year ended December 31, 2006. The increase in the cost
of
revenues for the year ended December 31, 2007 as compared to the year ended
December 31, 2006 was primarily due to higher revenues as discussed
above.
Selling,
General and Administrative Expenses. Selling,
general and administrative expenses were $3,291,000 for the year ended December
31, 2007 as compared to $2,401,000 for the year ended December 31, 2006, an
increase of 37.1% due primarily to a increases in compensation expenses,
performance bonuses, legal expenses and bad debt expense.
Other
Operating Expense.
For the
year ended December 31, 2006, we increased our reserve against the note
receivable from Blake Capital Partners, LLC (“Blake”) by $1,083,885 as a result
of the non-payment of interest, bringing the net of the note receivable less
the
reserve down to $210,000, the approximate value of the collateral securing
the
note. During 2007, the Company canceled 500,000 shares of the Company’s common
stock that were pledged as collateral on the note and applied the value of
the
stock, $115,000 against the outstanding note receivable balance. The Company
is
exploring its opportunities to obtain proceeds from the sale of 250,000 shares
of VioQuest Pharmaceuticals, Inc. common stock (OTC Bulletin Board: VQPH),
also
pledged as collateral on the note. As such, the Company has continued to adjust
the carrying value of the note receivable to the approximate value of the
collateral securing the note at December 31, 2007, which has increased the
reserve by $70,000 for the year ended December 31, 2007. (See “Liquidity and
Capital Resources” under this Item 6 below).
Interest
Income and Expense. Interest
expense for the year ended December 31, 2007 was $10,000 as compared with
interest expense of $107,000 for the year ended December 31, 2006. The decrease
in 2007 as compared to 2006 was primarily due to the pay-off of debt after
the
sale of the Company’s California building during the year ended December 31,
2006. The note with Pandora Select Partners L.P. was also repaid in June 2006.
Interest income decreased from $105,000 in the year ended December 31, 2006
to
$60,000 in the year ended December 31, 2007, primarily due to the Company not
recording any interest income on the note receivable from Blake Capital
Partners, LLC in the second half of 2006 or the year ended December 31, 2007.
Gain
on Sale of Building, Land, and Building Improvements. Gain
on
sale of building, land and building improvements was $1,725,000 for the year
ended December 31, 2006. This gain was related to the sale of the Company’s
facilities in Anaheim, California that housed the Company’s insulation
operations.
Other
Income and Expense.
Other
income for the year ended December 31, 2006 was $1,025,000. $100,000 of other
income related to the settlement agreement with Meyers-Reynolds whereby
Meyers-Reynolds agreed to pay Entrx Corporation $100,000 in exchange for the
dismissal with prejudice by Entrx Corporation of the law suit filed by Entrx
Corporation against Meyers-Reynolds. Also included in the $1,025,000 of other
income for the year ended December 31, 2006 was $925,000 related to the
settlement agreement with Ventana Global Environmental Organizational
Partnership, L.P. and North America Environmental Fund, L.P. (collectively
referred to as “Ventana”) whereby Ventana agreed to pay Entrx Corporation
$1,250,000 in exchange for the dismissal with prejudice by Entrx Corporation
of
the law suit (the “Ventana Action”) filed by Entrx Corporation against Ventana
and others in Orange County, California Superior Court in November 2000. Entrx
Corporation received $925,000 net after payment of legal fees and expenses
associated with the settlement.
In
an
effort to increase shareholder value and to diversify from our insulation
services business, we have made equity investments in several companies that
are
not in the insulation services business and which we believed had the ability
to
provide acceptable return on our investments. For the year ended December 31,
2007 we recognized an impairment charge of $80,000 related to our investment
in
VioQuest Pharmaceuticals, Inc. For the year ended December 31, 2006 we
recognized an impairment charge of $91,000 related to our investment in VioQuest
Pharmaceuticals, Inc. The impairment charges were due to the decline in the
fair
value below the cost basis that was judged to be other than temporary.
Net
Income.
We
realized net income of $622,000 (or net income of $0.08 per share) for the
year
ended December 31, 2007, as compared to net income of $2,052,000 (or net income
of $0.26 per share) for the comparable period ended December 31, 2006. The
net
income for the year ended December 31, 2006 was primarily due to the gain on
the
sale of our facilities in Anaheim, California, our settlement with Ventana
Global Environmental Organizational Partnership, L.P. and North America
Environmental Fund, L.P. and the improved operating results at Metalclad
Insulation Corporation.
Liquidity
and Capital Resources
As
of
December 31, 2007, we had $1,445,000 in cash and cash equivalents and $559,000
in available-for-sale securities. The Company had working capital of $5,402,000
as of December 31, 2007.
In
an
effort to increase shareholder value and to diversify from our insulation
services business, we made an equity investment in Catalytic Solutions, Inc.,
that is not in the insulation services business and which we believed had the
ability to provide acceptable return on our investment. We currently have an
investment in Catalytic Solutions, Inc. which we value at $450,000. This company
is in the early stages of its business development. Our investment represents
less than 5% ownership and represents approximately 1.0% of the Company’s total
assets at December 31, 2007. Catalytic Solutions, Inc. manufactures and delivers
proprietary technology that improves the performance and reduces the cost of
catalytic converters. Catalytic Solutions, Inc. is traded on the AIM market
in
London, England.
Cash
used
in continuing operations was $24,000 for 2007, compared with cash provided
by
continuing operations of $446,000 in 2006. For the year ended December 31,
2007
the negative cash flow from operations was primarily the result of an increase
in accounts receivable and an increase in costs and estimated earnings in excess
of billings on uncompleted contracts, partially offset by our net income and
an
increase in accounts payable and accrued expenses. The increase in accounts
receivable is primarily due to an increase in revenues. For the year ended
December 31, 2006 the positive cash flow from operations was primarily the
result of our net income, a decrease in inventories, a decrease in other
receivables and a gain on the settlement of the Ventana action.
These
sources of cash were partially offset by an increase in accounts receivable.
Net
investing activities used $25,000 of cash in the year ended December 31, 2007,
and provided $3,566,000 of cash in 2006. Additions to property and equipment
used $64,000 and $171,000 in 2007 and 2006, respectively, primarily for our
subsidiary, Metalclad Insulation Corporation. During the year ended December
31,
2007, cash of $39,000 was provided by proceeds from sales of assets. During the
year ended December 31, 2006, cash of $3,738,000 was provided by proceeds from
sales of assets, primarily related to the sale of the Company’s facilities in
Anaheim, California.
Cash
used
in financing activities totaled $114,000 in 2007 compared with cash used in
financing activities of $2,819,000 in 2006. During the year ended December
31,
2006, $2,831,000 of cash was used to repay the note payable to bank, the
mortgage payable on the building we sold and the Company’s note to Pandora
Select Partners L.P. Long-term borrowings provided $114,000 of cash in 2006
and
payments on long-term borrowings used $114,000 and $102,000 of cash in 2007
and
2006, respectively.
In
2001,
$1,250,000 was loaned to an affiliate of Wayne W. Mills, Blake Capital Partners,
LLC (“Blake”) under a note (“Note”) secured by 500,000 shares of the Company’s
common stock and any dividends received on those shares. At the time the loan
was made, Mr. Mills was a principal shareholder of the Company, and was
subsequently elected as the Company’s President and Chief Executive Officer. In
November 2003, the Board of Directors of the Company negotiated an amendment
to
the security agreement (the “Amended and Restated Security Agreement”) which it
believed to be beneficial to the Company. The Note as amended (the “New Note”)
is in the principal amount of $1,496,370, and provided for an October 31, 2007
due date, with interest at 2% over the prime rate established by Wells Fargo
Bank, NA in Minneapolis, Minnesota, adjusted on March 1 and September 1 of
each
year, instead of the 12% rate established in the Note. Interest only was payable
commencing March 1, 2004, and at the end of each six-month period thereafter.
The New Note is with full recourse to Blake Capital Partners, which had minimal
assets, other than 350,000 shares of the Company’s common stock and 175,000
shares of VioQuest Pharmaceuticals, Inc., all of which, along with 150,000
shares of the Company’s common stock and 75,000 shares of VioQuest
Pharmaceuticals, Inc. owned by Mr. Mills, had been held by the Company as
collateral for the New Note. The Amended and Restated Security Agreement, unlike
the original Security Agreement, did not require us, or permit Blake Capital
Partners or Mr. Mills, to cancel the shares of the Company’s common stock held
as collateral as full payment of the loan, or require us to apply the value
of
those cancelled shares at $2.50 per share against the principal balance of
the
amounts due. In addition, Mr. Mills has personally guaranteed the repayment
of
the New Note.
For
the
year ended December 31, 2006, we increased our reserve against the note
receivable from Blake Capital Partners, LLC (“Blake”) by $1,083,885 as a result
of the non-payment of interest, bringing the net of the note receivable less
the
reserve down to $210,000, the approximate value of the collateral securing
the
Note. In April 2007, the Company canceled 500,000 shares of the Company’s common
stock that were pledged as collateral on the New Note and applied the $115,000
value of the stock against the outstanding New Note balance. The New Note was
not repaid on the October 31, 2007 due date. As of December 31, 2007 the Company
adjusted the net book value of the New Note to $25,000, the approximate value
of
the collateral securing the New Note. The Company is exploring its opportunities
to obtain proceeds from the sale of the VioQuest Pharmaceuticals, Inc. common
stock, also pledged as collateral on the note.
Prior
to
1975, we were engaged in the sale and installation of asbestos-related
insulation materials, which has resulted in numerous claims of personal injury
allegedly related to asbestos exposure. Many of these claims are now being
brought by the children and close relatives of persons who have died, allegedly
as a result of the direct or indirect exposure to asbestos. To date, all of
the
asbestos-related injury claims have been defended and paid by our insurance
carriers.
The
number of asbestos-related cases which have been initiated naming us (primarily
our subsidiary, Metalclad Insulation Corporation) as a defendant decreased
to
351 in 2003, to 265 in 2004 and to 199 in 2005, but increased in 2006 to 232.
The number decreased to 163 in 2007. At December 31, 2003, 2004, 2005, 2006
and
2007, there were, respectively, approximately 853, 710, 507, 404 and 222 cases
pending. These claims are currently defended and covered by insurance.
Set
forth
below is a table for the years ended December 31, 2003, 2004, 2005, 2006 and
2007, which sets forth for each such period the approximate number of
asbestos-related cases filed, the number of such cases resolved by dismissal
or
by trial, the number of such cases resolved by settlement, the total number
of
resolved cases, the number of filed cases pending at the end of such period,
the
total indemnity paid on all resolved cases, the average indemnity paid on all
settled cases and the average indemnity paid on all resolved
cases:
|
|
|
2003
|
|
|
2004
|
|
|
2005
|
|
|
|
2006
|
|
|
2007
|
|
New
cases filed
|
|
|
351
|
|
|
265
|
|
|
199
|
|
|
|
232
|
|
|
163
|
|
Defense
judgments and dismissals
|
|
|
311
|
|
|
311
|
|
|
294
|
(3)
|
|
|
253
|
|
|
292
|
(3)
|
Settled
cases
|
|
|
175
|
|
|
97
|
|
|
108
|
|
|
|
82
|
|
|
53
|
|
Total
resolved cases (1)
|
|
|
486
|
|
|
408
|
|
|
402
|
(3)
|
|
|
335
|
|
|
345
|
(3)
|
Pending
cases (1)
|
|
|
853
|
|
|
710
|
|
|
507
|
(2,3)
|
|
|
404
|
|
|
222
|
(3)
|
Total
indemnity payments
|
|
$
|
10,618,700
|
|
$
|
6,366,750
|
|
$
|
8,513,750
|
|
|
$
|
4,858,750
|
|
$
|
7,974,500
|
|
Average
indemnity paid on settled cases
|
|
$
|
60,678
|
|
$
|
65,637
|
|
$
|
78,831
|
|
|
$
|
59,253
|
|
$
|
150,462
|
|
Average
indemnity paid on all resolved cases
|
|
$
|
21,849
|
|
$
|
15,605
|
|
$
|
21,178
|
(2)
|
|
$
|
14,504
|
|
$
|
23,114
|
|
(1)
Total
resolved cases includes, and the number of pending cases excludes, cases which
have been settled but which have not been closed for lack of final documentation
or payment.
(2)
The
average indemnity paid on resolved cases does not include, and the number of
pending cases includes, a jury award rendered on March 22, 2005 and a judgment
on that award rendered on April 4, 2005, finding Metalclad Insulation
Corporation liable for $1,117,000 in damages, which is covered by insurance.
The
judgment is being appealed by our insurer.
(3)
Of
the
decrease from 710 cases pending at December 31, 2004 to 507 cases pending at
December 31, 2005, were 80 cases which had been previously counted in error
and
are included in “Defense judgments and dismissals” and “Total resolved cases”,
so that the actual decrease over the year ended December 31, 2005 was 123 cases.
Included in the decrease from 404 cases pending at December 31, 2006 to 222
cases pending at December 31, 2007, were 53 cases which had been previously
counted in error and are included in “Defense judgments and dismissals” and
“Total resolved cases”, so that the actual decrease for the year ended December
31, 2007 was 129 cases.
The
number of asbestos-related claims made against the Company since 2003, as well
as the number of cases pending at the end of each of those years, has reflected
a general downward trend from 2003 through 2007. We believe that it is probable
that this general trend will continue, although such continuance cannot be
assured. The average indemnity paid on all resolved claims has fluctuated over
the past five-year period ended December 31, 2007 from a high of $23,114 in
2007, to a low of $14,504 in 2006, with an average indemnity payment of $19,250
over the same five-year period.
We
believe that the sympathies of juries, the aggressiveness of the plaintiffs’ bar
and the declining base of potential defendants as the result of business
failures, have tended to increase payments on resolved cases. This tendency,
we
believe, has been mitigated by the declining pool of claimants resulting from
death, and the likelihood that the most meritorious claims have been ferreted
out by plaintiffs’ attorneys and that the newer cases being brought are not as
meritorious nor do they have as high a potential for damages as do cases which
were brought earlier. We have no reason to believe, therefore, that the average
future indemnity payments will increase materially in the future.
In
addition, direct defense costs per resolved claim increased from $8,514 in
2003
to $16,700 in 2007. We believe that these defense costs increased as a result
of
a change in legal counsel in 2004, and the more aggressive defense posture
taken
by new legal counsel since that change. We do not believe that the defense
costs
will increase materially in the future, and are projecting those costs to be
approximately $13,500 per claim.
Based
on
the general trend of reducing asbestos-related injury claims made against the
Company over the prior six calendar years, we projected in our Form 10-KSB
filed
with the Securities and Exchange Commission for the year ended December 31,
2006
that there would be 924 asbestos-related injury claims made against the Company
after December 31, 2006. The 924, in addition to the 404 claims existing as
of
December 31, 2006, totaled 1,328 current and future claims. Multiplying the
average indemnity per resolved claim over the past six years of $19,131, times
1,328, we projected the probable future indemnity to be paid on those claims
after December 31, 2006 to be equal to approximately $25 million. In addition,
multiplying an estimated cost of defense per resolved claim of approximately
$13,500 times 1,328, we projected the probable future defense costs to equal
approximately $18 million. Accordingly, our total estimated future
asbestos-related liability at December 31, 2006 was $43 million.
As
of
December 31, 2006, we projected that approximately 186 new asbestos-related
claims would be commenced, and approximately 237 cases would be resolved, in
2007, resulting in an estimated 353 cases pending at December 31, 2007. Although
the actual number of claims made in 2007 was 163, and the number of cases
pending as of December 31, 2007 was 222, slightly less than we anticipated,
we
do not believe the differences are significant enough to re-evaluate our
estimate. In addition, our future defense costs could be greater than projected,
and such increase could partially offset any lower projection of liability
which
would result from such re-evaluation. Since we projected that an aggregate
of
738 new cases would be commenced after December 31, 2007, and that 148 of these
cases would be commenced in 2008, we estimated that an aggregate of 590 new
cases would be commenced after December 31, 2008. Accordingly, we have projected
the cases pending and projected to be commenced in the future at December 31,
2008, would be 897 cases. Multiplying 897 claims times the approximate average
indemnity paid and defense costs incurred per resolved claim from 2002 through
2006 of $32,600, we estimated our liability for current and future
asbestos-related claims at December 31, 2008 to be approximately $29,000,000.
This amounts to a $7,000,000 reduction from the $36,000,000 liability we
estimated as of December 31, 2007, or a $1,750,000 reduction per quarter in
2008.
We
have
determined that it is probable that we have sufficient insurance to provide
coverage for both current and future projected asbestos-related injury claims.
This determination assumes that the current trend of reducing asbestos-related
injury claims will continue and that the average indemnity and direct legal
costs of each resolved claim will not materially increase. The determination
also assumes that the insurance companies live up to what we believe is their
obligation to continue to cover our exposure with regards to these claims.
Several affiliated insurance companies have brought a declaratory relief action
against our subsidiary, Metalclad, as well as a number of other insurers, to
resolve certain coverage issues.
We
intend
to re-evaluate our estimate of future liability for asbestos claims at the
end
of each fiscal year, or whenever actual results are materially different from
our estimates, integrating our actual experience in that fiscal year with that
of prior fiscal years. We estimate that the effects of economic inflation on
either the average indemnity payment or the projected direct legal expenses
will
be approximately equal to a discount rate applied to our future liability based
upon the time value of money. It is probable that we have adequate insurance
to
cover current and future asbestos-related claims, although such coverage cannot
be assured.
Although
defense costs are included in our insurance coverage, we expended $174,000,
$304,000, $188,000, $215,000 and $296,000 in 2003, 2004, 2005, 2006 and 2007,
respectively, to administer the asbestos claims and defend the ACE Lawsuit
discussed below. These amounts were primarily fees paid to attorneys to monitor
the activities of the insurers, and their selected defense counsel, and to
look
after our rights under the various insurance policies.
There
are
numerous insurance carriers which have issued a number of policies to us over
a
period extending from approximately 1967 through approximately 1985 that still
provide coverage for asbestos-related injury claims. After approximately 1985
the policies were issued with provisions which purport to exclude coverage
for
asbestos related claims. The terms of our insurance policies are complex, and
coverage for many types of claims is limited as to the nature of the claim
and
the amount of coverage available. It is clear, however, under California law,
where the substantial majority of the asbestos-related injury claims are
litigated, that all of those policies cover any asbestos-related injury
occurring during the 1967 through 1985 period when these policies were in
force.
We
have
engaged legal counsel to review all of our known insurance policies, and to
provide us with the amount of coverage which such counsel believes to be
probable under those policies for current and future asbestos-related injury
claims against us. Such legal counsel has provided us with its opinion of the
minimum probable insurance coverage available to satisfy asbestos-related injury
claims, which significantly exceeds our estimated $36 million future liability
for such claims as of December 31, 2007. Accordingly, we have included
$36,000,000 and $43,000,000 of such insurance coverage receivable as an asset
on
our 2007 and 2006 balance sheets, respectively.
On
February 23, 2005 ACE Property & Casualty Company ("ACE"), Central National
Insurance Company of Omaha ("Central National") and Industrial Underwriters
Insurance Company ("Industrial"), which are all related entities, filed a
declaratory relief lawsuit (“the ACE Lawsuit”) against Metalclad Insulation
Corporation (“Metalclad”) and a number of Metalclad's other liability insurers,
in the Superior Court of the State of California, County of Los Angeles. ACE,
Central National and Industrial issued umbrella and excess policies to
Metalclad, which has sought and obtained from the plaintiffs both defense and
indemnity under these policies for the asbestos lawsuits brought against
Metalclad during the last four to five years. The ACE Lawsuit seeks declarations
regarding a variety of coverage issues, but is centrally focused on issues
involving whether historical and currently pending asbestos lawsuits brought
against Metalclad are subject to either an "aggregate" limits of liability
or
separate "per occurrence" limits of liability. Whether any particular asbestos
lawsuit is properly classified as being subject to an aggregate limit of
liability depends upon whether or not the suit falls within the "products"
or
"completed operations" hazards found in most of the liability policies issued
to
Metalclad. Resolution of these classification issues will determine if, as
ACE
and Central National allege, their policies are nearing exhaustion of their
aggregate limits and whether or not other Metalclad insurers who previously
asserted they no longer owed any coverage obligations to Metalclad because
of
the claimed exhaustion of their aggregate limits, in fact, owe Metalclad
additional coverage obligations. The ACE Lawsuit also seeks to determine the
effect of the settlement agreement between the Company and Allstate Insurance
Company on the insurance obligations of various other insurers of Metalclad,
and
the effect of the “asbestos exclusion” in the Allstate policy. The ACE Lawsuit
does not seek any monetary recovery from Metalclad. Nonetheless, we anticipate
that we will incur attorneys fees and other associated litigation costs in
defending the lawsuit and any counter claims made against us by any other
insurers, and in prosecuting any claims we may seek to have adjudicated
regarding our insurance coverage. In addition, the ACE Lawsuit may result in
our
incurring costs in connection with obligations we may have to indemnify Allstate
under a settlement agreement (See “Item 1 – Description of Business – Insurance
and
Bonding – Insurance Policy Settlement”). Allstate, in a cross-complaint filed
against Metalclad Insulation Corporation in October, 2005, asked the court
to
determine the Company’s obligation to assume and pay for the defense of Allstate
in the ACE Lawsuit under the Company’s indemnification obligations in the
settlement agreement. The Company does not believe that it has any legal
obligation to assume or pay for such defense.
In
2003
and 2004 the Judiciary Committee of the United States Senate considered
legislation to create a privately funded, publicly administered fund to provide
the necessary resources for an asbestos injury claims resolution program, and
is
commonly referred to as the “FAIR” Act. In 2005, a draft of the “FAIR” Act was
approved by the Judiciary Committee, but the bill was rejected by the full
Senate in February 2006, when a cloture motion on the bill was withdrawn. An
amended version of the 2006 “FAIR” Act (S 3274) was introduced in the Senate in
May 2006, but has not been scheduled for a vote. A similar bill was introduced
in the House (HR 1360) in March 2005, but was referred to a subcommittee in
May
2005. The latest draft of the “FAIR” Act calls for the fund to be funded
partially by asbestos defendant companies, of which the Company is one, and
partially by insurance companies. The bill could be voted on by the Senate
or
the House at any time in the future. The impact, if any, the “FAIR” Act will
have on us if passed cannot be determined at this time although the latest
draft
of the legislation did not appear favorable to us.
The
following summarizes our contractual obligations at December 31, 2007. The
long-term debt consists of various notes payable to a finance company for
vehicles used in the ordinary course of the Company’s insulation business (See
Note 9).
|
|
Total
|
|
1 Year or Less
|
|
1-3 Years
|
|
4-5 Years
|
|
Over 5 Years
|
|
Long-term
debt
|
|
$
|
245,470
|
|
$
|
113,000
|
|
$
|
132,470
|
|
$
|
-
|
|
$
|
-
|
|
Non-cancelable
leases
|
|
|
865,224
|
|
|
162,972
|
|
|
518,832
|
|
|
183,420
|
|
|
-
|
|
Estimated
interest payments
|
|
|
5,488
|
|
|
3,208
|
|
|
2,280
|
|
|
-
|
|
|
-
|
|
Total
|
|
$
|
1,116,182
|
|
$
|
279,180
|
|
$
|
653,582
|
|
$
|
183,420
|
|
$
|
-
|
|
During
2007 and 2006, we did not pay or declare any cash dividends and do not intend
to
pay any cash dividends in the near future.
The
Company projects that cash flow generated through the operations of its
subsidiary, Metalclad Insulation Corporation, and the Company’s cash balance at
December 31, 2007, will be sufficient to meet the Company’s cash requirements
for at least the next twelve months.
Impact
of Inflation
We
reflect price escalations in our quotations to our insulation customers and
in
the 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
us
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 us
as
the contracts are completed; however, the majority of our contracts are
completed within 12 months of their commencement and we believe that the impact
of inflation on such contracts is insignificant.
Significant
Accounting Policies
Our
critical accounting policies are those both having the most impact to the
reporting of our financial condition and results, and requiring significant
judgments and estimates. Our critical accounting policies include those related
to (a) revenue recognition, (b) investments in unconsolidated affiliates, (c)
allowances for uncollectible notes and accounts receivable, (d) judgments and
estimates used in determining the need for an accrual, and the amount, of our
asbestos liability, and (e) evaluation and estimates of our probable insurance
coverage for asbestos-related claims. Revenue recognition for 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. Revenue recognition on time and material contracts is recognized based
upon the amount of work performed. We have made investments in companies which
can still be considered to be in the startup or development stages. We monitor
these investments for impairment considering factors such as the severity and
duration of any decline in fair value, our ability and intent to retain our
investment for a period of time sufficient to allow for a recovery of market
value and based on the financial condition and near-term prospects of these
companies. We make appropriate reductions in carrying values if we determine
an
impairment charge is required. These investments are inherently risky, as the
markets for the technologies or products these companies are developing are
typically in the early stages and may never materialize. Notes and accounts
receivable are reduced by an allowance for amounts that may become uncollectible
in the future. The estimated allowance for uncollectible amounts is based
primarily on our evaluation of the financial condition of the noteholder or
customer. Future changes in the financial condition of a note payee or customer
may require an adjustment to the allowance for uncollectible notes and accounts
receivable. We have estimated the probable amount of future claims related
to
our asbestos liability and the probable amount of insurance coverage related
to
those claims. We offset proceeds received from our insurance carriers resulting
from claims of personal injury allegedly related to asbestos exposure against
the payment issued to the plaintiff. The cash from the insurance company goes
directly to the plaintiff, so we never have access to this cash. We never have
control over any of the funds the insurance company issues to the plaintiff.
Once a claim is settled, payment of the claim is normally made by the insurance
carrier or carriers within 30 to 60 days. Changes in any of the judgments and
estimates could have a material impact on our financial condition and results
of
operations.
New
Accounting Pronouncements
In
September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. SFAS
No.
157 defines fair value, establishes a framework for measuring fair value in
generally accepted accounting principles and expands disclosures about fair
value measurements. SFAS No. 157 applies under other accounting pronouncements
that require or permit fair value measurements, the FASB having previously
concluded in those accounting pronouncements that fair value is the relevant
measurement attribute. Accordingly, SFAS No. 157 does not require any new fair
value measurements. SFAS No. 157 is effective for fiscal years beginning after
December 15, 2007. We are evaluating the impact, if any, that the adoption
of
SFAS No. 157 will have on our financial statements.
In
February 2007, the FASB issued Statement of Financial Accounting Standards
No.
159 (SFAS 159), "The Fair Value Option for Financial Assets and Financial
Liabilities". SFAS 159 permits entities to choose to measure certain financial
instruments and certain other items at fair value. Unrealized gains and losses
on items for which the fair value option has been elected are reported in
earnings. SFAS 159 is effective for fiscal years beginning after November 15,
2007. The Company does not expect to elect to apply SFAS 159 to its financial
assets and liabilities. Therefore, SFAS 159 is expected to have no impact on
the
Company's financial position and results of operations.
Effective
January 1, 2007, the Company adopted FASB Interpretation (FIN) No. 48 (FIN
No.
48), “Accounting for Uncertainty in Income Taxes”. The adoption of FIN No. 48
had no material impact on the financial position or results of operations for
the year ended December 31, 2007.
In
December 2007, the FASB issued SFAS No. 141(R), Business Combinations. SFAS
141(R) requires the acquiring entity in a business combination to record all
assets acquired and liabilities assumed at their respective acquisition-date
fair values and changes other practices under SFAS No. 141, Business
Combinations, some of which could have a material impact on how an entity
accounts for its business combinations. SFAS 141(R) also requires additional
disclosure of information surrounding a business combination. SFAS 141(R) is
effective for fiscal years beginning after December 15, 2008, and is to be
applied prospectively to business combinations for which the acquisition date
is
on or after December 15, 2008. The provisions of SFAS 141(R) will only impact
the Company if it is party to a business combination after the pronouncement
has
been adopted.
In
December 2007, the FASB issued SFAS No. 160, Noncontrolling Interest in
Consolidated Financial Statements - an amendment of ARB No. 51. SFAS 160
requires entities to report non-controlling minority interests in subsidiaries
as equity in consolidated financial statements. SFAS 160 is effective for fiscal
years beginning on or after December 15, 2008. The Company does not believe
that
SFAS 160 will have any impact on its financial position or results of operations
since none of its subsidiaries are owned by minority interests.
Item
7. FINANCIAL STATEMENTS
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To
the
Shareholders, Audit Committee and Board of Directors
Entrx
Corporation and subsidiaries
Minneapolis,
Minnesota
We
have
audited the accompanying consolidated balance sheets of Entrx Corporation and
subsidiaries as of December 31, 2007 and 2006, and the related consolidated
statements of operations and comprehensive income, shareholders' equity and
cash
flows for the years then ended. These consolidated financial statements are
the
responsibility of the company's management. Our responsibility is to express
an
opinion on these consolidated financial statements based on our
audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan
and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. The Company
is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audit included consideration
of
its internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose
of
expressing an opinion on the effectiveness of the Company's internal control
over financial reporting. Accordingly, we express no such opinion. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management as well as evaluating the overall consolidated financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In
our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Entrx Corporation and
subsidiaries as of December 31, 2007 and 2006 and the results of their
operations and their cash flows for the years then ended, in conformity with
U.S. generally accepted accounting principles.
/s/
Virchow, Krause & Company, LLP
Minneapolis,
Minnesota
March
10,
2008
ENTRX
CORPORATION AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
|
|
December
31,
2007
|
|
December
31,
2006
|
|
ASSETS
|
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
1,444,883
|
|
$
|
1,607,580
|
|
Available-for-sale
securities
|
|
|
559,436
|
|
|
99,094
|
|
Accounts
receivable, less allowance for doubtful accounts of $80,000 and $15,000
as
of December 31, 2007 and December 31, 2006, respectively
|
|
|
5,466,889
|
|
|
4,052,823
|
|
Costs
and estimated earnings in excess of billings on uncompleted
contracts
|
|
|
631,625
|
|
|
364,981
|
|
Inventories
|
|
|
107,118
|
|
|
27,763
|
|
Prepaid
expenses and other current assets
|
|
|
273,156
|
|
|
191,309
|
|
Insurance
claims receivable
|
|
|
7,000,000
|
|
|
8,000,000
|
|
Shareholder
note receivable, net of allowance of $1,356,000 and $1,286,000 as
of
December 31, 2007 and 2006, respectively
|
|
|
25,000
|
|
|
210,000
|
|
Other
receivables
|
|
|
180,015
|
|
|
374,175
|
|
Total
current assets
|
|
|
15,688,122
|
|
|
14,927,725
|
|
|
|
|
|
|
|
|
|
Property,
plant and equipment, net
|
|
|
366,954
|
|
|
331,041
|
|
Investments
in unconsolidated affiliates
|
|
|
450,000
|
|
|
1,206,889
|
|
Insurance
claims receivable
|
|
|
29,000,000
|
|
|
35,000,000
|
|
Other
assets
|
|
|
193,540
|
|
|
201,560
|
|
Total
Assets
|
|
$
|
45,698,616
|
|
$
|
51,667,215
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND SHAREHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
Current
portion of long-term debt
|
|
$
|
113,000
|
|
$
|
89,327
|
|
Accounts
payable
|
|
|
1,251,423
|
|
|
946,417
|
|
Accrued
expenses
|
|
|
1,859,048
|
|
|
1,486,082
|
|
Reserve
for asbestos liability claims
|
|
|
7,000,000
|
|
|
8,000,000
|
|
Billings
in excess of costs and estimated earnings on uncompleted
contracts
|
|
|
62,394
|
|
|
106,353
|
|
Total
current liabilities
|
|
|
10,285,865
|
|
|
10,628,179
|
|
|
|
|
|
|
|
|
|
Long-term
debt, less current portion
|
|
|
132,470
|
|
|
67,762
|
|
Reserve
for asbestos liability claims
|
|
|
29,000,000
|
|
|
35,000,000
|
|
Total
liabilities
|
|
|
39,418,335
|
|
|
45,695,941
|
|
|
|
|
|
|
|
|
|
Commitments
and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders’
equity:
|
|
|
|
|
|
|
|
Preferred
stock, par value $1; 5,000,000 shares authorized; none
issued
|
|
|
-
|
|
|
-
|
|
Common
stock, par value $0.10; 80,000,000 shares authorized; 7,616,147 issued
and
outstanding at December 31, 2007 and 8,455,947 and 8,001,147 issued
and
outstanding, respectively, at December 31, 2006
|
|
|
807,095
|
|
|
845,595
|
|
Additional
paid-in capital
|
|
|
69,821,881
|
|
|
70,260,746
|
|
Less
treasury stock at cost, 454,800 shares at December 31,
2006
|
|
|
-
|
|
|
(380,765
|
)
|
Accumulated
deficit
|
|
|
(64,132,186
|
)
|
|
(64,754,302
|
)
|
Accumulated
other comprehensive loss
|
|
|
(216,509
|
)
|
|
-
|
|
Total
shareholders’ equity
|
|
|
6,280,281
|
|
|
5,971,274
|
|
Total
Liabilities and Shareholders’ Equity
|
|
$
|
45,698,616
|
|
$
|
51,667,215
|
|
See
Notes
to Consolidated Financial Statements
ENTRX
CORPORATION AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
|
|
Year
Ended December 31,
|
|
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
Contract
revenues
|
|
$
|
22,358,764
|
|
$
|
19,517,250
|
|
|
|
|
|
|
|
|
|
Contract
costs and expenses
|
|
|
18,352,750
|
|
|
16,638,105
|
|
|
|
|
|
|
|
|
|
Gross
margin
|
|
|
4,006,014
|
|
|
2,879,145
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
Selling,
general and administrative
|
|
|
3,290,670
|
|
|
2,400,799
|
|
Change
in allowance on shareholder note receivable
|
|
|
70,000
|
|
|
1,083,885
|
|
Gain
on disposal of property, plant and equipment
|
|
|
(6,957
|
)
|
|
(1,294
|
)
|
Total
operating expenses
|
|
|
3,353,713
|
|
|
3,483,390
|
|
|
|
|
|
|
|
|
|
Operating
income (loss)
|
|
|
652,301
|
|
|
(604,245
|
)
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
59,720
|
|
|
104,882
|
|
Interest
expense
|
|
|
(9,867
|
)
|
|
(107,150
|
)
|
Gain
on sale of building, land and building improvements
|
|
|
-
|
|
|
1,724,980
|
|
Other
income - settlements
|
|
|
-
|
|
|
1,025,000
|
|
Impairment
charge on available-for-sale securities
|
|
|
(80,038
|
)
|
|
(91,472
|
)
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
622,116
|
|
|
2,051,995
|
|
|
|
|
|
|
|
|
|
Other
comprehensive loss
|
|
|
|
|
|
|
|
Unrealized
losses on available-for-sale securities
|
|
|
(216,509
|
)
|
|
-
|
|
|
|
|
|
|
|
|
|
Comprehensive
income
|
|
$
|
405,607
|
|
$
|
2,051,995
|
|
|
|
|
|
|
|
|
|
Weighted
average number of common shares — basic and diluted
|
|
|
7,721,065
|
|
|
7,979,640
|
|
|
|
|
|
|
|
|
|
Net
income per common share — basic and diluted
|
|
$
|
0.08
|
|
$
|
0.26
|
|
|
|
|
|
|
|
|
|
See
Notes
to Consolidated Financial Statements
ENTRX
CORPORATION AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF SHAREHOLDERS’ EQUITY
Years
Ended December 31, 2007 and 2006
|
|
Common
Stock
|
|
Additional
Paid-in
|
|
Treasury
Stock
|
|
Accumulated
|
|
Accumulated
Other
Comprehensive
|
|
Total
Shareholders’
|
|
|
|
Shares
|
|
Amounts
|
|
Capital
|
|
Shares
|
|
Amounts
|
|
Deficit
|
|
Income
(loss)
|
|
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2005
|
|
|
7,951,147
|
|
$
|
840,595
|
|
$
|
70,257,746
|
|
|
454,800
|
|
$
|
(380,765
|
)
|
$
|
(66,806,297
|
)
|
$
|
(47,641
|
)
|
$
|
3,863,638
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclassification
adjustment for losses recognized in net income
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
47,641
|
|
|
47,641
|
|
Common
stock issued in exchange for services
|
|
|
50,000
|
|
|
5,000
|
|
|
3,000
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
8,000
|
|
Net
income
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
2,051,995
|
|
|
-
|
|
|
2,051,995
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2006
|
|
|
8,001,147
|
|
|
845,595
|
|
|
70,260,746
|
|
|
454,800
|
|
|
(380,765
|
)
|
|
(64,754,302
|
)
|
|
-
|
|
|
5,971,274
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
loss on available-for-sale securities
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(216,509
|
)
|
|
(216,509
|
)
|
Common
stock issued in exchange for services
|
|
|
115,000
|
|
|
11,500
|
|
|
6,900
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
18,400
|
|
Cancellation
of treasury stock
|
|
|
-
|
|
|
-
|
|
|
(380,765
|
)
|
|
(454,800
|
)
|
|
380,765
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Cancellation
of common stock held as collateral on shareholder note
receivable
|
|
|
(500,000
|
)
|
|
(50,000
|
)
|
|
(65,000
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(115,000
|
)
|
Net
income
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
622,116
|
|
|
-
|
|
|
622,116
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2007
|
|
|
7,616,147
|
|
$
|
807,095
|
|
$
|
69,821,881
|
|
|
-
|
|
$
|
-
|
|
$
|
(64,132,186
|
)
|
$
|
(216,509
|
)
|
$
|
6,280,281
|
|
See
Notes
to Consolidated Financial Statements
ENTRX
CORPORATION AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|
Year
Ended December 31,
|
|
|
|
2007
|
|
2006
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
622,116
|
|
$
|
2,051,995
|
|
Adjustments
to reconcile net income to net cash provided by (used in)
operating activities:
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
198,239
|
|
|
171,768
|
|
Gain
on disposal of property, plant and equipment
|
|
|
(6,957
|
)
|
|
(1,726,274
|
)
|
Impairment
charge on investments
|
|
|
80,038
|
|
|
91,472
|
|
Change
in allowance for doubtful accounts
|
|
|
65,000
|
|
|
4,388
|
|
Allowance
on shareholder note receivable
|
|
|
70,000
|
|
|
1,036,370
|
|
Net
interest income recorded on shareholder note receivable
|
|
|
-
|
|
|
42,513
|
|
Common
stock issued for services
|
|
|
18,400
|
|
|
8,000
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
Accounts
receivable, net
|
|
|
(1,479,066
|
)
|
|
(1,140,706
|
)
|
Costs
and estimated earnings in excess of billings on uncompleted
contracts
|
|
|
(266,644
|
)
|
|
(171,750
|
)
|
Inventories
|
|
|
(79,355
|
)
|
|
107,628
|
|
Prepaid
expenses and other current assets
|
|
|
(81,847
|
)
|
|
52,055
|
|
Other
receivables
|
|
|
194,160
|
|
|
123,448
|
|
Other
assets
|
|
|
8,020
|
|
|
(125,964
|
)
|
Accounts
payable and accrued expenses
|
|
|
677,972
|
|
|
(8,165
|
)
|
Billings
in excess of costs and estimated earnings on uncompleted
contracts
|
|
|
(43,959
|
)
|
|
(70,288
|
)
|
Net
cash (used in) provided by operating activities
|
|
|
(23,883
|
)
|
|
446,490
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
Capital
expenditures
|
|
|
(63,919
|
)
|
|
(171,199
|
)
|
Proceeds
from sale of property, plant and equipment, net of
expenses
|
|
|
38,800
|
|
|
3,737,621
|
|
Net
cash (used in) provided by investing activities
|
|
|
(25,119
|
)
|
|
3,566,422
|
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
Proceeds
from long-term debt
|
|
|
-
|
|
|
114,178
|
|
Payments
on note payable to bank
|
|
|
-
|
|
|
(775,000
|
)
|
Payments
on long-term debt
|
|
|
(113,695
|
)
|
|
(102,258
|
)
|
Payments
on note payable
|
|
|
-
|
|
|
(554,969
|
)
|
Payments
on mortgage payable
|
|
|
-
|
|
|
(1,500,678
|
)
|
Net
cash provided by (used in) financing activities
|
|
|
(113,695
|
)
|
|
(2,818,727
|
)
|
|
|
|
|
|
|
|
|
Increase
(decrease) in cash and cash equivalents
|
|
|
(162,697
|
)
|
|
1,194,185
|
|
Cash
and cash equivalents at beginning of year
|
|
|
1,607,580
|
|
|
413,395
|
|
Cash
and cash equivalents at end of year
|
|
$
|
1,444,883
|
|
$
|
1,607,580
|
|
Non-cash
investing and financing activities:
|
|
|
|
|
|
|
|
Acquisition
of property, plant and equipment in exchange for notes
payable
|
|
$
|
202,076
|
|
$
|
-
|
|
See
Notes
to Consolidated Financial Statements
ENTRX
CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2007 AND 2006
NOTE
1 –
DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING
POLICIES
Description
of Business
Entrx
Corporation (the “Company”) is engaged in insulation services, including
asbestos abatement and material sales, to customers primarily in California
(the
“Insulation Business”).
Principles
of Consolidation
The
consolidated financial statements include the accounts of the Company, its
wholly-owned and majority-owned subsidiaries, and the accounts of
Curtom-Metalclad pursuant to Financial Accounting Standards Board (FASB)
Interpretation 46R, “Consolidation of Variable Interest Entities” (see Note 2).
Significant intercompany accounts and transactions have been eliminated in
consolidation.
Cash
and 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. The Company
deposits its cash in high credit quality financial institutions. The balances,
at times, may exceed federally insured limits.
Investments
Investments
held by the Company are classified as available-for-sale securities.
Available-for-sale securities are reported at fair value with all unrealized
gains or losses included in other comprehensive income. The fair value of the
securities was determined by quoted market prices of the underlying security.
For purposes of determining gross realized gains, the cost of available-for-sale
securities is based on specific identification.
|
|
Aggregate
fair
value
|
|
Gross unrealized
gains
|
|
Gross unrealized
losses
|
|
Cost
|
|
Available
for sale securities –
December
31, 2007
|
|
$
|
559,436
|
|
$
|
-
|
|
$
|
216,509
|
|
$
|
775,945
|
|
Available
for sale securities – December 31, 2006
|
|
$
|
99,094
|
|
$
|
-
|
|
$
|
-
|
|
$
|
99,094
|
|
The
Company's net unrealized holding loss was $216,509 and $0 for the years ended
December 31, 2007 and 2006, respectively.
On
an
ongoing basis, the Company evaluates its investments in available-for-sale
securities to determine if a decline in fair value is other-than-temporary.
When
a decline in fair value is determined to be other-than-temporary, an impairment
charge is recorded and a new cost basis in the investment is established.
Considering
the severity and duration of the decline in fair value and the financial
condition and near-term prospects of one of our investments, we recognized
an
other than temporary impairment charge in the amount of $80,038 during the
year
ended December 31, 2007.
The
following table shows the gross unrealized losses and fair value of the
Company's investments with unrealized losses that are not deemed to be
other-than-temporarily impaired, aggregated by investment category and length
of
time that individual securities have been in a continuous unrealized loss
position, at December 31, 2007.
|
|
Less
than 12 Months
|
|
12
Months or Greater
|
|
|
|
Total
|
|
Description
of
Securities
|
|
Fair
Value
|
|
Unrealized
Losses
|
|
Fair
Value
|
|
Unrealized
Losses
|
|
Fair
Value
|
|
Losses
|
|
Marketable
equity securities
|
|
$
|
559,436
|
|
$
|
(216,509
|
)
|
$
|
-
|
|
$
|
-
|
|
$
|
559,436
|
|
$
|
(216,509
|
)
|
Total
|
|
$
|
559,436
|
|
$
|
(216,509
|
)
|
$
|
-
|
|
$
|
-
|
|
$
|
559,436
|
|
$
|
(216,509
|
)
|
The
Company also has a minority investment in a company. This investment is included
in investments in unconsolidated affiliates on the Consolidated Balance Sheets
and is carried at cost unless the fair value of the investment below the cost
basis is judged to be other-than-temporary. The Company monitors this investment
for impairment on an ongoing basis (see Note 5).
Accounts
Receivable
The
Company reviews customers’ credit history before extending unsecured credit and
establishes an allowance for doubtful accounts based upon factors surrounding
the credit risk of specific customers and other information. Invoices are
generally issued with net 30 day terms. Accounts receivable over 30 days are
considered past due. The Company does not accrue interest on past due accounts
receivable. Accounts receivable are uncollateralized customer obligations
resulting from the performance of construction contracts and time and material
projects. Balances are based on terms of the contract or invoice amount. The
Company follows the practice of filing liens on construction projects where
collection problems are anticipated. The liens serve as collateral on the
associated receivable. Receivables are written-off only after all collection
attempts have failed and are based on individual credit evaluation and specific
circumstances of the customer.
Financial
Instruments
The
carrying amounts for all financial instruments approximate fair value. The
carrying amounts for cash and cash equivalents, accounts receivable, accounts
payable and accrued expenses approximate fair value because of the short
maturity of these instruments. The fair value of the Company’s long-term debt
approximates the carrying amount based upon the Company's expected borrowing
rate for debt with similar remaining maturities and comparable
risk.
Inventories
Inventories,
which consist principally of insulation products and related materials, are
stated at the lower of cost (determined on the first-in, first-out method)
or
market.
Depreciation
and Amortization
Property,
plant and equipment are stated at cost. Depreciation and amortization is
computed using the straight-line method over the estimated useful lives of
related assets which range from three to five years for machinery and equipment.
Maintenance, repairs and minor renewals are expensed when incurred.
Advertising
Costs
Advertising
costs are expensed as incurred. Advertising costs totaled approximately $15,265
and $684 for the years ended December 31, 2007 and 2006,
respectively.
Revenue
Recognition
Fixed
price insulation installation and asbestos abatement contracts are accounted
for
by the percentage-of-completion method wherein costs and estimated earnings
are
included in revenues as the work is performed. If a loss on a fixed price
contract is indicated, the entire amount of the estimated loss is accrued when
known. Time and material contracts are accounted for under a cost plus fee
basis. Retentions by customers under contract terms are due at contract
completion. The Company did not have any claims revenue during the years ended
December 31, 2007 and 2006.
The
Company has both one and multi-year maintenance contracts. These contracts
are
billed monthly for the amount of work performed (time and materials with pre
approval daily by the customer) and revenue is recognized
accordingly.
Income/Loss
Per Share
The
Company computes income (loss) per share in accordance with Statement of
Financial Accounting Standards (“SFAS”) 128, “Earnings Per Share”. This
statement requires the presentation of both basic and diluted net income (loss)
per share for financial statement purposes. Basic net income (loss) per share
is
computed by dividing the net income (loss) available to common shareholders
by
the weighted average number of common shares outstanding. Diluted net income
(loss) per share includes the effect of the potential shares outstanding,
including dilutive stock options and warrants using the treasury stock method.
Options and warrants totaling 2,291,630 and 2,295,710 shares were excluded
from
the computation of diluted earnings per share for the years ended December
31,
2007 and 2006, respectively, as their exercise price exceeded the average market
price of the Company’s common stock. Following is a reconciliation of basic and
diluted net income (loss) per share:
|
|
2007
|
|
2006
|
|
Basic
net income per common share
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
622,116
|
|
$
|
2,051,995
|
|
Weighted
average shares outstanding
|
|
|
7,721,065
|
|
|
7,979,640
|
|
Basic
net income per common share
|
|
$
|
0.08
|
|
$
|
0.26
|
|
|
|
|
|
|
|
|
|
Diluted
net income per common share
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
622,116
|
|
$
|
2,051,995
|
|
Weighted
average shares outstanding
|
|
|
7,721,065
|
|
|
7,979,640
|
|
Effect
of dilutive securities
|
|
|
-
|
|
|
-
|
|
Weighted
average shares outstanding
|
|
|
7,721,065
|
|
|
7,979,640
|
|
Diluted
net income per common share
|
|
$
|
0.08
|
|
$
|
0.26
|
|
Legal
Costs
The
Company expenses its legal costs as incurred.
Stock-Based
Compensation
On
December 16, 2004, the Financial Accounting Standards Board, or FASB, issued
SFAS No. 123(R), “Share-Based Payment”, which is a revision of SFAS No. 123 and
supersedes APB Opinion No. 25. SFAS No. 123 (R) requires all share-based
payments to employees, including grants of employee stock options, to be valued
at fair value on the date of grant, and to be expensed over the applicable
vesting period. Pro forma disclosure of the income statement effects of
share-based payments is no longer an alternative. In addition, companies must
also recognize compensation expense related to any awards that are not fully
vested as of the effective date. Compensation expense for the unvested awards
will be measured based on the fair value of the awards previously calculated
in
developing the pro forma disclosures in accordance with the provisions of SFAS
No. 123. We implemented SFAS No. 123(R) on January 1, 2006 using the modified
prospective method. SFAS 123(R) did not have an impact on the Company’s
consolidated financial statements since all of the Company’s outstanding stock
options were fully vested at December 31, 2005 and no additional options were
granted through December 31, 2007.
Concentration
of Credit Risk
Financial
instruments that potentially subject the Company to credit risk consist
principally of cash and contract receivables. Contract receivables are
concentrated primarily with refineries and utility companies located in Southern
California. Historically, the Company’s credit losses have been
insignificant.
Income
Taxes
Deferred
taxes are provided using the asset and liability method whereby deferred tax
assets are recognized for deductible temporary differences and operating loss
and tax credit carry forwards and deferred tax liabilities are recognized for
taxable temporary differences. Temporary differences are the differences between
the reported amounts of assets and liabilities and their tax bases. Deferred
tax
assets are reduced by a valuation allowance when, in the opinion of management,
it is more likely than not that some portion or all of the tax assets will
not
be realized. Deferred tax assets and liabilities are adjusted for the effects
of
changes in tax laws and rates on the date of enactment.
Comprehensive
Income
SFAS
130,
“Reporting Comprehensive Income” establishes rules for the reporting of
comprehensive income (loss) and its components. Comprehensive income (loss)
consists of net income (loss), and unrealized gains (losses) on
available-for-sale securities. During the years ended December 31, 2007 and
2006, the Company recorded other comprehensive loss of $216,509 and $0,
respectively, for unrealized losses on available-for-sale securities (net of
reclassification adjustment of $47,641 for the year ended December 31, 2006).
Since the Company has various net operating loss carry forwards, the amounts
related to other comprehensive income (loss) for all periods presented are
shown
without any income tax provision or benefit.
New
Accounting Pronouncements
In
September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. SFAS
No.
157 defines fair value, establishes a framework for measuring fair value in
generally accepted accounting principles and expands disclosures about fair
value measurements. SFAS No. 157 applies under other accounting pronouncements
that require or permit fair value measurements, the FASB having previously
concluded in those accounting pronouncements that fair value is the relevant
measurement attribute. Accordingly, SFAS No. 157 does not require any new fair
value measurements. SFAS No. 157 is effective for fiscal years beginning after
December 15, 2007. We are evaluating the impact, if any, that the adoption
of
SFAS No. 157 will have on our financial statements.
In
February 2007, the FASB issued Statement of Financial Accounting Standards
No.
159 (SFAS 159), "The Fair Value Option for Financial Assets and Financial
Liabilities". SFAS 159 permits entities to choose to measure certain financial
instruments and certain other items at fair value. Unrealized gains and losses
on items for which the fair value option has been elected are reported in
earnings. SFAS 159 is effective for fiscal years beginning after November 15,
2007. The Company does not expect to elect to apply SFAS 159 to its financial
assets and liabilities. Therefore, SFAS 159 is expected to have no impact on
the
Company's financial position and results of operations.
Effective
January 1, 2007, the Company adopted FASB Interpretation (FIN) No. 48 (FIN
No.
48), “Accounting for Uncertainty in Income Taxes”. The adoption of FIN No. 48
had no material impact on the financial position or results of operations for
the year ended December 31, 2007.
In
December 2007, the FASB issued SFAS No. 141(R), Business Combinations. SFAS
141(R) requires the acquiring entity in a business combination to record all
assets acquired and liabilities assumed at their respective acquisition-date
fair values and changes other practices under SFAS No. 141, Business
Combinations, some of which could have a material impact on how an entity
accounts for its business combinations. SFAS 141(R) also requires additional
disclosure of information surrounding a business combination. SFAS 141(R) is
effective for fiscal years beginning after December 15, 2008, and is to be
applied prospectively to business combinations for which the acquisition date
is
on or after December 15, 2008. The provisions of SFAS 141(R) will only impact
the Company if it is party to a business combination after the pronouncement
has
been adopted.
In
December 2007, the FASB issued SFAS No. 160, Noncontrolling Interest in
Consolidated Financial Statements - an amendment of ARB No. 51. SFAS 160
requires entities to report non-controlling minority interests in subsidiaries
as equity in consolidated financial statements. SFAS 160 is effective for fiscal
years beginning on or after December 15, 2008. The Company does not believe
that
SFAS 160 will have any impact on its financial position or results of operations
since none of its subsidiaries are owned by minority interests.
Use
of Estimates
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Accounting
for the Impairment of Long-Lived Assets
The
Company reviews long-lived assets for impairment whenever events or changes
in
business circumstances indicate that the carrying amount of an asset may not
be
fully recoverable. An impairment loss would be recognized when the estimated
future cash flows from the use of the asset are less than the carrying amount
of
that asset.
NOTE
2 – 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 joint venture agreement
provides that Curtom-Metalclad receives approximately 2.5% of contract revenues.
Curtom-Metalclad
is considered by us to be a Variable Interest Entity (VIE) and, as such, the
Company consolidates Curtom-Metalclad since we consider the Company to be the
primary beneficiary. At December 31, 2007, Curtom-Metalclad had assets of
$14,000 (all cash) and partners’ equity of $14,000. Curtom-Metalclad did not
have any liabilities at December 31, 2007.
NOTE
3 – ACCOUNTS RECEIVABLE
Accounts
receivable consisted of the following at December 31:
|
|
2007
|
|
2006
|
|
Billed
|
|
|
|
|
|
|
|
Completed
contracts
|
|
$
|
1,441,653
|
|
$
|
655,623
|
|
Contracts
in process
|
|
|
466,590
|
|
|
703,850
|
|
Time
and material work
|
|
|
3,555,965
|
|
|
2,421,061
|
|
Material
sales
|
|
|
3,765
|
|
|
8,784
|
|
Unbilled
retainage
|
|
|
78,916
|
|
|
278,505
|
|
|
|
|
5,546,889
|
|
|
4,067,823
|
|
Less:
Allowance for doubtful accounts
|
|
|
(80,000
|
)
|
|
(15,000
|
)
|
|
|
$
|
5,466,889
|
|
$
|
4,052,823
|
|
NOTE
4 – COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED
CONTRACTS
Costs
and
estimated earnings on uncompleted contracts consisted of the following at
December 31:
|
|
2007
|
|
2006
|
|
Costs
incurred on uncompleted contracts
|
|
$
|
8,407,635
|
|
$
|
9,963,088
|
|
Estimated
earnings (loss)
|
|
|
2,008,008
|
|
|
(23,431
|
)
|
|
|
|
10,415,643
|
|
|
9,939,657
|
|
Less
billings to date
|
|
|
(9,846,412
|
)
|
|
(9,681,029
|
)
|
|
|
$
|
569,231
|
|
$
|
258,628
|
|
The
above
information is presented in the balance sheet as follows:
|
|
2007
|
|
2006
|
|
Costs
and estimated earnings in excess of billings on uncompleted
contracts
|
|
$
|
631,625
|
|
$
|
364,981
|
|
Billings
in excess of costs and estimated earnings on uncompleted
contracts
|
|
|
(62,394
|
)
|
|
(106,353
|
)
|
|
|
$
|
569,231
|
|
$
|
258,628
|
|
NOTE
5 - INVESTMENTS IN UNCONSOLIDATED AFFILIATES
The
Company owns 384,084 shares of the common stock of Catalytic Solutions, Inc.
(“Catalytic Solutions”). Catalytic Solutions is a materials science technology
company focused on applying its technology to improve the performance and reduce
the cost of automotive catalytic converters. In November 2006, the common stock
of Catalytic Solutions began trading on the AIM market in London, England.
The
Company has determined that the AIM market is not of the breadth and scope
of
the United States markets and therefore a fair market value for the investment
is not readily determinable as required by FAS 115. Due to the lack of a readily
determinable fair market value, the Company has continued to carry the
investment at cost as an investment in an unconsolidated affiliate. In
evaluating the carrying value of our investment in Catalytic we consider whether
there has been an “impairment indicator” as discussed in Emerging Issues Task
Force 03-1 “The Meaning of Other-Than-Temporary Impairment and its Application
to Certain Investments”. We determined that there had not been an impairment
indicator during the years ended December 31, 2007 and 2006.
The
Company’s investment in Clearwire Corporation was previously accounted for under
the cost method, and was reclassified to available-for-sale securities upon
Clearwire’s initial public offering in the first quarter of 2007.
The
Company’s investments in unconsolidated affiliates consisted of the
following:
|
|
December
31,
|
|
|
|
2007
|
|
2006
|
|
Clearwire
Corporation
|
|
$
|
-
|
|
$
|
756,889
|
|
Catalytic
Solutions, Inc.
|
|
|
450,000
|
|
|
450,000
|
|
|
|
$
|
450,000
|
|
$
|
1,206,889
|
|
NOTE
6 - PROPERTY, PLANT AND EQUIPMENT
Property,
plant and equipment consist of the following:
|
|
December
31,
|
|
|
|
2007
|
|
2006
|
|
Machinery
and equipment
|
|
$
|
539,519
|
|
$
|
515,170
|
|
Leasehold
improvements
|
|
|
35,073
|
|
|
32,092
|
|
Automotive
equipment
|
|
|
619,411
|
|
|
498,414
|
|
|
|
|
1,194,003
|
|
|
1,045,676
|
|
|
|
|
|
|
|
|
|
Less
accumulated depreciation and
amortization
|
|
|
(827,049
|
)
|
|
(714,635
|
)
|
|
|
$
|
366,954
|
|
$
|
331,041
|
|
Depreciation
and amortization expense for the years ended December 31, 2007 and 2006 was
$198,239 and $171,768, respectively.
NOTE
7 – SALE OF FACILITIES
The
Company signed an agreement in December 2005 to sell its facilities in Anaheim,
California for $3,900,000. The sale of the building was completed in April
2006
and the Company recorded a gain on the sale of $1,725,000.
NOTE
8 – ACCRUED EXPENSES
Accrued
expenses consist of the following:
|
|
December
31,
|
|
|
|
2007
|
|
2006
|
|
Wages,
bonuses and taxes
|
|
$
|
677,096
|
|
$
|
374,449
|
|
Union
dues
|
|
|
462,483
|
|
|
261,022
|
|
Accounting
and legal fees
|
|
|
42,000
|
|
|
31,877
|
|
Insurance
|
|
|
61,147
|
|
|
158,094
|
|
Insurance
settlement reserve
|
|
|
375,000
|
|
|
375,000
|
|
Inventory
purchases
|
|
|
44,871
|
|
|
55,133
|
|
Other
|
|
|
196,451
|
|
|
230,507
|
|
|
|
$
|
1,859,048
|
|
$
|
1,486,082
|
|
NOTE
9 – LONG-TERM DEBT
Long-term
debt consists of various notes payable to finance companies for vehicles used
in
the ordinary course of the Company’s insulation business. The notes are
collateralized by the vehicles and bear interest at rates ranging from 0% to
8.99% for a period of 36 months with the last payment due in 2010. Principal
maturities over the next five years are as follows:
Year
ending
December
31,
|
|
|
|
|
|
|
|
2008
|
|
$
|
113,000
|
|
2009
|
|
|
89,025
|
|
2010
|
|
|
43,445
|
|
2011
|
|
|
-
|
|
2012
|
|
|
-
|
|
Totals
|
|
|
245,470
|
|
|
|
|
|
|
Less
current portion
|
|
|
(113,000
|
)
|
Long-term
portion
|
|
$
|
132,470
|
|
NOTE
10 - INCOME TAXES
The
major
deferred tax items are as follows:
|
|
December
31,
|
|
|
|
2007
|
|
2006
|
|
Assets:
|
|
|
|
|
|
|
|
Allowances
established against realization of certain assets
|
|
$
|
1,344,000
|
|
$
|
1,280,000
|
|
Net
operating loss carryforwards
|
|
|
12,145,000
|
|
|
12,527,000
|
|
Liabilities:
|
|
|
|
|
|
|
|
Accrued
liabilities and other
|
|
|
(4,000
|
)
|
|
(20,000
|
)
|
|
|
|
13,485,000
|
|
|
13,787,000
|
|
Valuation
allowance
|
|
|
(13,485,000
|
)
|
|
(13,787,000
|
)
|
|
|
$ |
- |
|
$
|
-
|
|
The
decrease in valuation allowance was $302,000 and $799,000 for the years ended
December 31, 2007 and 2006, respectively.
Income
tax computed at the U.S. federal statutory rate reconciled to the effective
tax
rate is as follows for the years ended December 31:
|
|
2007
|
|
2006
|
|
Federal
statutory tax rate
|
|
|
35.0
|
%
|
|
35.0
|
%
|
State
tax, net of federal benefit
|
|
|
5.0
|
%
|
|
5.0
|
%
|
Change
in valuation allowance
|
|
|
(44.6
|
)%
|
|
(40.9
|
)%
|
Permanent
differences
|
|
|
4.6
|
%
|
|
0.9
|
%
|
Effective
tax rate
|
|
|
0.0
|
%
|
|
0.0
|
%
|
At
December 31, 2007, the Company has available for U.S. federal income tax
purposes net operating loss carry-forwards of approximately $30,363,000. These
carryforwards expire in the years 2011 through 2025. The ultimate utilization
of
the net operating loss carryforwards may be limited in the future due to changes
in the ownership of the Company. This limitation, if applicable, has not been
determined by the Company.
The
realization of the Company’s deferred tax assets is dependent upon the Company’s
ability to generate taxable income in the future. The Company has recorded
a
100% valuation allowance against all of the deferred tax assets due to the
uncertainty regarding their realizability.
The
Company adopted FIN 48, Accounting for Uncertainty in Income Taxes - An
Interpretation of FASB Statement No. 109 effective January 1, 2007. Upon
adoption, the Company recognized no liability for unrecognized tax benefits.
The
Company’s tax returns are open to examination by tax authorities for the tax
years 2004 through 2007. The Company has elected to recognize interest on tax
deficiencies as interest expense and income tax penalties as selling, general
and administrative expense. For the year ended December 31, 2007, the Company
recognized no interest and penalties.
NOTE
11 - SHAREHOLDERS’ EQUITY
Stock
Options
On
March
24, 1993, the Company adopted an omnibus stock option plan (the “1993 Plan”)
which authorized options to acquire 100,000 shares of the Company’s common
stock. At December 31, 2007, there were options outstanding under the 1993
Plan
for 4,730 shares, and no shares available for grant. These options expire 10
years from the date of the grant. Under the terms of the plan, the Board of
Directors had the authority to grant options and other stock-based awards to
key
employees to purchase shares of the Company’s common stock. The options were
exercisable at such times, in installments or otherwise, as the Board of
Directors determined.
On
May
15, 1997, the Company adopted an omnibus stock option plan (the “1997 Plan”)
which authorized options to acquire 600,000 shares of the Company’s common
stock. At December 31, 2007, there were 450,000 options outstanding under this
plan and 150,000 options available for grant. These options expire 10 years
from
the date of the grant. Under the terms of the plan, the Board of Directors
may
grant options and other stock-based awards to key employees to purchase shares
of the Company’s common stock. The options are exercisable at such times, in
installments or otherwise, as the Board of Directors may determine.
On
November 20, 2001, the Company adopted an omnibus stock option plan (the “2000
Plan”) which authorized options to acquire 2,000,000 shares of the Company’s
stock. At December 31, 2007, there were options outstanding under the 2000
Plan
for 1,672,900 shares and 327,100 shares available for grant. These options
expire 10 years from date of grant. The terms of the 2000 Plan are the same
as
the 1997 Plan. Under the terms of the plan, the stock option committee may
grant
options and other stock-based awards to key employees and members of the board
of directors to purchase shares of the Company’s common stock. The options are
exercisable at such times, in installments or otherwise, as the stock option
committee may determine.
At
December 31, 2007, there were options that were granted outside of the stock
option plans outstanding to acquire 64,000 shares of the Company’s stock. The
options are exercisable at $15.00 per share.
The
following is a summary of options granted:
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
2006
|
|
|
|
Shares
|
|
Weighted
Average
Exercise
Price
|
|
Shares
|
|
Weighted
Average
Exercise
Price
|
|
Options
outstanding at beginning of the year
|
|
|
2,195,710
|
|
$
|
2.61
|
|
|
2,234,040
|
|
$
|
3.09
|
|
Granted
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Canceled
|
|
|
(4,080
|
)
|
|
14.08
|
|
|
(38,330
|
)
|
|
30.55
|
|
Options
outstanding at end of the year
|
|
|
2,191,630
|
|
$
|
2.59
|
|
|
2,195,710
|
|
$
|
2.61
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
Exercisable
|
|
|
2,191,630
|
|
$
|
2.59
|
|
|
2,195,710
|
|
$
|
2.61
|
|
There
is
no intrinsic value at December 31, 2007 for outstanding or exercisable
options.
Options
Outstanding
|
|
Options
Exercisable
|
|
Range
of
exercise
prices
|
|
Number
outstanding
as
of 12/31/07
|
|
Weighted
average
remaining
contractual
life
in
years
|
|
Weighted
Average
exercise
price
|
|
Number
exercisable
as
of
12/31/07
|
|
Weighted
Average
exercise
price
|
|
$0.50
|
|
|
250,000
|
|
|
1.89
|
|
$
|
0.50
|
|
|
250,000
|
|
$
|
0.50
|
|
$0.55
- $1.20
|
|
|
209,500
|
|
|
2.15
|
|
$
|
0.87
|
|
|
209,500
|
|
$
|
0.87
|
|
$2.00
|
|
|
510,000
|
|
|
3.44
|
|
$
|
2.00
|
|
|
510,000
|
|
$
|
2.00
|
|
$2.50
|
|
|
283,400
|
|
|
1.24
|
|
$
|
2.50
|
|
|
283,400
|
|
$
|
2.50
|
|
$3.00
|
|
|
870,000
|
|
|
2.39
|
|
$
|
3.00
|
|
|
870,000
|
|
$
|
3.00
|
|
$12.50
- $15.00
|
|
|
68,730
|
|
|
0.09
|
|
$
|
14.98
|
|
|
68,730
|
|
$
|
14.98
|
|
$0.50
- $15.00
|
|
|
2,191,630
|
|
|
2.33
|
|
$
|
2.59
|
|
|
2,191,630
|
|
$
|
2.59
|
|
On
November 7, 2002 the Company issued options to purchase a total of 75,000 shares
of its available-for-sale securities holdings in VioQuest Pharmaceuticals,
Inc.,
to two former and one current members of the Company’s Board of Directors. The
options, which are fully vested, have an exercise price of $1.25 per share
and
terminate on November 5, 2009.
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 various dates
through July, 2009. At December 31, 2007 and 2006, the weighted average exercise
price for warrants outstanding was $0.63.
Summarized
information for stock purchase warrants is as follows:
|
|
Number
of
Warrants
|
|
Price per share
|
|
|
|
|
|
|
|
Warrants
outstanding at December 31, 2005
|
|
|
775,000
|
|
|
$0.50 - $1.50
|
|
Cancelled
|
|
|
(675,000
|
)
|
|
$1.50
|
|
|
|
|
|
|
|
|
|
Warrants
outstanding at December 31, 2006
|
|
|
100,000
|
|
|
$0.50 - $0.75
|
|
|
|
|
|
|
|
|
|
Warrants
outstanding at December 31, 2007
|
|
|
100,000
|
|
|
$0.50
- $0.75
|
|
Common
Stock
During
the year ended December 31, 2006, the Company issued an aggregate of 50,000
shares to four members of the Company’s board of directors and to the one member
of Metalclad Insulation’s board of directors. The shares issued to the board
members had a value of $8,000, based upon the market price at the date of
issuance.
During
the year ended December 31, 2007, the Company issued an aggregate of 115,000
shares to four members of the Company’s board of directors and to the one member
of Metalclad Insulation’s board of directors. The shares issued to the board
members had a value of $18,400, based upon the market price at the date of
issuance.
NOTE
12 - EMPLOYEE BENEFIT PLANS
Effective
January 1, 1990, the Company established a contributory profit sharing and
thrift plan for all salaried employees. Discretionary matching contributions
may
be made by the Company based upon participant contributions, within limits
provided for in the plan. No Company contributions were made in the years ended
December 31, 2007 and 2006.
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. Company contributions were $717,233 and $621,106 for the years ended
December 31, 2007 and 2006, respectively.
NOTE
13 - SIGNIFICANT CUSTOMERS
Sales
for
the year ended December 31, 2007 to Jacobs Field Services North America, Inc.
were approximately $3,884,000, representing 17.4% of total revenues and to
ARB,
Inc. were approximately $4,008,000 representing 17.9% of total revenues.
Accounts receivable from Southern California Edison Company was approximately
$694,000, from ARB, Inc. was $1,516,000 and from Jacobs Field Services North
America, Inc. was approximately $992,000 at December 31, 2007.
Sales
for
the year ended December 31, 2006 to Southern California Edison Company through
our Curtom-Metalclad joint venture were approximately $2,967,000, representing
15.2% of total revenues and to JE Merit Constructors, Inc. were approximately
$3,367,000 representing 17.3% of total revenues. Accounts receivable from NRG
was approximately $571,000 at December 31, 2006 and accounts receivable from
JE
Merit Constructors, Inc. was approximately $855,000.
It
is the
nature of the Company’s business that a significant customer in one year may not
be a significant customer in a succeeding year.
NOTE
14 - COMMITMENTS AND CONTINGENCIES
Collective
Bargaining Agreements
Approximately
90% of the Company’s employees are covered under collective Bargaining
Agreements. In August, 2004 a new “Basic Agreement” was signed with Local No. 5
of the International Association of Heat and Frost Insulators and Asbestos
Workers that expires in September 2008. The new “Basic Agreement” included a
“Maintenance Agreement” as an addendum. Approximately 95% of the Company’s
hourly employees are covered by the Local No. 5 agreement. An agreement with
the
Laborers Local 300 was signed in January 2007 and expires in December 2009.
Approximately 5% of the Company’s hourly employees are covered by the Labors
Local 300 agreement.
Leases
In
February 2002, the headquarters of the Company was moved to Minneapolis,
Minnesota. The Company is leasing the Minneapolis facility on a month-to-month
basis.
Due
to
the sale of the Company’s facilities in Anaheim, California on April 20, 2006,
the Company leased the facilities back for eight months at a market rate of
$21,800 per month. In December 2006 our wholly owned subsidiary, Metalclad
Insulation Corporation, executed a lease for a facility in Fullerton,
California. The Company has leased this facility through December 31, 2011
at a
rate of $13,500 per month with yearly rent increases of approximately 3% per
year. The lease contains an option to renew for an additional five years as
defined in the agreement.
Total
rent expense under operating leases was $187,804 and $221,329 for the years
ended December 31, 2007 and 2006, respectively. The Company has future minimum
non-cancelable lease commitments of $163,000, $168,000, $173,000, $178,000
and
$183,000 in 2008, 2009, 2010, 2011 and 2012, respectively.
Litigation
Prior
to
1975, we were engaged in the sale and installation of asbestos-related
insulation materials, which has resulted in numerous claims of personal injury
allegedly related to asbestos exposure. Many of these claims are now being
brought by the children and close relatives of persons who have died, allegedly
as a result of the direct or indirect exposure to asbestos. To date, all of
the
asbestos-related injury claims have been defended and paid by our insurance
carriers.
The
number of asbestos-related cases which have been initiated naming us (primarily
our subsidiary, Metalclad Insulation Corporation) as a defendant decreased
from
232 in 2006 to 163 in 2007. At December 31, 2006 and 2007, there were,
respectively, approximately 404 and 222 cases pending. These claims are
currently defended and covered by insurance.
Set
forth
below is a table for the years ended December 31, 2006 and 2007, which sets
forth for each such period the approximate number of asbestos-related cases
filed, the number of such cases resolved by dismissal or by trial, the number
of
such cases resolved by settlement, the total number of resolved cases, the
number of filed cases pending at the end of such period, the total indemnity
paid on all resolved cases, the average indemnity paid on all settled cases
and
the average indemnity paid on all resolved cases:
|
|
2006
|
|
2007
|
|
New
cases filed
|
|
|
232
|
|
|
163
|
|
Defense
Judgments and dismissals
|
|
|
253
|
|
|
292
|
(3)
|
Settled
cases
|
|
|
82
|
|
|
53
|
|
Total
resolved cases (1)
|
|
|
335
|
|
|
345
|
|
Pending
cases (1)
|
|
|
404
|
|
|
222
|
|
Total
indemnity payments
|
|
$
|
4,858,750
|
|
$
|
7,974,500
|
|
Average
indemnity paid on settled cases
|
|
$
|
59,253
|
|
$
|
150,462
|
|
Average
indemnity paid on all resolved cases
|
|
$
|
14,504
|
|
$
|
23,114
|
|
(1)
Total
resolved cases includes, and the number of pending cases excludes, cases which
have been settled but which have not been closed for lack of final documentation
or payment.
The
number of asbestos-related claims made against the Company has reflected a
general downward trend. We believe that it is probable that this general trend
will continue, although such continuance cannot be assured. The average
indemnity paid on all resolved claims average $19,250.
We
believe that the sympathies of juries, the aggressiveness of the plaintiffs’ bar
and the declining base of potential defendants as the result of business
failures, have tended to increase payments on resolved cases. This tendency,
we
believe, has been mitigated by the declining pool of claimants resulting from
death, and the likelihood that the most meritorious claims have been ferreted
out by plaintiffs’ attorneys and that the newer cases being brought are not as
meritorious nor do they have as high a potential for damages as do cases which
were brought earlier. We have no reason to believe, therefore, that the average
future indemnity payments will increase materially in the future.
In
addition, direct defense costs per resolved claim have been approximately
$13,500 per claim.
Based
on
the general trend of reducing asbestos-related injury claims made against the
Company we projected in our Form 10-KSB filed with the Securities and Exchange
Commission for the year ended December 31, 2006 that there would be 924
asbestos-related injury claims made against the Company after December 31,
2006.
The 924, in addition to the 404 claims existing as of December 31, 2006, totaled
1,328 current and future claims. Multiplying the average indemnity per resolved
claim of $19,131, times 1,328, we projected the probable future indemnity to
be
paid on those claims after December 31, 2006 to be equal to approximately $25
million. In addition, multiplying an estimated cost of defense per resolved
claim of approximately $13,500 times 1,328, we projected the probable future
defense costs to equal approximately $18 million. Accordingly, our total
estimated future asbestos-related liability at December 31, 2006 was $43
million.
As
of
December 31, 2006, we projected that approximately 186 new asbestos-related
claims would be commenced, and approximately 237 cases would be resolved, in
2007, resulting in an estimated 353 cases pending at December 31, 2007. Although
the actual number of claims made in 2007 was 163 and the number of cases pending
as of December 31, 2007 was 222, slightly less than we anticipated, we do not
believe the differences are significant enough to re-evaluate our estimate.
In
addition, our future defense costs could be greater than projected, and such
increase could partially offset any lower projection of liability which would
result from such re-evaluation. Since we projected that an aggregate of 738
new
cases would be commenced after December 31, 2007, and that 148 of these cases
would be commenced in 2008, we estimated that an aggregate of 590 new cases
would be commenced after December 31, 2008. Accordingly, we have projected
the
cases pending and projected to be commenced in the future at December 31, 2008,
would be 897 cases. Multiplying 897 claims times the approximate average
indemnity paid and defense costs incurred per resolved claim of $32,600, we
estimated our liability for current and future asbestos-related claims at
December 31, 2008 to be approximately $29,000,000. This amounts to a $7,000,000
reduction from the $36,000,000 liability we estimated as of December 31, 2007,
or a $1,750,000 reduction per quarter in 2008.
We
have
determined that it is probable that we have sufficient insurance to provide
coverage for both current and future projected asbestos-related injury claims.
This determination assumes that the current trend of reducing asbestos-related
injury claims will continue and that the average indemnity and direct legal
costs of each resolved claim will not materially increase. The determination
also assumes that the insurance companies live up to what we believe is their
obligation to continue to cover our exposure with regards to these claims.
Several affiliated insurance companies have brought a declaratory relief action
against our subsidiary, Metalclad, as well as a number of other insurers, to
resolve certain coverage issues.
We
intend
to re-evaluate our estimate of future liability for asbestos claims at the
end
of each fiscal year, or whenever actual results are materially different from
our estimates, integrating our actual experience in that fiscal year with that
of prior fiscal years. We estimate that the effects of economic inflation on
either the average indemnity payment or the projected direct legal expenses
will
be approximately equal to a discount rate applied to our future liability based
upon the time value of money. It is probable that we have adequate insurance
to
cover current and future asbestos-related claims, although such coverage cannot
be assured.
Although
defense costs are included in our insurance coverage, we expended $215,000
and
$296,000 in 2006 and 2007, respectively, to administer the asbestos claims
and
defend the ACE Lawsuit discussed below. These amounts were primarily fees paid
to attorneys to monitor the activities of the insurers, and their selected
defense counsel, and to look after our rights under the various insurance
policies.
There
are
numerous insurance carriers which have issued a number of policies to us over
a
period extending from approximately 1967 through approximately 1985 that still
provide coverage for asbestos-related injury claims. After approximately 1985
the policies were issued with provisions which purport to exclude coverage
for
asbestos related claims. The terms of our insurance policies are complex, and
coverage for many types of claims is limited as to the nature of the claim
and
the amount of coverage available. It is clear, however, under California law,
where the substantial majority of the asbestos-related injury claims are
litigated, that all of those policies cover any asbestos-related injury
occurring during the 1967 through 1985 period when these policies were in
force.
We
have
engaged legal counsel to review all of our known insurance policies, and to
provide us with the amount of coverage which such counsel believes to be
probable under those policies for current and future asbestos-related injury
claims against us. Such legal counsel has provided us with its opinion of the
minimum probable insurance coverage available to satisfy asbestos-related injury
claims, which significantly exceeds our estimated $43 million future liability
for such claims as of December 31, 2006. Accordingly, we have included
$36,000,000 and $43,000,000 of such insurance coverage receivable as an asset
on
our 2007 and 2006 balance sheets, respectively.
On
February 23, 2005 ACE Property & Casualty Company ("ACE"), Central National
Insurance Company of Omaha ("Central National") and Industrial Underwriters
Insurance Company ("Industrial"), which are all related entities, filed a
declaratory relief lawsuit (“the ACE Lawsuit”) against Metalclad Insulation
Corporation (“Metalclad”) and a number of Metalclad's other liability insurers,
in the Superior Court of the State of California, County of Los Angeles. ACE,
Central National and Industrial issued umbrella and excess policies to
Metalclad, which has sought and obtained from the plaintiffs both defense and
indemnity under these policies for the asbestos lawsuits brought against
Metalclad during the last four to five years. The ACE Lawsuit seeks declarations
regarding a variety of coverage issues, but is centrally focused on issues
involving whether historical and currently pending asbestos lawsuits brought
against Metalclad are subject to either an "aggregate" limits of liability
or
separate "per occurrence" limits of liability. Whether any particular asbestos
lawsuit is properly classified as being subject to an aggregate limit of
liability depends upon whether or not the suit falls within the "products"
or
"completed operations" hazards found in most of the liability policies issued
to
Metalclad. Resolution of these classification issues will determine if, as
ACE
and Central National allege, their policies are nearing exhaustion of their
aggregate limits and whether or not other Metalclad insurers who previously
asserted they no longer owed any coverage obligations to Metalclad because
of
the claimed exhaustion of their aggregate limits, in fact, owe Metalclad
additional coverage obligations. The ACE Lawsuit also seeks to determine the
effect of the settlement agreement between the Company and Allstate Insurance
Company on the insurance obligations of various other insurers of Metalclad,
and
the effect of the “asbestos exclusion” in the Allstate policy. The ACE Lawsuit
does not seek any monetary recovery from Metalclad. Nonetheless, we anticipate
that we will incur attorneys fees and other associated litigation costs in
defending the lawsuit and any counter claims made against us by any other
insurers, and in prosecuting any claims we may seek to have adjudicated
regarding our insurance coverage. In addition, the ACE Lawsuit may result in
our
incurring costs in connection with obligations we may have to indemnify Allstate
under the settlement agreement. Allstate, in a cross-complaint filed against
Metalclad Insulation Corporation in October, 2005, asked the court to determine
the Company’s obligation to assume and pay for the defense of Allstate in the
ACE Lawsuit under the Company’s indemnification obligations in the settlement
agreement. The Company does not believe that it has any legal obligation to
assume or pay for such defense.
In
2003
and 2004 the Judiciary Committee of the United States Senate considered
legislation to create a privately funded, publicly administered fund to provide
the necessary resources for an asbestos injury claims resolution program, and
is
commonly referred to as the “FAIR” Act. In 2005, a draft of the “FAIR” Act was
approved by the Judiciary Committee, but the bill was rejected by the full
Senate in February 2006, when a cloture motion on the bill was withdrawn. An
amended version of the 2006 “FAIR” Act (S 3274) was introduced in the Senate in
May 2006, but has not been scheduled for a vote. A similar bill was introduced
in the House (HR 1360) in March 2005, but was referred to a subcommittee in
May
2005. The latest draft of the “FAIR” Act calls for the fund to be funded
partially by asbestos defendant companies, of which the Company is one, and
partially by insurance companies. The bill could be voted on by the Senate
or
the House at any time in the future. The impact, if any, the “FAIR” Act will
have on us if passed cannot be determined at this time although the latest
draft
of the legislation did not appear favorable to us.
In
October 1999, we completed the sale of our operating businesses and development
project located in Aguascalientes, Mexico. That sale specifically excluded
those
Mexican assets involved in the Company’s NAFTA claim which was settled in 2001.
Under the terms of the sale we received an initial cash payment of $125,000
and
recorded a receivable for $779,000, which has been fully reserved. On November
13, 2000, the Company filed a complaint in the Superior Court of California
against a former employee, the U.S. parent of the buyer and its representative
for breach of contract, fraud, collusion and other causes of action in
connection with this sale seeking damages in the form of a monetary award.
An
arbitration hearing was held in September, 2002 in Mexico City, as requested
by
one of the defendants. This arbitration hearing was solely to determine the
validity of the assignment of the purchase and sale agreement by the buyer
to a
company formed by the former employee defendant. The Superior Court action
against the U.S. parent was stayed pending the Mexican arbitration. On April
8,
2003, the arbitrator ruled that the assignment was inexistent, due to the
absence of our consent. In June 2003, the Court of Appeal for the State of
California ruled that the U.S.
parent was also entitled to compel a Mexican arbitration of the claims raised
in
our complaint. We are now prepared to pursue our claim in an arbitration
proceeding for the aforementioned damages. No assurances can be given on the
outcome.
In
a
related action, a default was entered against us in December, 2002, in favor
of
the same former employee referred to in the foregoing paragraph by the Mexican
Federal Labor Arbitration Board, for an unspecified amount. The former employee
was seeking in excess of $9,000,000 in damages as a result of his termination
as
an employee. The default was obtained without the proper notice being given
to
us, and was set aside in the quarter ended June 30, 2003. The Mexican Federal
Labor Arbitration Board rendered a recommendation on December 13, 2004, to
the
effect that the former employee was entitled to an award of $350,000 from Entrx
in connection with the termination of his employment. The award is in the form
of a recommendation which has been affirmed by the Mexican Federal Court, but
is
only exercisable against assets of the Company located in Mexico. The Company
has no material assets in Mexico. The award does not represent a collectible
judgment against the Company in the United States. Since the Company has no
material assets in Mexico, the likelihood of any liability based upon this
award
is remote, and we therefore believe that there is no potential liability to
the
Company at December 31, 2007 or 2006. The Company intends to continue to pursue
its claims against the same employee for breach of contract, fraud, collusion
and other causes of action in connection with the 1999 sale of one of the
Company’s operating businesses in Mexico.
On
May
31, 2006, we entered into a Settlement Agreement with Ventana Global
Environmental Organizational Partnership, L.P. and North America Environmental
Fund, L.P. (collectively referred to as “Ventana”) whereby Ventana agreed to pay
Entrx Corporation $1,250,000 in exchange for the dismissal with prejudice by
Entrx Corporation of the law suit (the “Ventana Action”) filed by Entrx
Corporation against Ventana and others in Orange County, California Superior
Court in November 2000. Entrx Corporation and Ventana also entered into a mutual
release of all claims each may have had against the other. In addition, Entrx
Corporation released Carlos Alberto de Rivas Oest and Geologic de Mexico S.A.
de
C.V., which were parties related to Ventana, and against whom Entrx Corporation
had claims pending in Mexico. The Settlement Agreement does not limit claims
that Entrx had or currently has against Javier Guerra Cisneros and Promotora
Industrial Galeana, S.A. de C.V., which Entrx Corporation continues to pursue
in
Mexico. Javier Guerra Cisneros and Promotora Industrial Galeana, S.A. de C.V.
were involved with the transactions which were the subject of the Ventana
Action. Entrx Corporation received approximately $925,000 net after payment
of
legal fees and expenses associated with the Ventana Action and the Settlement
Agreement.
In
August
of 2001, Metalclad Insulation Corporation purchased a workers’ compensation
policy from American Home Assurance Company (“American Home”), an American
International Group (“AIG”) company, for the period of September 1, 2001 to
September 1, 2002. The premium for the workers’ compensation policy was to be
calculated retrospectively. The American Home policy required Metalclad to
pay
an initial estimated premium, but Metalclad’s premium was recalculated
periodically, through March 1, 2006, based on actual workers’ compensation
losses incurred. Metalclad also provided American Home with collateralized
security for future premium adjustments in the form of a letter of credit and
cash.
In
November 2003, a dispute arose between Metalclad, on the one hand, and American
Home and Metalclad’s insurance broker, Meyers-Reynolds & Associates, on the
other hand regarding calculation of the first periodic premium adjustment.
Specifically, American Home employed the use of a loss development factor and
estimated payroll figure in its premium calculation which substantially
increased the premium it charged Metalclad. As a result of that dispute, another
AIG company, National Union Fire Insurance Company of Pittsburgh drew down
on
the above mentioned letter of credit. Metalclad believes that American Home’s
calculations were inconsistent with the terms of the American Home policy and
representations made by American Home and Meyers-Reynolds regarding how the
premium would be calculated. Metalclad also believes that National Union was
in
breach of the American Home policy when it drew down on the letter of
credit.
On
February 27, 2004, we filed an action in Orange County Superior Court against
American Home, National Union and Meyers-Reynolds for breach of contract, breach
of the covenant of good faith and fair dealing, declaratory relief, reformation,
injunctive relief, negligent and intentional misrepresentation and breach of
fiduciary duty. During the three months ended March 31, 2005, the Company
recorded an accrual of $75,000 related to this dispute. On May 2, 2005, we
reached a settlement in principal with American Home and National Union which
resulted in the payment by the Company to American Home of approximately $39,000
in 2005 and resulted in the Company paying an additional $45,000 in 2006, which
had been accrued at December 31, 2005. During 2006 the Company reached a
settlement with Meyers-Reynolds which resulted in the payment to the Company
by
Meyers-Reynolds of $100,000.
Insurance
Settlement
In
June
2004, Metalclad Insulation Corporation, our wholly owned subsidiary, and Entrx
Corporation, entered into a Settlement Agreement and Full Policy Release (the
“Agreement”) releasing Allstate Insurance Company from its policy obligations
for a broad range of claims arising from injury or damage which may have
occurred during the period March 15, 1980 to March 15, 1981, under an umbrella
liability policy (the “Policy”). The Policy provided limits of $5,000,000 in the
aggregate and per occurrence. Allstate claimed that liability under the Policy
had not attached, and that regardless of that fact, an exclusion in the Policy
barred coverage for virtually all claims of bodily injury from exposure to
asbestos, which is of primary concern to Metalclad Insulation Corporation.
Metalclad Insulation Corporation took the position that such asbestos coverage
existed. The parties to the Agreement reached a compromise, whereby Metalclad
Insulation Corporation received $2,500,000 in cash, and Metalclad Insulation
Corporation and Entrx Corporation agreed to indemnify and hold harmless the
insurer from all claims which could be alleged against the insurer respecting
the policy, limited to $2,500,000 in amount. Based on past experience related
to
asbestos insurance coverage, we believe that the Agreement we entered into
in
June 2004, will result in a probable loss contingency for future insurance
claims based on the indemnification provision in the Agreement. Although we
are
unable to estimate the exact amount of the loss, we believe at this time the
reasonable estimate of the loss will not be less than $375,000 or more than
$2,500,000 (the $2,500,000 represents the maximum loss we would have based
on
the indemnification provision in the Agreement). Based on the information
available to us, no amount in this range appears at this time to be a better
estimate than any other amount. The $375,000 estimated loss contingency noted
in
the above range represents 15% of the $2,500,000 we received and is based upon
our attorney’s informal and general inquiries to an insurance company of the
cost for us to purchase an insurance policy to cover the indemnification
provision we entered into. We recorded a reserve of $375,000 at the time we
entered into the Agreement and nothing has come to our attention that would
require us to record a different estimate at December 31, 2007. The ACE Lawsuit
may result in our incurring costs in connection with obligations we may have
to
indemnify Allstate under the Settlement Agreement. Allstate, in a
cross-complaint filed against Metalclad Insulation Corporation in October,
2005,
asked the court to determine the Company’s obligation to assume and pay for the
defense of Allstate in the ACE Lawsuit under the Company’s indemnification
obligations in the Settlement Agreement. The Company is taking the position
that
it has no legal obligation to assume or pay for such defense.
Other
Matters
The
Company had under contract uncompleted work at bid prices totaling approximately
$12,629,000 and $11,305,000 at December 31, 2007 and 2006, respectively.
NOTE
15 –
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION AND NON-CASH INVESTING
ACTIVITIES
Supplemental
Disclosures of Cash Flow Information
Cash
paid
for interest was $9,867 and $110,494 for the years ended December 31, 2007
and
2006, respectively.
NOTE
16 - RELATED PARTY TRANSACTIONS
In
2001,
$1,255,000 was loaned to an affiliate of Wayne W. Mills, Blake Capital Partners,
LLC (“Blake”) under a note (“Note”) secured by 500,000 shares of the Company’s
common stock and any dividends received on those shares. At the time the loan
was made, Mr. Mills was a principal shareholder of the Company, and was
subsequently elected as the Company’s President and Chief Executive Officer. In
November 2003, the Board of Directors of the Company negotiated an amendment
to
the security agreement (the “Amended and Restated Security Agreement”) which it
believed to be beneficial to the Company. The Note as amended (the “New Note”)
is in the principal amount of $1,496,370, and provided for an October 31, 2007
due date, with interest at 2% over the prime rate established by Wells Fargo
Bank, NA in Minneapolis, Minnesota, adjusted on March 1 and September 1 of
each
year, instead of the 12% rate established in the Note. Interest only was payable
commencing March 1, 2004, and at the end of each six-month period thereafter.
The New Note was with full recourse to Blake Capital Partners, which had minimal
assets, other than 350,000 shares of the Company’s common stock and 175,000
shares of VioQuest Pharmaceuticals, Inc., all of which, along with 150,000
shares of the Company’s common stock and 75,000 shares of VioQuest
Pharmaceuticals, Inc. owned by Mr. Mills, were held by the Company as collateral
for the New Note. The Amended and Restated Security Agreement, unlike the
original Security Agreement, did not require us, or permit Blake Capital
Partners or Mr. Mills, to cancel the shares of the Company’s common stock held
as collateral as full payment of the loan, or require us to apply the value
of
those cancelled shares at $2.50 per share against the principal balance of
the
amounts due. In addition, Mr. Mills has personally guaranteed the repayment
of
the New Note.
For
the
year ended December 31, 2006, we increased our reserve against the note
receivable from Blake Capital Partners, LLC (“Blake”) by $1,083,885 as a result
of the non-payment of interest, bringing the net of the note receivable less
the
reserve down to $210,000, the approximate value of the collateral securing
the
Note. In April 2007, the Company canceled 500,000 shares of the Company’s common
stock that were pledged as collateral on the New Note and applied the $115,000
value of the stock against the outstanding New Note balance. The New Note was
not repaid on the October 31, 2007 due date. As of December 31, 2007 the Company
adjusted the net book value of the New Note to $25,000, the approximate value
of
the collateral securing the New Note. The Company is exploring its opportunities
to obtain proceeds from the sale of the 250,000 shares of VioQuest
Pharmaceuticals, Inc. common stock pledged as collateral on the
note.
An
officer of the Company was employed by a corporation which received payments
for
rent and health insurance of $43,715 and $44,112 for the years ended December
31, 2007 and 2006, respectively.
In
order
to fund operations of the Company until the sale of the Company’s facilities in
Anaheim, California was completed, on February 9, 2006 the Company borrowed
$150,000 from Peter Hauser, the Company’s Chairman and Chief Executive Officer.
The promissory note evidencing the loan was due and payable 10 days following
written demand and bore interest at 2% over the prime interest rate as published
in the Wall Street Journal (9.5% at March 31, 2006). The loan was secured by
a
deed of trust on the Company’s facilities in Anaheim, California, housing the
industrial insulation services operations of the Company’s subsidiary, Metalclad
Insulation Corporation. The Company repaid the loan and accrued interest upon
the sale of the Company’s facilities in April 2006.
ITEM
8. |
CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
|
None
ITEM
8A. |
CONTROLS
AND PROCEDURES
|
Evaluation
of Disclosure Controls and Procedures
We
have
established disclosure controls and procedures to ensure that material
information relating to the Company is made known to the officers who certify
the financial statements and to other members of senior management and the
Audit
Committee of the Board.
We
conducted an evaluation, under the supervision and with the participation of
our
chief executive officer and chief financial officer of our disclosure controls
and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under
the Securities Exchange Act of 1934). Based on this evaluation our chief
executive officer and chief financial officer have concluded that, as of
December 31, 2007, our disclosure controls and procedures are
effective.
Changes
in Internal Control Over Financial Reporting
There
have been no changes in our internal controls over financial reporting for
the
three-months ended December 31, 2007 that have materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting.
Management’s
Report on Internal Controls over Financial Reporting
The
management of the Company is responsible for establishing and maintaining
adequate internal control over financial reporting. Our internal control system
was designed to provide reasonable assurance to our management and Board of
Directors regarding the preparation and fair presentation of published financial
statements.
All
internal controls over financial reporting, no matter how well designed, have
inherent limitations, including the possibility of human error and the
circumvention or overriding of controls. Therefore, even effective internal
control over financial reporting can provide only reasonable, and not absolute,
assurance with respect to financial statement preparation and presentation.
Further, because of changes in conditions, the effectiveness of internal
controls over financial reporting may vary over time.
Our
management, including our chief executive officer and chief financial officer,
assessed the effectiveness of our internal control over financial reporting
as
of December 31, 2007. In making its assessment of internal control over
financial reporting, management used the criteria set forth by the Committee
of
Sponsoring Organizations of the Treadway Commission (COSO) in
Internal Control—Integrated Framework
. Based
on our evaluation, management concluded that, as of December 31, 2007, our
internal control over financial reporting was effective based on those
criteria.
This
annual report does not include an attestation report of the Company’s
independent registered public accounting firm regarding internal control over
financial reporting. Management’s report was not subject to attestation by the
Company’s registered public accounting firm pursuant to temporary rules of the
Securities and Exchange Commission that permit the Company to provide only
management’s report in this annual report.
ITEM
8B. OTHER
INFORMATION
None
PART
III
ITEM
9. DIRECTORS,
EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION
16(a)
OF THE EXCHANGE ACT
Directors
The
name,
initial year of service as a director, age, and position or office of each
member of our board of directors, is as follows:
Name
|
|
Director Since
|
|
Age
|
|
Position
|
|
|
|
|
|
|
|
Peter
L. Hauser
|
|
2004
|
|
67
|
|
President,
Chief Executive Officer, Chairman of the Board and
Director
|
|
|
|
|
|
|
|
Joseph
M. Caldwell(1)(2)(3)
|
|
2002
|
|
40
|
|
Director
|
|
|
|
|
|
|
|
E.
Thomas Welch(4)
|
|
2004
|
|
69
|
|
Director
|
David
E. Cleveland(5)
|
|
2008
|
|
74
|
|
Director
|
(1) Member
of
the Audit Committee and Stock Option Committee since March 2003.
(2) Member
of
the Nominating Committee since April 2004.
(3) Member
of
the Compensation Committee since December 2004.
(4) Member
of
the Audit, Compensation, Nominating and Stock Option Committees since December
2004.
(5) Member
of
the Audit, Compensation and Nominating Committees since January
2008.
The
business experience, principal occupations and directorships in publicly-held
companies of the members of our board of directors are set forth
below.
Peter
L. Hauser
has been
the president and chief executive officer of Entrx Corporation since October
2004, and devotes approximately one-third of his working time to such office.
Mr. Hauser is a founder, and has been the principal owner and chairman of the
board of directors, of Health Care Financial Solutions, Inc., since March 2003.
Health Care Financial Solutions, Inc., with its office in St. Paul, Minnesota,
is engaged in the development and marketing of a health care claims
administration software system for use by third-party health care plan
administrators. Mr. Hauser was an account executive at Feltl & Company, a
Minneapolis, Minnesota securities brokerage firm, from April 2003 until June
2003, at which time he retired from the securities industry. From 1977 through
April 2003, Mr. Hauser was employed at Equity Securities Trading Co., Inc.,
a
Minneapolis, Minnesota-based securities brokerage firm (now known as The Oak
Ridge Financial Group, Inc.), where he acted as a vice president and a principal
beginning in 1993. From 1993 until 2003, Mr. Hauser was a member of the board
of
directors of GelStat Corp. (OTCBB: GSAC.OB), (formerly called “Developed
Technology Resources, Inc.”), which was previously engaged in various
enterprises in the former Soviet Union, including the distribution of airport
security equipment and the manufacture and distribution of dairy products and
snack foods. By 2003, GelStat had disposed of all of its assets relating to
its
former Soviet Union enterprises, and began engaging in the domestic production
and distribution of over-the-counter, non-prescription health care
products.
Joseph
M. Caldwell
founded
US Internet Corporation in March 1995, and since that date has served on
its board of directors. From March 1995 to May 2000 Mr. Caldwell was the chief
executive officer of US Internet Corporation. In June 2005 he became the
Vice President of Marketing for US Internet Corporation, a position he currently
holds. US Internet Corporation is a Minneapolis-based, privately held Internet
service provider, providing services in over 1,300 cities nationwide and
over 110 cities internationally. From April 2002 until June 2005, Mr. Caldwell
was the chief executive officer of Marix Technologies, Inc., and beginning
in
May, 2000, a member of its board of directors. Marix Technologies, Inc. was
a
privately held company based in Minneapolis, Minnesota that developed and
marketed software designs to facilitate and control offsite access to software
applications and information.
E.
Thomas Welch has
been
the president of BNC National Bank at its Minneapolis, Minnesota office, since
April 2005. BNC National Bank, with corporate offices in Phoenix, Arizona,
conducts banking business through 21 banks located in North Dakota, Minnesota
and Arizona. Mr. Welch was a Managing Director of the U. S. Trust Company,
at
its Minneapolis, Minnesota office, from April 2001 until March 2005, where
he
was primarily responsible for financial, risk management, compliance and
fiduciary matters. U.S. Trust Company was engaged nationally in the trust,
asset
management, investment and banking business. From 1984 until April 2001, Mr.
Welch was employed by Resource Trust Company, in Minneapolis, Minnesota, where
he acted as the president from 1988 to April 2001, in charge of private banking,
trust investment and corporate matters. Resource Trust Company and its principal
affiliated companies were acquired by U.S. Trust Company in April 2001. Mr.
Welch has a Bachelor’s degree in accounting and a J.D. degree in
law.
David
E. Cleveland
was
chairman of the Board of Associated Bank of Minnesota, in Minneapolis,
Minnesota, from March 2001 until April 2004, and President of the Board of
that
bank from March 13, 2000 until January 2001. From March 1987 until March 2000,
Mr. Cleveland was President of the Riverside Bank, in Minneapolis, Minnesota.
From April 1969 until March 1987, Mr. Cleveland served consecutively as
President of State Bank of Hudson, Hudson, Wisconsin, Riverside Community State
Bank, Minneapolis, and Resources Bank & Trust, Minneapolis. Mr. Cleveland
has been retired since April 2004.
Each
member of our Board of Directors was elected to serve until the next annual
meeting of our shareholders.
Meetings
of Board of Directors
During
the year ended December 31, 2007, the Board of Directors held 5 meetings. Each
member of the Board of Directors was present for all of the meetings except
for
Joseph M. Caldwell and Kenneth W. Brimmer, who each missed one meeting.
Committees
of Board of Directors
Audit
Committee. The
Audit
Committee has the authority and responsibilities set forth in Entrx’s Audit
Committee Charter (the “Charter”). The Charter was originally adopted in 2001
and was amended in April 2004. Under the Charter, the Audit Committee has the
authority and responsibility of (i) reviewing audited annual consolidated
financial statements, and reports and consolidated financial statements
submitted to any governmental body or disclosed to the public; (ii) consulting
with Entrx’s independent auditors on various audit and financial personnel
issues, including questions of independence, disagreement between the auditors
and Entrx’s financial personnel, reviewing of internal financial controls; (iii)
recommending to the Board of Directors the engagement of independent accountants
to audit the consolidated financial statements of Entrx, and reviewing the
performance of such accountants; (iv) reviewing and considering the
appropriateness of accounting principles or practices applied to Entrx’s
consolidated financial statements; and (v) reviewing Entrx’s financial personnel
and organization. E. Thomas Welch, a member of the Audit Committee, has been
determined to be the audit committee financial expert. Each member of the Audit
Committee is independent as that term is defined in Rule 4200 of the National
Association of Securities Dealers, Inc. The Audit Committee held four meetings
during the year ended December 31, 2007.
Compensation
Committee.
The
Compensation Committee, which consists solely of non-employee directors, has
the
obligation to adopt policies applicable to the establishment and the
compensation of Entrx’s executive officers, and has authority to consider and
recommend to the Board of Directors the salaries, bonuses, share options, and
other forms of compensation of those executive officers. The Compensation
Committee held one meeting during the year ended December 31,
2007.
Nominating
Committee.
Entrx's
Nominating Committee was initially established by resolution of the Board of
Directors in February 2002. The Board of Directors expanded and revised the
duties of the Nominating Committee by resolutions adopted in April 2004. The
Nominating Committee is charged with the responsibility to seek out and consider
the qualifications of new candidates and incumbents for election as members
of
our Board of Directors, and to recommend to the Board of Directors those persons
it believes would be suitable candidates for election or, in the case of a
vacancy, appointment, as members of our Board of Directors. The full Board
of
Directors nominates persons to be members of the Board of Directors, after
considering the recommendation of the Nominating Committee. Each member of
the
Nominating Committee is independent, as that term is defined in Rule 4200 of
the
National Association of Security Dealers, Inc. The Nominating Committee has
no
charter.
The
Nominating Committee met on two occasions by conference telephone, in June
2007
and then in August 2007, to discuss and establish its recommendations for
nominees for election to the Company’s Board of Directors, and recommended the
re-election of Peter L. Hauser, Joseph M. Caldwell and E. Thomas Welch at the
special meeting of the Company’s shareholders held in January 2008. Also
recommended to be nominated for election as a director at the January 2008
meeting, was David E. Cleveland, who was introduced to the Nominating Committee
by Mr. Welch. Mr. Cleveland was a former business associate of Mr. Welch. The
Board of Directors adopted the recommendations of the Nominating Committee,
and
all of the nominees were elected as directors at the special meeting of
shareholders held in January 2008.
We
have
found it to be difficult to find suitable candidates who would be willing to
serve as a member of the Board of Directors of a small company such as ours.
We
are looking for candidates with a good business background, preferably with
some
experience in starting or growing, and running a business. We would also
favorably entertain a candidate with a good financial background, either as
a
chief financial officer or chief executive officer of another company, or by
reason of education and experience in accounting. We would exclude any candidate
who had any criminal record, or a background which exhibited any illegal or
unethical activities, or questionable business practices.
Shareholders
are encouraged to send the resumes of persons they believe would be suitable
candidates to Joseph Caldwell, Entrx Corporation, 800 Nicollet Mall, Suite
2690,
Minneapolis, Minnesota 55402. Along with the resume of the proposed candidate,
please have the candidate provide a written consent to serve as a member of
our
Board of Directors if so elected, or to acknowledge in writing that he or she
would like to be considered for nomination.
Shareholders
are further encouraged to submit the names of proposed candidates at any time
throughout the year. We will not likely be able to consider any candidate
submitted to us for inclusion in our proxy statement for the annual meeting
to
be held in 2008, after April 30, 2008.
Stock
Option Committee.
Entrx’s
Stock Option Committee was established by resolutions adopted by the Board
of
Directors in September 2002. The Stock Option Committee, which consists solely
of independent members, has the authority to grant options to purchase common
stock of Entrx to employees and members of the Board of Directors. In granting
options to non-executive officer employees, the Stock Option Committee generally
considers the recommendation of management. In the past, the Stock Option
Committee has worked closely with, and considered the recommendations of, the
Compensation Committee in cases involving the granting of stock options to
executive officers of Entrx. The Stock Option Committee did not meet in the
year
ended December 31, 2007, and no stock options were granted.
Information
Concerning Non-Director Executive Officers
The
name,
age, position or office, and business experience of each of our non-director
executive officers is as follows:
Name
|
|
Age
|
|
Position
|
|
|
|
|
|
Brian
D. Niebur
|
|
44
|
|
Treasurer
and Chief Financial Officer
|
|
|
|
|
|
David
R. Trueblood
|
|
36
|
|
President
of Metalclad Insulation
Corporation
|
Brian
D. Niebur
has been
employed part time by Entrx as its treasurer and chief financial officer since
February 2002. At the request of Entrx’s Board of Directors, from May 2002,
until February 2003 Mr. Niebur served as chief financial officer and a member
of
the Board of Directors of Chiral Quest, Inc. (formerly Surg II, Inc.) (OTCBB:
CQST). Chiral Quest, Inc. was a 90%-owned subsidiary of Entrx until Entrx’s
shares of Chiral Quest, Inc. were spun out to Entrx’s shareholders in October
2002. Mr. Niebur has a Bachelor of Arts degree in accounting and is a CPA
(inactive). Since July 2000, Mr. Niebur has acted as a vice president and
controller for Wyncrest Capital, Inc. in Minneapolis, Minnesota, a privately
held venture capital firm. Mr. Niebur’s duties for Wyncrest Capital, Inc. have
included acting as chief financial officer and a director for Spectre Gaming,
Inc. (OTCBB: SGMG), in which Wyncrest Capital, Inc. has made an equity
investment, from January 2003 until November 2005. Spectre Gaming, Inc. is
engaged in the business of developing and marketing electronic gaming systems
for the Native American gaming market. From January 2005 until March 2007,
Mr.
Niebur’s duties for Wyncrest Capital, Inc. also included acting as Chief
Financial Officer and Secretary of Ready Credit Corporation (Pink Sheets: RCTC),
another corporation in which Wyncrest Capital, Inc. as an investment. Mr. Niebur
has acted as a member of the board of directors of Ready Credit Corporation
since January, 2005. From August 1997 until July 2000, Mr. Niebur was the
controller for Vital Images, Inc., a developer and marketer of medical
visualization and analysis software, in Plymouth, Minnesota.
David
R. Trueblood
was
elected as the President of Entrx’s wholly owned subsidiary, Metalclad
Insulation Corporation, on February 1, 2007. Mr. Trueblood replaced John J.
Macias, Metalclad Insulation Corporation’s former President, after Mr. Macias
experienced major medical problems which prevented him from continuing as
President and resulted in his taking a long-term disability leave. Mr. Trueblood
has been employed by Metalclad Insulation Corporation since November 1993,
in
various capacities. Immediately prior to his appointment as President, Mr.
Trueblood served as a Project Manager, bidding, securing and managing many
of
our most important projects.
Each
officer of Entrx and Metalclad Insulation Corporation is elected to serve at
the
discretion of the Board of Directors of each corporation.
Reporting
Under Section 16(a) of the Securities Exchange Act of 1934
Section
16(a) of the Securities Exchange Act of 1934 requires executive officers and
directors of Entrx, and persons who beneficially own more than 10 percent of
Entrx's outstanding shares of Common Stock, to file initial reports of ownership
and reports of changes in ownership of securities of Entrx with the Securities
and Exchange Commission (“SEC”) and the NASDAQ Stock Market. Officers, directors
and persons owning more than 10 percent of Entrx's outstanding Common Stock
are
required by SEC regulation to furnish Entrx with copies of all Section 16(a)
forms filed. Based solely on a review of the copies of such reports and
amendments thereto furnished to or obtained by Entrx or written representations
that no other reports were required, Entrx believes that during the year ended
December 31, 2007, all filing requirements applicable to its directors, officers
or beneficial owners of more than 10 percent of Entrx's outstanding shares
of
Common Stock were complied with, except that the
Form
3 of David Trueblood, who became the President of Entrx’s wholly owned
subsidiary, Metalclad Insulation Corporation, on February 1, 2007, was filed
on
March 23, 2007; (2) the Form 4’s of Peter Hauser, Joseph Caldwell, Kenneth
Brimmer, E. Thomas Welch and Brian Niebur, officers and directors who received
stock grants from Entrx of 45,000, 20,000, 20,000, 20,000 and 10,000 shares,
respectively, on March 9, 2007, were all filed one day late on March 12, 2007;
and (3) the Form 4’s of Wayne W. Mills, a 10% shareholder, with respect to the
disposition of his Entrx common stock were filed as follows: (i) the foreclosure
upon 500,000 shares, on April 3, 2007, held as collateral by Entrx to secure
payment of a loan, which occurred on April 3, 2007, was reported in a Form
4
filed on July 31, 2007; (ii) the sale of 95,000 shares by Mr. Mills and 25,000
shares by his spouse, over the period from August 6 to August 23, was reported
in a Form 4 filed by Mr. Mills on August 27, 2007; and (iii) the sale of 100,000
shares by Mr. Mills over the period from September 4 to September 24, 2007,
was
reported on a Form 4 filed by Mr. Mills on October 5, 2007.
Code
of Ethics
We
have
adopted a Code of Ethics which is intended to govern the conduct of our
officers, directors and employees in order to promote honesty, integrity,
loyalty and the accuracy of our financial statements. You may obtain a copy
of
the Code of Ethics without charge by writing us and requesting a copy,
attention: Brian Niebur, 800 Nicollet Mall, Suite 2690, Minneapolis, Minnesota
55402. You may also request a copy by calling us at (612) 333-0614.
ITEM
10. EXECUTIVE
COMPENSATION
Summary
Compensation Table
The
following table sets forth certain compensation information for: (i) each person
who served as the chief executive officer of Entrx at any time during the year
ended December 31, 2007, regardless of compensation level, and (ii) each of
our
other executive officers, other than the chief executive officer, serving as
an
executive officer at any time during 2007. The foregoing persons are
collectively referred to in this Form 10-KSB as the “Named Executive Officers.”
Compensation information is shown for fiscal years 2007 and 2006.
Name/Principal
Position
|
|
Year
|
|
Salary
($)
|
|
Bonus
($)
|
|
Stock
Awards
($)
|
|
Option
Awards
($)
|
|
Non-Equity
Incentive Plan
Compensation
($)
|
|
Nonqualified
Deferred
Compensation
Earnings
($)
|
|
All
Other
Compensation
($)
|
|
Total
($)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Peter
L. Hauser
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
President
and Chief Executive
|
|
|
2007
|
|
|
75,000
|
|
|
—
|
|
|
7,200
|
(4)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
82,200
|
|
Officer
|
|
|
2006
|
|
|
75,000
|
|
|
—
|
|
|
1,600
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
76,600
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Brian
D. Niebur
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Treasurer
and Chief
|
|
|
2007
|
|
|
78,750
|
|
|
15,310
|
(2)
|
|
1,600
|
(5)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
95,660
|
|
Financial
Officer
|
|
|
2006
|
|
|
75,000
|
|
|
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
75,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
David
R. Trueblood(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
President
of Metalclad
|
|
|
2007
|
|
|
126,969
|
|
|
26,021
|
(3)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
152,990
|
|
Insulation
Corporation
|
|
|
2006
|
|
|
98,416
|
|
|
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
98,416
|
|
There
are
no employment agreements between Entrx and any executive officer of Entrx or
any
subsidiary.
(1) |
On
February 1, 2007, David R. Trueblood replaced Mr. Macias as the President
of our wholly owned subsidiary, Metalclad Insulation Corporation,
as the
result of Mr. Macias’ current medical incapacity to fulfill his duties as
President.
|
(2) |
Pursuant
to an incentive plan established for Mr. Niebur, he earned bonuses
based
upon Metalclad’s net profit for 2007 and 2006, equal to $30,300 and
$15,310, respectively. The 2007 bonus was paid in 2008 and is not
included
in the table above and the 2006 bonus was paid in
2007.
|
(3) |
Pursuant
to an incentive plan established for the employees of Entrx’s subsidiary,
Metalclad Insulation Corporation, Mr. Trueblood earned a bonus based
upon
Metalclad’s net profits for 2007 and 2006, equal to $55,785 and $20,820,
respectively. $5,200 of the 2007 bonus was paid in December 2007,
with the
remaining amount paid in 2008 and is not included in the table above.
The
2006 bonus was paid in 2007.
|
(4) |
Common
stock awards of 45,000 and 10,000 valued at $7,200 and $1,600,
respectively, were granted to Mr. Hauser in 2007 and 2006, respectively,
for services as a member of the Board of Directors, and was included
in
the table above, rather than in the table headed “Director
Compensation.”
|
(5) |
A
10,000 common stock award, valued at $1,600, was granted to Mr. Niebur
in
2007, for services as a member of the Metalclad Insulation Corporation
Board of Directors.
|
Outstanding
Option Awards at Year End
The
following table provides certain information regarding unexercised options
to
purchase common stock, stock options that have not vested, and equity-incentive
plan awards outstanding at December 31, 2007, for each Named Executive
Officer.
Outstanding
Equity Awards At Fiscal Year-End
|
|
|
|
Option
Awards
|
|
Stock
Awards
|
|
|
|
Number
of Securities Underlying Unexercised Options
(#)
Exercisable
|
|
Number
of Securities Underlying Unexercised Options
(#)
Unexercisable
|
|
Equity
Incentive Plan Awards: Number of Securities Underlying Unexercised
Unearned Options (#)
|
|
Option
Exercise Price ($)
|
|
Option
Expiration Date
|
|
Number
of Shares or Units of Stock That Have Not Vested (#)
|
|
Market
Value of Shares or Units of Stock That Have Not Vested ($)
|
|
Equity
Incentive Plan Awards: Number of Unearned Shares, Units or Other
Rights
That Have Not Vested (#)
|
|
Equity
Incentive Plan Awards: Market or Payout Value of Unearned Shares,
Units or
Other Rights That Have Not Vested ($)
|
|
Peter
L. Hauser
(1)
|
|
|
200,000
10,000
|
|
|
0
0
|
|
|
0
0
|
|
$
$
|
0.50
0.55
|
|
|
10/15/09
12/31/09
|
|
|
0
0
|
|
|
n/a
n/a
|
|
|
0
0
|
|
|
0
0
|
|
Brian
D. Niebur
|
|
|
50,000
20,000
|
|
|
0
0
|
|
|
0
0
|
|
$
$
|
2.50
0.65
|
|
|
3/10/10
3/04/09
|
|
|
0
0
|
|
|
n/a
n/a
|
|
|
0
0
|
|
|
0
0
|
|
David
R. Trueblood
|
|
|
7,000
900
|
|
|
0
0
|
|
|
0
0
|
|
$
$
|
1.20
15.00
|
|
|
9/23/09
1/26/08
|
|
|
0
0
|
|
|
n/a
n/a
|
|
|
0
0
|
|
|
0
0
|
|
|
(1)
|
Not
included are 50,000 shares which Mr. Hauser may purchase under a
warrant
issued to Mr. Hauser in February 2003, before he became an employee,
director or executive officer of Entrx. The warrant was exercisable
through February 12, 2008 at $0.50 per
share.
|
Director
Compensation
The
following table sets forth the compensation paid to our directors for our fiscal
year ended December 31, 2007, excluding Entrx’s Chief Executive Officer Peter L.
Hauser, whose compensation is set forth in the Summary Compensation Table for
Named Executive Officer, set forth above.
Director
Compensation
|
|
Name
|
|
Fees
Earned or Paid in Cash
($)
|
|
Stock
Awards
(1)
($)
|
|
Option
Awards
($)
|
|
Non-Equity
Incentive Plan Compensation ($)
|
|
Nonqualified
Deferred Compensation Earnings
($)
|
|
All
Other Compensation ($)
|
|
Total
($)
|
|
Kenneth
W. Brimmer (2)(3)
|
|
|
0
|
|
|
3,200
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
3,200
|
|
Joseph
M. Caldwell (2)
|
|
|
0
|
|
|
3,200
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
3,200
|
|
David
E. Cleveland(4)
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
E.
Thomas Welch (5)
|
|
|
0
|
|
|
3,200
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
3,200
|
|
(1) |
On
March 9, 2007, the Company issued each of its three independent directors
20,000 shares of common stock. The stock was valued at $0.16 per
share,
the fair market value on March 9, 2007.
|
(2) |
At
December 31, 2007, Messrs. Brimmer and Caldwell each had exercisable
options to purchase 90,000 shares of our common stock: (i) 50,000
shares
at $2.50 per share, expiring on March 4, 2009 (with respect to Mr.
Brimmer) and June 24, 2009 (with respect to Mr. Caldwell);
(ii)
10,000 shares at $1.03 per share, which expire on December 31, 2010;
(iii)
10,000 shares at $0.80 per share, which expire on December 31, 2009;
(iv)
10,000 shares at $0.50 per share, which expire on April 10, 2010;
and (v)
10,000 shares at $0.55 per share, which expire on December 31, 2009.
|
(3)
|
Mr.
Brimmer resigned as a director of the Company on July 12,
2007.
|
(4)
|
Mr.
Cleveland was elected to the board of directors on January 28,
2008.
|
(5)
|
At
December 31, 2007, Mr. Welch had exercisable options to purchase
25,000
shares of our common stock at $0.55 per share, expiring on December
31,
2009.
|
ITEM
11. SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS
Share
Ownership of Officers and Directors
The
following table sets forth certain information as of February 29, 2008, with
respect to the shares of common stock beneficially owned by: (i) each director;
(ii) each executive officer; and (iii) all current executive officers
(regardless of salary and bonus level) and directors as a group. The address
for
each shareholder is 800 Nicollet Mall, Suite 2690, Minneapolis, MN 55402, except
for Mr. Trueblood whose address is 1818 East Rosslynn Avenue, Fullerton, CA
92831. Unless otherwise indicated, the shareholders listed in the table below
have sole voting and investment powers with respect to the shares
indicated:
Name
of Beneficial Owner
|
|
Number
of
Common
Shares
Beneficially
Owned
|
|
Percentage
of
Outstanding
Shares
(7)
|
|
Peter
L. Hauser
|
|
|
987,075
|
(1)
|
|
12.6
|
%
|
Joseph
M. Caldwell
|
|
|
130,000
|
(2)
|
|
1.7
|
%
|
David
E. Cleveland
|
|
|
10,000
|
|
|
*
|
|
E.
Thomas Welch
|
|
|
65,000
|
(3)
|
|
*
|
|
Brian
D. Niebur
|
|
|
80,000
|
(4)
|
|
1.0
|
%
|
David
R. Trueblood
|
|
|
7,000
|
(5)
|
|
*
|
|
All
executive officers and directors as a group (6 persons)
|
|
|
1,279,075
|
(6)
|
|
15.9
|
%
|
____________________
(1)
|
Includes
210,000 shares that Mr. Hauser may acquire upon the exercise of
outstanding stock options.
|
(2)
|
Includes
90,000 shares that Mr. Caldwell may acquire upon the exercise of
outstanding stock options.
|
(3)
|
Includes
25,000 shares that Mr. Welch may acquire upon the exercise of outstanding
stock options. Includes 40,000 shares held in a revocable trust for
the
benefit of Mr. Welch’s spouse.
|
(4)
|
Includes
70,000 shares which Mr. Niebur may acquire upon the exercise of
outstanding stock options.
|
(5)
|
Includes
7,000 shares which Mr. Trueblood may acquire upon the exercise of
outstanding stock options.
|
(6)
|
Assumes
that each shareholder listed exercised all options available to that
person which would vest as of April 29,
2008.
|
(7)
|
The
percentage of outstanding shares of common stock as shown in the
table
above is calculated on 7,656,147 shares outstanding, as of February
29,
2008, plus it assumes in each case that the shareholder exercised
all
vested options available to that person as of April 29,
2008.
|
Share
Ownership of Certain Beneficial Owners
The
following table sets forth the name, address, number of shares of Entrx's common
stock beneficially owned, and the percentage of the outstanding shares of common
stock such shares represent, of each person or group of persons, known by Entrx
to beneficially own more than 5% of Entrx's outstanding common stock as of
February 29, 2008. Unless otherwise indicated, the shareholders listed in the
table below have sole voting and investment powers with respect to the shares
indicated:
Name
and Address
of
Beneficial Owner
|
|
Number
of
Common
Shares
Beneficially
Owned
|
|
Percentage
of
Outstanding
Shares
(6)
|
|
Peter
L. Hauser
16913
Kings Court
Lakeville,
MN 55044
|
|
|
987,075
|
(1)
|
|
12.6
|
%
|
Wayne
W. Mills
2125
Hollybush Road
Medina,
MN 55340
|
|
|
800,000
|
(2)
|
|
10.4
|
%
|
Grant
S. Kesler
3739
Brighton Point Drive
Salt
Lake City, UT 84121
|
|
|
764,335
|
(3)
|
|
9.2
|
%
|
Anthony
C. Dabbene
26921
Magnolia Court
Laguna
Hills, CA 92653
|
|
|
487,200
|
(4)
|
|
6.0
|
%
|
George
W. Holbrook, Jr.
1157
S.W. 30th
Street
Suite
E
Box
1938
Palm
City, FL 34991
|
|
|
451,615
|
(5)
|
|
5.9
|
%
|
James
R. McGoogan
1157
S.W. 30th
Street
Suite
E
Box
1938
Palm
City, FL 34991
|
|
|
387,740
|
(5)
|
|
5.1
|
%
|
Bradley
Resources Company
1157
S.W. 30th
Street
Suite
E
Box
1938
Palm
City, FL 34991
|
|
|
376,255
|
(5)
|
|
4.9
|
%
|
____________________
(1)
|
Includes
10,000 shares which Mr. Hauser may purchase under currently exercisable
options at $0.55 per share and 200,000 shares which Mr. Hauser may
purchase under currently exercisable options at $0.50 per share.
|
(2)
|
As
reported in a Schedule 13 D/A on October 10, 2007, includes 50,000
shares
which are owned by Blake Capital Partners, LLC, which is owned by
Mr.
Mills, 400,000 shares which are owned by Mr. Mills Individual Retirement
Account, 50,000 shares which Mr. Mills may purchase under currently
exercisable options at prices ranging from $0.50 to $2.50 per
share.
|
(3)
|
Includes
620,000 shares which Mr. Kesler may purchase under currently exercisable
options at prices ranging from $2.00 to $3.00 per
share.
|
(4)
|
Includes
450,000 shares which Mr. Dabbene may purchase under currently exercisable
options at prices ranging from $2.00 to $3.00 per
share.
|
(5)
|
As
reported in a Form 13-G on January 7, 2005, Messrs.
Holbrook and McGoogan beneficially own 75,360 and 11,485 shares,
respectively, of our common stock and are both partners of Bradley
Resources Company with shared voting and dispositive power with respect
to
the 376,255 shares owned by Bradley Resources Company. Included in
the
shares owned by Mr. Holbrook is a warrant to purchase 50,000 shares.
Bradley Resources Company, Mr. Holbrook and Mr. McGoogan may be considered
to be a “group” as defined under Rule 13d-5 of the Securities Exchange Act
of 1934, with the power to vote and dispose of an aggregate of 451,615
shares of our common stock, or 5.9% of our common
stock.
|
(6)
|
The
percentage of outstanding shares of common stock shown in the table
above
is calculated based upon 7,656,147 shares outstanding as of the close
of
business February 29, 2008, plus it assumes in each case that the
shareholder exercised all options available to that person that would
vest
within 60 days thereafter.
|
Equity
Compensation Plan Information
The
following table sets forth as of December 31, 2007, the total number of shares
of our common stock which may be issued upon the exercise of outstanding stock
options and other rights under compensation plans approved by the shareholders,
and under compensation plans not approved by the shareholders. The table also
sets forth the weighted average purchase price per share of the shares subject
to those options, and the number of shares available for future issuance under
those plans.
Plan
Category
|
|
Number
of securities to be issued upon exercise of outstanding options and
warrants
|
|
Weighted-average
exercise price of outstanding options and warrants
|
|
Number
of securities remaining available for future issuance under equity
compensation plans (excluding securities reflected in column
(a))
|
|
Equity
compensation plans approved by security holders
|
|
|
2,127,630
|
(1)
|
$
|
2.22
|
|
|
477,100
|
|
Equity
compensation plans not approved by security holders
|
|
|
164,000
|
(2)
|
$
|
6.23
|
|
|
None
|
|
Total
|
|
|
2,291,630
|
|
$
|
2.50
|
(3)
|
|
477,100
|
|
____________________
(1)
|
Options
for 1,672,900 shares have been granted under Entrx’s 2000 Omnibus Stock
Option and Incentive Plan (the “2000 Plan”) which was approved by Entrx’s
shareholders. The remaining options for 454,730 shares were granted
under
similar plans which were previously adopted and approved by the
shareholders, and which have been
terminated.
|
(2)
|
Options
for 64,000 shares were granted in February 1998 to two employees.
The
options are exercisable at $15.00 per share. Warrants for 100,000
shares
have been issued from February 2003 through December 31, 2006, to
two
persons in connection with various financings, services and concessions.
The warrants are exercisable at prices ranging from $0.50 to $0.75
per
share, some of which are subject to price adjustments under the
anti-dilution provisions of the
warrants.
|
(3)
|
The
prices at which all options and warrants are exercisable range from
$0.50
to $15.00 per share.
|
ITEM
12. CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS
Loan
to Affiliate of Wayne Mills
On
December 10, 2001, Entrx loaned Blake Capital Partners, LLC (“Blake Capital”), a
Minnesota limited liability company, $1,250,000 under a non-recourse secured
note (the “Note”). Blake Capital is wholly owned by Wayne W. Mills who later
became a director, President and Chief Executive Officer of Entrx on February
13, 2002. The Note with interest at the rate of 6% per annum, was due June
10,
2002. Blake Capital had the right to extend the due date of the Note for up
to
90 days, and on June 10, 2002, exercised that right. During the 90-day extension
period and beyond, the rate of interest increased to 12% per annum. The Note
was
not repaid on the extended due date of September 8, 2002.
As
security for the loan, Mr. Mills pledged 500,000 shares of Entrx's common stock,
under the terms of a pledge agreement (the “Pledge Agreement”) dated as of
December 10, 2001. In October 2002, Entrx spun off shares of Chiral Quest,
Inc.,
now known as VioQuest Pharmaceuticals, Inc. (OTCBB: VQPH), common stock as
a
dividend to its shareholders, on the basis of one share of VioQuest
Pharmaceuticals, Inc. (then Chiral Quest, Inc.) common stock for each two shares
of Entrx common stock held as of October 11, 2002. Prior to the dividend,
VioQuest Pharmaceuticals, Inc. was a 90% owned subsidiary of Entrx. As a result
of the dividend, Mr. Mills received 250,000 shares of the common stock of
VioQuest Pharmaceuticals, Inc., which were added to the 500,000 shares of
Entrx’s common stock held as collateral for the loan.
The
Pledge Agreement provided that Mr. Mills would retain voting power over the
collateralized shares until such shares are either cancelled or sold to satisfy
the loan under the terms of the Note and Pledge Agreement. To satisfy its
obligations under the Note, all or a portion of the 500,000 shares of Entrx
common stock, or 250,000 shares of VioQuest Pharmaceuticals, Inc. common stock,
could have been sold at the direction of Blake Capital, in which case the
proceeds of such sale would have been applied against the principal and interest
due under the Note. The terms of the Note also provided that Blake Capital
could
request that the Entrx shares be cancelled, in which case they could have
carried a value of $2.50 per share which would be applied against the amount
due
under the Note. If the Note was in default, Entrx could have cancelled the
shares at a value of $2.50 per share, and apply the amount cancelled against
the
principal and interest due under the Note. Although the Pledge Agreement was
not
clear, Entrx took the position that the $2.50 value related to one share of
Entrx common stock and one-half share of VioQuest Pharmaceuticals, Inc. common
stock.
Since
the
Note was non-recourse to Blake Capital, neither Blake Capital nor Mr. Mills
had
any personal liability under the Note, except for the interest on the Note,
and
Entrx's only recourse for repayment of the Note was the 500,000 shares of Entrx
common stock, and 250,000 shares of VioQuest Pharmaceuticals, Inc. common stock,
pledged as security. The market value of the stock held as collateral has never
exceeded the principal balance of the Note since it became due.
Modification
of Loan to Affiliate of Wayne Mills
The
Sarbanes-Oxley Act of 2002 was adopted on August 1, 2002, while the loan to
Blake Capital Partners, as discussed in the foregoing section entitled “Loan to
Affiliate of Wayne W. Mills,” was outstanding. Under Section 402 of the
Sarbanes-Oxley Act, it is unlawful for any company registered under Section
12
of the Securities Exchange Act of 1934 to make a personal loan to any directors
or executive officers of that company. The provision also provides that a loan
outstanding on the date of the enactment of Section 402 is not in violation
of
that provision, provided that there is no material modification to any terms
of
the loan after such enactment. The independent members of the Board of
Directors, taking into consideration the purpose and policy of Section 402,
have
concluded that the prohibition against any modification to the loan to Mr.
Mills
would not be applicable where the modification was, in their reasonably
exercised determination, on balance materially beneficial to Entrx.
Accordingly,
for several months beginning in August 2003, the independent members of Entrx’s
Board of Directors, constituting the Audit Committee, negotiated an amendment
to
the Note and Pledge Agreement with Blake Capital Partners and Mr. Mills, which
culminated in the execution of an amendment to the Pledge Agreement (the
“Amended and Restated Pledge Agreement”) which they believed to be beneficial to
Entrx. The Note as amended (the “New Note”) in the principal amount of
$1,496,370, provided for an October 31, 2007 due date, with interest at 2%
over
the prime rate established by Wells Fargo Bank, NA in Minneapolis, Minnesota,
adjusted on March 1 and September 1 of each year, instead of the 12% rate
established in the Note. Interest only was payable commencing March 1, 2004,
and
at the end of each six-month period thereafter. The New Note had full recourse
to Blake, which had minimal assets, other than 500,000 common shares of the
Company’s common stock and 250,000 shares of VioQuest Pharmaceuticals, Inc., all
of which were being held by the Company as collateral for the New Note. The
Amended and Restated Pledge Agreement did not require Entrx, nor permit Blake
or
Mr. Mills, to cancel the shares of Entrx’s common stock, and require Entrx to
apply the value of those cancelled shares at $2.50 per share, to be applied
against the principal balance of the amounts due. In addition, Mr. Mills
personally guaranteed the repayment of the New Note. Other financial obligations
of Mr. Mills have materially impaired his ability to fulfill his obligations
as
a guarantor of the New Note.
Blake
Capital failed to pay the interest due under the New Note on September 1, 2006,
and Mr. Mills has recently indicated to the Company that he is currently unable
to fulfill his obligations under the guarantee of the New Note. Accordingly,
on
January 4, 2007, consistent with authority given by the Board of Directors,
the
Company gave notice to Blake and Mr. Mills that it was declaring the New Note
to
be in default, and intended to foreclose on the 500,000 shares of the Company
held as collateral, by cancelling those shares. In April 2007, the Company
canceled 500,000 shares of the Company’s common stock that were pledged as
collateral on the New Note and applied the $115,000 value of the stock against
the outstanding New Note balance. The New Note was not repaid on the October
31,
2007 due date. The Company is exploring its opportunities to obtain proceeds
from the sale of the 250,000 shares of VioQuest Pharmaceuticals, Inc. common
stock pledged as collateral on the note.
ITEM
13. EXHIBITS
(a)
The
following exhibits are being filed with this Annual Report on Form 10-KSB and/or
are incorporated by reference therein in accordance with the designated footnote
references:
3.
|
Restated
and Amended Certificate of Incorporation and Bylaws of the Company, and
all amendments thereto. (1)
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|
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3.2
|
Amended
and Restated Bylaws adopted February 14, 2002. (2)
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|
|
3.3
|
Certificate
of Amendment to Certificate of Incorporation effective June 25, 2002.
(3)
|
|
|
4.1
|
Form
of Certificate for Common Stock. (4)
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|
|
10.1
|
Form
of 1993 Omnibus Stock Option and Incentive Plan. (5)
|
|
|
10.2
|
Form
of 1996 Omnibus Stock Option and Incentive Plan. (6)
|
|
|
10.3
|
Form
of 2000 Omnibus Stock Option and Incentive Plan. (7)
|
|
|
10.4
|
Curtom-Metalclad
Partnership Agreement and Amendment. (8)
|
|
|
10.5
|
Secured
Promissory Note of Blake Capital Partners and Guarantee of Wayne
W. Mills
dated November 1, 2003. (9)
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|
|
10.6
|
Amended
and Restated Security and Pledge Agreement between Blake Capital
Partners,
Wayne W. Mills, Entrx Corporation and the escrow agent, Bruce Haglund,
dated November 1, 2003. (10)
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|
|
10.7
|
Pledge
Agreement between the Company and Pandora Select Partners L.P. dated
December 3, 2003. (11)
|
|
|
10.8
|
Settlement
Agreement and Full Policy Release between the Company and one of
its
insurers dated June 22, 2004. (12)
|
|
|
10.9
|
Exchange
Agreement between the Company and Pandora Select Partners, L.P. dated
November 23, 2005. (13)
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|
|
10.10
|
Amended
and Restated Promissory Note, dated January 16, 2006, issued by the
Company to Pandora Select Partners, L.P. to replace secured Convertible
Promissory Note. (14)
|
|
|
10.11
|
Settlement
Agreement between the Company and Ventana Global Environmental
Organizational Partnership, L.P. and North America Environmental
Fund,
L.P. dated May 31, 2006. (15)
|
|
|
14.
|
Code
of Ethics (16)
|
|
|
21.
|
List
of Subsidiaries of the Registrant. (17)
|
|
|
31.1
|
Rule
13a-14(a) Certification of Chief Executive Officer.
|
|
|
31.2
|
Rule
13a-14(a) Certification of Chief Financial Officer.
|
|
|
32.
|
Section
1350 Certification.
|
(1)
|
Filed
with the Company’s Annual Report on Form 10-K for the year ended December
31, 1997 and incorporated herein by this
reference.
|
(2)
|
Filed
with the Company's Form 8-K on February 28, 2002 as Exhibit (v) and
incorporated herein by this
reference.
|
(3)
|
Filed
with the Company’s Annual Report on Form 10-K for the year ended December
31, 2002 as Exhibit 3.2 and incorporated herein by this
reference.
|
(4)
|
Filed
with the Company’s Annual Report on Form 10-K for the year ended December
31, 2002 as Exhibit 4.1 and incorporated herein by this
reference.
|
(5)
|
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.
|
(6) |
Filed
with the Company’s Proxy Statement dated April 17, 1997 and incorporated
herein by this reference.
|
(7)
|
Filed
with the Company’s Proxy Statement dated October 20, 2000 and incorporated
herein by this reference.
|
(8)
|
Filed
with the Company’s Annual Report on Form 10-K for the year ended December
31, 2001 as Exhibit 10.20 and incorporated herein by this
reference.
|
(9)
|
Filed
with the Company’s Quarterly Report on Form 10-Q for the period ended
September 30, 2003 as Exhibit 10.2 and incorporated herein by this
reference.
|
(10)
|
Filed
with the Company’s Quarterly Report on Form 10-Q for the period ended
September 30, 2003 as Exhibit 10.3 and incorporated herein by this
reference.
|
(11)
|
Filed
with the Company’s Annual Report on Form 10-K, for the year ended December
31, 2003, on March 24, 2004 as exhibit 10.23 and incorporated herein
by
reference.
|
(12)
|
Filed
with the Company's Form 8-K on June 25, 2004 as Exhibit 10.1 and
incorporated herein by this
reference.
|
(13)
|
Filed
with the Company’s Annual Report on Form 10-K, for the year ended December
31, 2005, on May 22, 2006 as exhibit 10.9 and incorporated herein
by
reference.
|
(14)
|
Filed
with the Company’s Annual Report on Form 10-K, for the year ended December
31, 2005, on May 22, 2006 as exhibit 10.10 and incorporated herein
by
reference.
|
(15)
|
Filed
with the Company's Form 8-K on June 2, 2006 as Exhibit 1 and incorporated
herein by this reference.
|
(16)
|
Filed
with the Company’s Annual Report on Form 10-K, for the year ended December
31, 2003, on March 24, 2004 as exhibit 14 and incorporated herein
by
reference.
|
(17)
|
Filed
with the Company's Annual Report on Form 10-K, for the year ended
December
31, 2003, on March 24, 2004 as exhibit 21 and incorporated herein
by
reference.
|
ITEM
14. PRINCIPAL
ACCOUNTANT FEES AND SERVICES
Auditors
On
April
16, 2002, upon the recommendation and approval of the Audit Committee, Entrx
engaged Virchow, Krause & Company, LLP (“Virchow Krause”), certified public
accountants with an office in Minneapolis, Minnesota, to audit Entrx’s
consolidated financial statements for 2002 and to perform other appropriate
accounting services for Entrx as needed. Entrx had not previously engaged
Virchow Krause on any matter. Virchow Krause was engaged directly by the Audit
Committee to provide its services with respect to Entrx’s 2003, 2004, 2005, 2006
and 2007 fiscal years.
Audit
Fees
Virchow
Krause billed Entrx $73,900 and $82,058 for the annual audit of Entrx’s
consolidated financial statements, and the review of Entrx’s consolidated
financial statements included in Entrx’s quarterly reports on Form 10Q filed
with the Securities and Exchange Commission, for the 2006 and 2007 fiscal years,
respectively.
Audit-Related
Fees
Virchow
Krause billed Entrx $12,050 and $0 for assurance and related services provided
to Entrx that are not included under the caption “Audit Fee” above, and were
reasonably related to the performance of its audit or review of Entrx’s
financial statements for the 2006 and 2007 fiscal year, respectively. Such
services were provided in connection with review of a Form S-2 registration
statement filing in April, 2004 and responses to SEC comment letters directed
to
the Company in connection with such filing.
Tax
Fees
Virchow
Krause billed Entrx $13,610 and $16,370 for services in connection with tax
compliance, tax advice and tax planning for the 2006 and 2007 fiscal years,
respectively. The services billed for in 2006 and 2007 were in connection with
the preparation of Entrx’s federal and state income tax returns.
All
Other Fees
No
such
services were provided or billed in 2006 or 2007.
Approval
by Audit Committee
According
to Entrx’s Audit Committee charter, all services provided to Entrx by its
independent auditors must be pre-approved by the Audit Committee. The Audit
Committee pre-approved of the engagement of Virchow Krause related to (i) the
audit of the consolidated financial statements of Entrx for 2006 and 2007,
and
to provide its report thereon, (ii) the preparation of our 2006 and 2007 federal
and state income tax returns, (iii) the review of our quarterly reports on
Form
10Q filed in 2006 and 2007, and (iv) review of a Form S-2 registration statement
filing and assistance with responses to SEC comment letters on the Form S-2
filing. No other services, other than those set forth in the foregoing sentence,
were performed by Virchow Krause on our behalf in 2006 or 2007.
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.
ENTRX
CORPORATION
|
|
|
By:
|
/s/
Brian D. Niebur
|
|
Brian
D. Niebur
|
|
Chief
Financial Officer
|
|
Date:
March 14, 2008
|
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/
Peter L. Hauser
|
|
Chief
Executive Officer and Chairman
|
|
March
14, 2008
|
Peter
L. Hauser
|
|
(Principal
Executive Officer)
|
|
|
|
|
|
|
|
/s/
Brian D. Niebur
|
|
Chief
Financial Officer
|
|
March
14, 2008
|
Brian
D. Niebur
|
|
(Principal
Financial and Accounting Officer)
|
|
|
|
|
|
|
|
/s/
Joseph M. Caldwell
|
|
Director
|
|
March
14, 2008
|
Joseph
M. Caldwell
|
|
|
|
|
|
|
|
|
|
/s/
David E. Cleveland
|
|
Director
|
|
March
14, 2008
|
David
E. Cleveland
|
|
|
|
|
|
|
|
|
|
|
|
Director
|
|
March
14, 2008
|
E.
Thomas Welch
|
|
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