Unassociated Document
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-K
(Mark
One)
x
ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934
For the
fiscal year ended December 31, 2008
Commission
File Number 0-2000
Entrx
Corporation
(Exact
name of registrant as specified in its charter)
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Delaware
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95-2368719
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(State or other jurisdiction of
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(I.R.S. Employer ID No.)
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incorporation or organization)
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800 Nicollet Mall, Suite 2690
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Minneapolis, Minnesota
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55402
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(Address of Principal Executive Office)
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(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:
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Name
of each exchange
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Title of each class
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on which registered
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None
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None
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Securities
registered pursuant to Section 12(g) of the Act:
Common
Stock — $.10 Par Value
(Title
of Class)
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Exchange Act. Yes ¨ No
x
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or 15(d) of the Exchange Act. Yes ¨ No
x
Indicate
by check mark whether registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes x No
¨
Indicate by check mark if disclosure of
delinquent filers in response to Items 405 of Regulation S-K (§229.405 of this
chapter) is not contained herein, and will not be contained, to the best of
registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of the Form 10-K or any amendment to this
Form 10-K. ¨
Indicate by checkmark whether the
registrant is a large accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company.
Large accelerated filer ¨ Accelerated
filer ¨
Non-accelerated
filer ¨ Smaller
reporting Company x
Indicate
by checkmark whether the registrant is a shell company (as defined by Rule 12b-2
of the Exchange Act). Yes ¨ No
x
The
aggregate market value of the common stock held by non-affiliates of the
registrant as of March 3, 2009 was approximately $881,279 based on the average
of the closing bid and asked price of the registrant’s common stock on such
date. All executive officers, directors and 10% or more beneficial
owners of the registrant’s common stock have been deemed, solely for the purpose
of the foregoing calculation, “affiliates” of the registrant.
As of
March 11, 2009, there were 7,656,147 shares of the registrant’s common stock,
$.10 par value, issued and outstanding.
All
statements, other than statements of historical fact, included in this Form
10-K, including without limitation the statements under “Management’s Discussion
and Analysis of Financial Condition and Results of Operations” and “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-K. Such
potential risks and uncertainties include, without limitation; estimates of
future revenues; 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; the imposition of laws or regulations relating to asbestos related
injury claims; 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-K and the Company assumes no obligation to update the
forward-looking statements or to update the reasons actual results could differ
from those projected in such forward-looking statements. Therefore,
readers are cautioned not to place undue reliance on these forward-looking
statements. 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 10K 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
40 years, the Company and its predecessors have been providing insulation
installation, maintenance and removal services, 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 painting and other trades not performed
by Metalclad Insulation as well as performing some of the
scaffolding. 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/Asbestos Hazard Emergency Response Act refresher course
annually. At December 31, 2008, two of our full-time salaried
employees and 72 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," submitted 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, 2008 for Curtom-Metalclad projects were
approximately $2,082,000 or 7.5% of our revenue, compared to $1,738,000 or 7.8%
of revenue in 2007. The revenues and gross profit from the
subcontracts we performed for Curtom-Metalclad over the past two years were not
significant to us in the past, and we do not anticipate they will be significant
in the future. 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 2008, Jacobs Field Services North America, Inc.,
Black & Veatch and BP West Coast Products LLC accounted for 18.0%, 12.0% and
11.3% of our revenues, respectively. We cannot project whether a
significant portion of our revenues will be derived from these customers in
2009. 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 11 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, 2008 and December 31, 2007 was
approximately $8,727,000 and $12,629,000, 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
49% 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, 2008 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 $15,000,000.
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.
We have
closely monitored the trend of asbestos related injury claims made against the
Company over the past eight years. That trend, on a year to year
basis has been somewhat erratic, particularly over the past three years, but has
been generally downward over the past eight year period. Based on
this general downward trend we project that 877 asbestos-related injury claims
will be made against the Company in the future, in addition to the 271 claims
existing as of December 31, 2008, totaling 1,148 claims. Multiplying
the average indemnity paid per resolved claim over the past eight years of
$20,900, by 1,148, we project the probable future indemnity to be paid on those
claims to be equal to approximately $24 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 $18,500 by
1,148, we project the probable future defense costs to equal approximately
$21.25 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 $45,250,000 liability
for such claims at December 31, 2008.
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. The
ACE Lawsuit is principally about coverage responsibility among the several
insurers, as well as total coverage. Regardless of the outcome of
this litigation, Entrx does not believe that the ACE Lawsuit will result in
materially diminishing Entrx’s insurance coverage for asbestos-related
claims. 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, but has accrued $375,000 to cover
potential indemnification obligations. Based upon information known
to date, the Company is unable to predict to what extent its indemnification
obligations are reasonably possible to vary from the amounts
accrued.
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 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. 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.
If
Allstate is required to provide indemnity for Entrx’s asbestos-related lawsuits,
it is likely that Entrx would have to indemnify Allstate for asbestos-related
claims that it defends up to $2,500,000 in the aggregate. If Allstate
is not required to provide indemnity, Entrx would have no liability to
Allstate. Entrx has accrued $375,000 as a potential loss in
connection with the Allstate matter and nothing has come to our attention that
would require us to record a different estimate at December 31,
2008.
Employees
As of
December 31, 2008, we had two part-time salaried employees in our executive
offices and 17 full-time salaried employees in our insulation business in
California, for a total of 19 employees. These included three
executive officers, project managers/estimators, purchasing, accounting, and
office staff.
As of
December 31, 2008, our subsidiary, Metalclad Insulation Corporation, employed
approximately 136 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, many of the trade union agreements we are a
party to include no strike, no work stoppage provisions. The
Company’s subsidiary, Metalclad Insulation Corporation, is one of a group of
employers with a collective bargaining agreement with Local No. 5 -
International Association of Heat and Frost Insulators and Asbestos Workers
("Local No. 5"). Our “Basic Agreement” with Local No. 5 of the
International Association of Heat and Frost Insulators and Asbestos Workers
expired in September 2008. The “Basic Agreement” included a
“Maintenance Agreement” as an addendum. Metalclad Insulation
Corporation and the other employers have agreed with the negotiating
representatives of Local No. 5 for an extension of the expired contract while
the parties continue their efforts to establish a new agreement. Such
extension is subject to termination upon 72 hour notice. We continue
to negotiate with Local 5 for a new Basic Agreement. Negotiations
seem to center around issues of compensation and the length of the new
contract. 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 1,400 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. We believe that the
properties currently 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 have fluctuated
from 265 in 2004, to 199 in 2005, to 232 in 2006, to 163 in 2007, and to 187 in
2008. At December 31, 2004, 2005, 2006 and 2007, there were,
respectively, approximately 710, 507, 404 and 222 cases pending. As
of December 31, 2008, there were 271 cases pending. These claims are
currently defended and covered by insurance.
Set forth
below is a table for the years ended December 31, 2004, 2005, 2006, 2007 and
2008 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:
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
New
cases filed
|
|
|
265 |
|
|
|
199 |
|
|
|
232 |
|
|
|
163 |
|
|
|
187 |
|
|
Defense
judgments and dismissals
|
|
|
311 |
|
|
|
294 |
(3) |
|
|
253 |
|
|
|
292 |
(3) |
|
|
109 |
|
|
Plaintiff
judgments and Settled cases
|
|
|
97 |
|
|
|
108 |
|
|
|
82 |
|
|
|
53 |
|
|
|
29 |
|
|
Total
resolved cases (1)
|
|
|
408 |
|
|
|
402 |
(3) |
|
|
335 |
|
|
|
345 |
(3) |
|
|
138 |
|
|
Pending
cases (1)
|
|
|
710 |
|
|
|
507 |
(2,3) |
|
|
404 |
|
|
|
222 |
(3) |
|
|
271 |
|
|
Total
indemnity payments
|
|
$ |
6,366,750 |
|
|
$ |
8,513,750 |
|
|
$ |
4,858,750 |
|
|
$ |
7,974,500 |
|
|
$ |
7,582,550 |
|
|
Average
indemnity paid on plaintiff judgments and settled cases
|
|
$ |
65,637 |
|
|
$ |
78,831 |
|
|
$ |
59,253 |
|
|
$ |
150,462 |
|
|
$ |
261,467 |
|
|
Average
indemnity paid on all resolved cases
|
|
$ |
15,605 |
|
|
$ |
21,178 |
(2) |
|
$ |
14,504 |
|
|
$ |
23,114 |
|
|
$ |
54,946 |
|
|
(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.
|
We have
closely monitored the trend of asbestos related injury claims made against the
Company over the past eight years. That trend, on a year to year
basis, has been somewhat erratic over the past three years, but has been
generally downward over the past eight years. We believe, however,
that it is probable that a general downward trend will continue, although such
continuance cannot be assured. From 2001 and through 2008, the annual
average indemnity paid on over 3,000 resolved cases has fluctuated
significantly, between a low of $14,504 in 2006 and a high of $54,946 in 2008,
with an overall average over that period of approximately
$20,900. During this period, there has been no discernible upward or
downward trend in indemnity payments.
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 $44,359 in 2008. The weighted average defense cost per resolved
claim from 2005 through 2008 was $18,233. 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. Due to this aggressive defensive posture, the new claims
against the Company have tended to have a greater potential liability and
therefore require more resources to defend. We intend to monitor the
defense costs in 2009 and will adjust our estimates if events occur which would cause us to believe
that those estimates need revision. We are currently
projecting those costs to be approximately $18,500 per claim.
In our
Form 10-KSB filed with the Securities and Exchange Commission for the year ended
December 31, 2007, 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. We further 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 and that we would resolve 194 cases in
2008. Accordingly, we previously had 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 previously estimated our liability for current and future
asbestos-related claims at December 31, 2008 to be approximately
$29,000,000. This amounted 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.
As of
December 31, 2008, we re-evaluated our estimates to take into account our
experience in 2008, which was unfavorable compared to previous
years. Primarily as a result of an increase in the number of new
cases commenced during 2008 which exceeded our previous estimates, we now
estimate that there will be 877 asbestos-related injury claims made against the
Company after December 31, 2008. The 877, in addition to the 271
claims existing as of December 31, 2008, totaled 1,148 current and future
claims. Multiplying the average indemnity per resolved claim over the
past eight years of $20,900, times 1,148, we project the probable future
indemnity to be paid on those claims after December 31, 2008 to be equal to
approximately $24 million. In addition, multiplying an estimated cost
of defense per resolved claim of approximately $18,500 times 1,148, we projected
the probable future defense costs to equal approximately
$21,250,000. Accordingly, our total estimated future asbestos-related
liability at December 31, 2008 is $45,250,000.
As of
December 31, 2008 we project that approximately 154 new asbestos-related claims
will be commenced and approximately 188 cases will be resolved in 2009,
resulting in an estimated 237 cases pending at December 31,
2009. Since we project that an aggregate of 877 new cases will be
commenced after December 31, 2008, and that 154 of these cases will be commenced
in 2009, we estimate that an aggregate of 723 new cases will be commenced after
December 31, 2009. Accordingly, we project the cases pending and
projected to be commenced in the future at December 31, 2009, will be 960
cases. Multiplying 960 claims times the approximate average indemnity
paid per resolved claim from 2001 through 2008 and defense costs incurred per
resolved claim from 2005 through 2008 of $39,400, we estimate our liability for
current and future asbestos-related claims at December 31, 2009 to be
approximately $38,000,000. This amounts to a $7,250,000 reduction
from the $45,250,000 liability we estimate as of December 31, 2008, or a
$1,812,500 reduction per quarter in 2009.
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 general trend of reducing
asbestos-related injury claims experienced prior to 2008 will resume 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 remain solvent and 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, as discussed under
“Insurance Coverage Litigation” below. Regardless of
our best estimates of liability for current and future asbestos-related claims,
the liability for these claims could be higher or lower than estimated by
amounts which are not predictable. We, of course, cannot give any
assurance that our liability for such claims will not ultimately exceed our
available insurance coverage. We believe, however, that our current
insurance is adequate to satisfy additional liability that is reasonably
possible in the event actual losses exceed our estimates. We will
update our estimates of liability and insurance coverage in future filings with
the Securities and Exchange Commission, as events occur which would cause us to
believe that those estimates need revision, based upon the subsequent claim
experience, using the methodology we have employed.
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 2001. 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.
Although
defense costs are included in our insurance coverage, we expended $304,000,
$188,000, $215,000, $296,000 and $128,000 in 2004, 2005, 2006, 2007 and 2008,
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
determined that the minimum probable insurance coverage available to satisfy
asbestos-related injury claims significantly exceeds our estimated future
liability for such claims of $45,250,000 and $36,000,000 as of December 31, 2008
and 2007, respectively. Accordingly, we have included $45,250,000 and
$36,000,000 of such insurance coverage receivable as an asset on our December
31, 2008 and 2007 balance sheets, respectively. Our 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, as discussed below. Regardless of our best
estimates of liability for current and future asbestos-related claims, the
liability for these claims could be higher or lower than estimated by amounts
which are not predictable. We have made material revisions to our
estimated projections of our potential asbestos related liability in the past,
and cannot give any assurance that our liability for such claims will not
ultimately exceed our available insurance coverage. We believe,
however, that our current insurance is adequate to satisfy additional liability
that is reasonably possible in the event actual losses exceed our
estimates. We will update our estimates of liability and insurance
coverage in future filings with the Securities and Exchange Commission, as
events occur which would cause us to believe that those estimates need revision,
based upon the subsequent claim experience, using the methodology we have
employed.
Insurance
Coverage Litigation
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. The
ACE Lawsuit is principally about coverage responsibility among the several
insurers, as well as total coverage. Regardless of the outcome of
this litigation, Entrx does not believe that the ACE Lawsuit will result in
materially diminishing Entrx’s insurance coverage for asbestos-related claims.
Nonetheless, we anticipate that we will incur attorney’s 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. 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. If Allstate is
required to provide indemnity for Entrx’s asbestos-related lawsuits, it is
likely that Entrx would have to indemnify Allstate for asbestos-related claims
that it defends up to $2,500,000 in the aggregate. If Allstate is not
required to provide indemnity, Entrx would have no liability to
Allstate. Entrx has accrued $375,000 as a potential loss in
connection with the Allstate matter.
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 obligation to satisfy this
award is remote, and we therefore believe that there is no potential liability
to the Company which needs to be recorded in our financial
statements. 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.
Since the
May 2006 Settlement Agreement, the remaining action against Javier Guerra
Cisneros and Promotora Industrial Galeana, S.A. de C.V has experienced repeated
and extended delays in the State Court in Mexico City. In the fourth
quarter of 2007, the Company filed an amparo (injunction)
application with the Mexican federal court in Mexico City, requesting that the
State Court take affirmative action in the Company's pending case. That amparo was denied during the
first quarter of 2008 and an appeal was presented to the federal appellate
court. The appeal was denied during the second quarter of
2008. The Company is investigating its options with regard to
pursuing the lawsuit.
ITEM
4. SUBMISSION OF
MATTERS TO A VOTE OF SECURITY HOLDERS
None
PART
II
|
ITEM
5.
|
MARKET
FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES
|
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
|
|
|
|
|
|
|
|
|
|
|
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 |
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended December 31,
2008
|
|
|
|
|
|
|
|
|
|
Quarter
Ended March 31, 2008
|
|
$ |
0.42 |
|
|
$ |
0.25 |
|
|
Quarter
Ended June 30, 2008
|
|
|
0.33 |
|
|
|
0.21 |
|
|
Quarter
Ended September 30, 2008
|
|
|
0.30 |
|
|
|
0.21 |
|
|
Quarter
Ended December 31, 2008
|
|
|
0.28 |
|
|
|
0.115 |
|
As of
March 11, 2009, the closing bid price for the common
shares in the pink sheets was $0.13.
Shareholders of Record
As of
March 11, 2009, the approximate number of record holders of our Common Stock was
520.
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 2008 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)
|
|
1/28/2008
|
|
40,000
Shares
|
|
Members
of the Board of Directors of Entrx Corporation (4 members)
|
|
Services
as directors, valued at $0.35 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 are deemed to be
“accredited investors” by reason of their
offices.
|
ITEM
6. MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Summary.
Our
revenues increased from $22,359,000 in 2007 to $27,847,000 in
2008. Gross margin percentage increased from 17.9% in 2007 to 18.0%
in 2008. Revenues increased primarily due to the Company obtaining
new maintenance contracts, and hiring additional project managers which has
allowed the Company to bid on more projects in 2008 and ultimately increased the
number of jobs in which we were the winning bidder. The gross margin
percentage increased for 2008 as compared with 2007 primarily as a result of
lower rates on our workers compensation insurance and the Company’s expansion
into commercial insulation and abatement, which generally allows for higher
gross margins than industrial insulation and abatement. While the
gross margin percentage varies from job to job, insulation maintenance contracts
generally have a lower gross margin percentage than insulation installation and
removal contracts. We anticipate that our revenues will decrease in
2009 primarily due to the general economic environment, and anticipate that
gross margin percentages in 2009 will approximate those in 2008.
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 $101,000 and $194,000,
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 0.5% and 2.2% of the
Company’s total assets at December 31, 2008 and 2007,
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 symbols “CTS” and “CTSU”. 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 19,056 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
“VOQPE.ob”. Of the 19,056 shares, 7,500 shares are subject to options
exercisable by one current and two former members of our Board of Directors at
$12.50 per share. The Company recognized impairment charges of
$930,000 and $80,000 on its available for sale securities during the years ended
December 31, 2008 and 2007, respectively. The Company recognized an
impairment charge of $563,000 on its investment in Clearwire Corporation for the
year ended December 31, 2008. The Company also recognized an
impairment charge of $349,000 on its investment in Catalytic Solutions, Inc.
during the year ended December 31, 2008, and a impairment charges of $18,000 and
$80,000 on its investment in VioQuest Pharmaceuticals, Inc. during the years
ended December 31, 2008 and 2007, respectively. Any or all of these
investments could be impaired in the future. See “Liquidity and
Capital Resources.”
While
revenues and gross margin increased in 2008 as compared to 2007, net income was
down primarily due to the impairment charges on our investments. We
had net income of $255,000 in 2008 and had net income of $622,000 in
2007.
Our
subsidiary, Metalclad Insulation Corporation, continues to be engaged in
lawsuits involving asbestos-related injury or potential injury
claims. The 187 claims made in 2008 were up from the 163 claims made
in 2007. The average indemnity payment on all resolved claims during
each of the past five years has fluctuated from a high of $54,946 in 2008, 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 $36,000,000 at December 31, 2007 and approximately $45,250,000 at
December 31, 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 general trend of reducing asbestos-related injury claims experienced
prior to 2008 will resume, 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 $128,000 and $296,000 in 2008 and 2007, 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, 2008 Compared to Year Ended December 31,
2007.
Contract
Revenue. Total revenues were $27,847,000 in 2008 as compared
to $22,359,000 for 2007, an increase of 24.5%. The increase from 2008
to 2007 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 2008 and which ultimately increased the number of jobs
in which we were the winning bidder.
Approximately
60.7% and 60.1% of the revenues for the years ended December 31, 2008 and 2007,
respectively, were from insulation maintenance contracts, which often continue
from year to year. Approximately 37.2% and 39.6% of revenues in the
years ended December 31, 2008 and 2007, respectively, were derived from
insulation installation and removal projects, which are not normally continuing,
but can go on for a year or more. These percentages are approximate
because some installation and removal projects involve maintenance arrangements,
and vice versa. The Company bids on hundreds of projects during any
given year. These projects range in value from a few hundred dollars to
multi-million dollar projects, and the projects can last from a few hours up to
over a year in duration. The Company cannot predict what projects
will be coming up for bid in any particular period, or whether it will be the
winning bidder. Accordingly, the Company is unable to determine if
the revenue trends, or the allocation between maintenance contracts and
installation and removal contracts, will continue. We do, however,
anticipate that our revenues in 2009 will be less than 2008.
Contract Costs
and Gross Margin. Total cost of revenue for the year ended
December 31, 2008 was $22,847,000 as compared to $18,353,000 for the year ended
December 31, 2007, an increase of 24.5%. The gross margin as a
percentage of revenue was approximately 18.0% for the year ended December 31,
2008 compared to 17.9% for the year ended December 31, 2007. The
increase in the gross margin percentage during the year ended December 31, 2008
as compared with the year ended December 31, 2007 is primarily the result of
lower rates on our workers compensation insurance and the Company’s expansion
into commercial insulation and abatement, which generally allows for higher
gross margins than industrial insulation and abatement. While the
gross margin percentage varies from job to job, insulation maintenance contracts
generally have a lower gross margin percentage than insulation installation and
removal contracts. The increase in the cost of revenues for the year
ended December 31, 2008 as compared to the year ended December 31, 2007 was
primarily due to higher revenues as discussed above.
Selling, General
and Administrative Expenses. Selling, general and
administrative expenses were $3,840,000 for the year ended December 31, 2008 as
compared to $3,291,000 for the year ended December 31, 2007, an increase of
16.7%. The increase was primarily due to increases in payroll,
bonuses, auto expense, insurance and entertainment expense. The
increase in payroll expense was primarily due to an increase in the number of
project managers at the Company which allows the Company to bid on more
projects. These increases were partially offset by decreases in legal
and bad debt expenses.
Change in
Allowance on Shareholder Note Receivable. Blake Capital
Partners, LLC was current in the payment of interest on the shareholder note
receivable through the payment due March 1, 2006. The payment due
September 1, 2006, however, was not made, and we were informed by Mr. Mills, the
principal of Blake Capital Partners and guarantor on the note, that no payment
should be expected in the foreseeable future. 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 note and applied
the $115,000 value of the stock against the outstanding note
balance. The 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 note to $25,000, the approximate value of the collateral securing the
note. In December 2008, the Company received a notice from the United
States Bankruptcy Court that Blake Capital Partners, LLC and Mr. Mills had filed
for Chapter 7 bankruptcy. The Company is exploring its opportunities
to obtain proceeds from the sale of the 25,000 shares (250,000 shares before a
one for ten share reverse stock split on April 30, 2008) of VioQuest
Pharmaceuticals, Inc. common stock pledged as collateral on the note, but any
proceeds are expected to be de minimis. As such, the Company has
completely written-off the note from Blake Capital Partners, LLC as of December
31, 2008.
Gain on Disposal
of Property, Plant and Equipment. Gain on the disposal of
property plant and equipment was $18,000 and $7,000 for the year ended December
31, 2008 and 2007, respectively.
Interest Income
and Expense. Interest expense for
the year ended December 31, 2008 was $8,000 as compared with interest expense of
$10,000 for the year ended December 31, 2007. Interest income
decreased from $60,000 in the year ended December 31, 2007 to $40,000 in the
year ended December 31, 2008.
Impairment Charge
on Available-for-Sale Securities. The Company recognized
impairment charges of $930,000 and $80,000 on its available for sale securities
during the years ended December 31, 2008 and 2007, respectively. The
Company recognized an impairment charge of $563,000 on its investment in
Clearwire Corporation for the year ended December 31, 2008. The
Company also recognized an impairment charge of $349,000 on its investment in
Catalytic Solutions, Inc. during the year ended December 31, 2008, and a
impairment charges of $18,000 and $80,000 on its investment in VioQuest
Pharmaceuticals, Inc. during the years ended December 31, 2008 and 2007,
respectively.
Net
Income. While revenues and gross margin increased in 2008 as
compared to 2007, net income was down primarily due to the impairment charges on
our investments. We realized net income of $255,000 (or net income of
$0.03 per share) for the year ended December 31, 2008, as compared to net income
of $622,000 (or net income of $0.08 per share) for the year ended December 31,
2007.
Liquidity and Capital
Resources
As of
December 31, 2008, we had $2,079,000 in cash and cash equivalents and $296,000
in available-for-sale securities. The Company had working capital of
$6,490,000 as of December 31, 2008. We own 39,415 shares of Clearwire
Corporation’s common stock (NASDAQ: CLWR) and 384,084 shares of Catalytic
Solutions, Inc. common stock (AIM: CTSU). We also own 19,057 shares
(190,566 shares before a one for ten share reverse stock split on April 30,
2008) of the common stock of VioQuest Pharmaceuticals, Inc., the common stock of
which is publicly traded on the OTC Bulletin Board under the symbol
“VOQP”. Of the 19,057 shares, 7,500 shares are subject to options
exercisable by one current and two former members of our Board of Directors at
$12.50 per share.
In an
effort to increase shareholder value and to diversify from our insulation
services business, we have made equity investments in Catalytic Solutions, Inc.
and Clearwire Corporation, that are not in the insulation services business and
which we believed had the ability to provide acceptable return on our
investment. The Company determined that there had been an impairment
with respect to Entrx’s investment in the common stock of Catalytic Solutions
based upon the severity of declines in the market price of the common stock
below our carrying value and our belief that there had been impairment
indicators as discussed in EITF 03-1, including factors that raise significant
concerns about Catalytic Solution’s ability to continue as a going
concern. The shares in Catalytic Solutions are traded on the London
Stock Exchange’s Alternative International Market for smaller company’s (the
“AIM”). We therefore recognized a $349,000 impairment on this
investment during the year ended December 31, 2008, representing the difference
between our carrying value and the quoted market price on December 31,
2008. Catalytic Solutions, Inc. manufactures and delivers proprietary
technology that improves the performance and reduces the cost of catalytic
converters. The Company also determined that there had been an
impairment with respect to Entrx’s investment in the common stock of Clearwire
Corporation based upon the severity of declines in the market price of the
common stock below our carrying value. We therefore recognized an
impairment charge of $563,000 on this investment during the year ended December
31, 2008, representing the difference between our carrying value and the quoted
market price on December 31, 2008.
Blake
Capital Partners, LLC was current in the payment of interest on the shareholder
note receivable through the payment due March 1, 2006. The payment
due September 1, 2006, however, was not made, and we have been informed by Mr.
Mills, the principal of Blake Capital Partners and guarantor on the note, that
no payment can be expected in the foreseeable future. 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 note and applied
the $115,000 value of the stock against the outstanding note
balance. The 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 note to $25,000, the approximate value of the remaining collateral
securing the note. In December 2008, the Company received a notice
from the United States Bankruptcy Court that Blake Capital Partners, LLC and Mr.
Mills had filed for Chapter 7 bankruptcy. The Company is exploring
its opportunities to obtain proceeds from the sale of the 25,000 shares (250,000
shares before a one for ten share reverse stock split on April 30, 2008) of
VioQuest Pharmaceuticals, Inc. common stock pledged as collateral on the note,
but any proceeds are expected to be de minimis. As such, the Company
has completely written-off the note from Blake Capital Partners, LLC as of
December 31, 2008.
Cash
provided by operations was $779,000 for 2008, compared with cash used in
operations of $24,000 in 2007. For the year ended December 31, 2008
the positive cash flow from operations was primarily the result of our net
income of $255,000, non-cash expenses for impairment charges on investments
totaling $930,000, and depreciation and amortization of $209,000 partially
offset by an increase in accounts receivable of $230,000, an increase in costs
and estimated earnings in excess of billings on uncompleted contracts totaling
$436,000 and a decrease in accounts payable and accrued expenses of
$168,000. The increase in accounts receivable is primarily due to an
increase in revenues. For the year ended December 31, 2007 the
negative cash flow from operations was primarily the result of an increase in
accounts receivable of $1,479,000 and an increase in costs and estimated
earnings in excess of billings on uncompleted contracts of $267,000, partially
offset by our net income of $622,000 and an increase in accounts payable and
accrued expenses totaling $678,000. The increase in accounts
receivable is primarily due to an increase in revenues.
Net
investing activities used $25,000 of cash in 2007. Additions to
property and equipment used $64,000 in 2007, 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.
Cash used
in financing activities totaled $145,000 in 2008 compared with cash used in
financing activities of $114,000 in 2007, due to payments on long-term
borrowings.
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 fluctuated from
265 in 2004, to 199 in 2005, to 232 in 2006, to 163 in 2007 and to 187 in 2008,
but overall have exhibited a downward trend. At December 31, 2004,
2005, 2006 and 2007, there were, respectively, approximately 710, 507, 404 and
222 cases pending. As of December 31, 2008, there were 271 cases
pending. These claims are currently defended and covered by
insurance.
Set forth
below is a table for the years ended December 31, 2004, 2005, 2006, 2007 and
2008 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:
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
New
cases filed
|
|
|
265 |
|
|
|
199 |
|
|
|
232 |
|
|
|
163 |
|
|
|
187 |
|
|
Defense
judgments and dismissals
|
|
|
311 |
|
|
|
294 |
(3) |
|
|
253 |
|
|
|
292 |
(3) |
|
|
109 |
|
|
Plaintiff
judgments and Settled cases
|
|
|
97 |
|
|
|
108 |
|
|
|
82 |
|
|
|
53 |
|
|
|
29 |
|
|
Total
resolved cases (1)
|
|
|
408 |
|
|
|
402 |
(3) |
|
|
335 |
|
|
|
345 |
(3) |
|
|
138 |
|
|
Pending
cases (1)
|
|
|
710 |
|
|
|
507 |
(2,3) |
|
|
404 |
|
|
|
222 |
(3) |
|
|
271 |
|
|
Total
indemnity payments
|
|
$ |
6,366,750 |
|
|
$ |
8,513,750 |
|
|
$ |
4,858,750 |
|
|
$ |
7,974,500 |
|
|
$ |
7,582,550 |
|
|
Average
indemnity paid on plaintiff judgments and settled cases
|
|
$ |
65,637 |
|
|
$ |
78,831 |
|
|
$ |
59,253 |
|
|
$ |
150,462 |
|
|
$ |
261,467 |
|
|
Average
indemnity paid on all resolved cases
|
|
$ |
15,605 |
|
|
$ |
21,178 |
(2) |
|
$ |
14,504 |
|
|
$ |
23,114 |
|
|
$ |
54,946 |
|
|
(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.
|
We have
closely monitored the trend of asbestos related injury claims made against the
Company over the past eight years. That trend, on a year to year
basis, has been somewhat erratic over the past three years, but has been
generally downward over the past eight years. We believe, however,
that it is probable that a general downward trend will continue, although such
continuance cannot be assured. From 2001 and through 2008, the annual
average indemnity paid on over 3,000 resolved cases has fluctuated
significantly, between a low of $14,504 in 2006 and a high of $54,946 in 2008,
with an overall average over that period of approximately
$20,900. During this period, there has been no discernible upward or
downward trend in indemnity payments.
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 $44,359 in 2008. The weighted average defense cost per resolved
claim from 2005 through 2008 was $18,233. 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. Due to this aggressive defensive posture, the new claims
against the Company have tended to have a greater potential liability and
therefore require more resources to defend. We intend to monitor the
defense costs in 2009 and will adjust our estimates if events occur which would cause us to believe
that those estimates need revision. We are currently
projecting those costs to be approximately $18,500 per claim.
In our
Form 10-KSB filed with the Securities and Exchange Commission for the year ended
December 31, 2007, 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. We further 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 and that we would resolve 194 cases in
2008. Accordingly, we previously had 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 previously estimated our liability for current and future
asbestos-related claims at December 31, 2008 to be approximately
$29,000,000. This amounted 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.
As of
December 31, 2008, we re-evaluated our estimates to take into account our
experience in 2008, which was unfavorable compared to previous
years. Primarily as a result of an increase in the number of new
cases commenced during 2008 which exceeded our previous estimates, we now
estimate that there will be 877 asbestos-related injury claims made against the
Company after December 31, 2008. The 877, in addition to the 271
claims existing as of December 31, 2008, totaled 1,148 current and future
claims. Multiplying the average indemnity per resolved claim over the
past eight years of $20,900, times 1,148, we project the probable future
indemnity to be paid on those claims after December 31, 2008 to be equal to
approximately $24 million. In addition, multiplying an estimated cost
of defense per resolved claim of approximately $18,500 times 1,148, we projected
the probable future defense costs to equal approximately
$21,250,000. Accordingly, our total estimated future asbestos-related
liability at December 31, 2008 is $45,250,000.
As of
December 31, 2008 we project that approximately 154 new asbestos-related claims
will be commenced and approximately 188 cases will be resolved in 2009,
resulting in an estimated 237 cases pending at December 31,
2009. Since we project that an aggregate of 877 new cases will be
commenced after December 31, 2008, and that 154 of these cases will be commenced
in 2009, we estimate that an aggregate of 723 new cases will be commenced after
December 31, 2009. Accordingly, we project the cases pending and
projected to be commenced in the future at December 31, 2009, will be 960
cases. Multiplying 960 claims times the approximate average indemnity
paid per resolved claim from 2001 through 2008 and defense costs incurred per
resolved claim from 2005 through 2008 of $39,400, we estimate our liability for
current and future asbestos-related claims at December 31, 2009 to be
approximately $38,000,000. This amounts to a $7,250,000 reduction
from the $45,250,000 liability we estimate as of December 31, 2008, or a
$1,812,500 reduction per quarter in 2009.
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 general trend of reducing
asbestos-related injury claims experienced prior to 2008 will resume 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 remain solvent and 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, as discussed under
“Insurance Coverage Litigation” below. Regardless of
our best estimates of liability for current and future asbestos-related claims,
the liability for these claims could be higher or lower than estimated by
amounts which are not predictable. We, of course, cannot give any
assurance that our liability for such claims will not ultimately exceed our
available insurance coverage. We believe, however, that our current
insurance is adequate to satisfy additional liability that is reasonably
possible in the event actual losses exceed our estimates. We will
update our estimates of liability and insurance coverage in future filings with
the Securities and Exchange Commission, as events occur which would cause us to
believe that those estimates need revision, based upon the subsequent claim
experience, using the methodology we have employed.
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 2001. 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.
Although
defense costs are included in our insurance coverage, we expended $304,000,
$188,000, $215,000, $296,000 and $128,000 in 2004, 2005, 2006, 2007 and 2008,
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
determined that the minimum probable insurance coverage available to satisfy
asbestos-related injury claims significantly exceeds our estimated future
liability for such claims of $45,250,000 and $36,000,000 as of December 31, 2008
and 2007, respectively. Accordingly, we have included $45,250,000 and
$36,000,000 of such insurance coverage receivable as an asset on our December
31, 2008 and 2007 balance sheets, respectively. Our 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, as discussed below. Regardless of our best
estimates of liability for current and future asbestos-related claims, the
liability for these claims could be higher or lower than estimated by amounts
which are not predictable. We have made material revisions to our
projections of our potential asbestos related liability in the past, and we
cannot give any assurance that our liability for such claims will not ultimately
exceed our available insurance coverage. We believe, however, that
our current insurance is adequate to satisfy additional liability that is
reasonably possible in the event actual losses exceed our
estimates. We will update our estimates of liability and insurance
coverage in future filings with the Securities and Exchange Commission, as
events occur which would cause us to believe that those estimates need revision,
based upon the subsequent claim experience, using the methodology we have
employed.
Insurance
Coverage Litigation
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. The
ACE Lawsuit is principally about coverage responsibility among the several
insurers, as well as total coverage. Regardless of the outcome of
this litigation, Entrx does not believe that the ACE Lawsuit will result in
materially diminishing Entrx’s insurance coverage for asbestos-related claims.
Nonetheless, we anticipate that we will incur attorney’s 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. 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. If Allstate is
required to provide indemnity for Entrx’s asbestos-related lawsuits, it is
likely that Entrx would have to indemnify Allstate for asbestos-related claims
that it defends up to $2,500,000 in the aggregate. If Allstate is not
required to provide indemnity, Entrx would have no liability to
Allstate. Entrx has accrued $375,000 as a potential loss in
connection with the Allstate matter.
The
following summarizes our contractual obligations at December 31,
2008. The long-term debt consists of various notes payable to finance
companies for vehicles used in the ordinary course of the Company’s insulation
business (See Note 7).
|
|
|
Total
|
|
|
1 Year or Less
|
|
|
1-3 Years
|
|
|
4-5 Years
|
|
|
Over 5 Years
|
|
|
Long-term
debt
|
|
$ |
293,892 |
|
|
$ |
153,290 |
|
|
$ |
140,602 |
|
|
$ |
- |
|
|
$ |
- |
|
|
Non-cancelable
leases
|
|
|
518,832 |
|
|
|
167,856 |
|
|
|
350,976 |
|
|
|
- |
|
|
|
- |
|
|
Estimated
interest payments
|
|
|
11,725 |
|
|
|
7,435 |
|
|
|
4,290 |
|
|
|
- |
|
|
|
- |
|
|
Total
|
|
$ |
824,449 |
|
|
$ |
328,581 |
|
|
$ |
495,868 |
|
|
$ |
- |
|
|
$ |
- |
|
During
2008 and 2007, 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, 2008, 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) valuation of investments, (c)
allowances for uncollectible notes and accounts receivable, (d) judgments and
estimates used in determining 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
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, Non-controlling 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 a
significant impact on its financial position or results of operations since its
consolidated subsidiaries are wholly owned and non-controlling interests in
consolidated variable interest entities are not material.
In March
2008, the FASB issued Statement of Financial Accounting Standards No. 161, Disclosures about Derivative
Instruments and Hedging Activities, an Amendment of FASB Statement No.
133. SFAS No. 161 amends and expands upon the disclosure
requirements for derivative financial instruments and for hedging activities
required under FASB Statement No. 133 to provide users of financial statements
with an enhanced understanding of how and why an entity uses derivative
financial instruments, how derivative financial instruments are accounted for
under Statement 133 and it related interpretations, and how derivative financial
instruments affect an entity’s financial position, financial performance, and
results of operations. SFAS No. 161 is effective for financial
statement and interim periods beginning after November 15, 2008. The
Company does not currently hold any derivative financial instruments, and
therefore, the Company does not expect that the adoption of SFAS No. 161 will
have a material effect on its financial statements and
disclosures.
In May
2008, the FASB issued Statement of Financial Accounting Standards No. 162, The Hierarchy of Generally Accepted
Accounting Principles. This standard is intended to improve
financial reporting by identifying a consistent framework, or hierarchy, for
selecting accounting principles to be used in preparing financial statements
that are presented in conformity with generally accepted accounting principles
in the United States for non-governmental entities. SFAS No. 162 is effective 60
days following approval by the SEC of the Public Company Accounting Oversight
Board’s amendments to AU Section 411, The Meaning of Present Fairly in Conformity with
Generally Accepted Accounting Principles or January 15,
2009. The Company does not expect that the adoption of SFAS No. 162
will have a material impact its consolidated financial
statements.
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, 2008 and 2007, 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, 2008 and 2007 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 24,
2009
ENTRX
CORPORATION AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
2,078,666 |
|
|
$ |
1,444,883 |
|
|
Available-for-sale
securities
|
|
|
296,266 |
|
|
|
559,436 |
|
|
Accounts
receivable, less allowance for doubtful accounts of $80,000 as of December
31, 2008 and 2007
|
|
|
5,697,084 |
|
|
|
5,466,889 |
|
|
Costs
and estimated earnings in excess of billings on uncompleted
contracts
|
|
|
1,067,384 |
|
|
|
631,625 |
|
|
Inventories
|
|
|
115,670 |
|
|
|
107,118 |
|
|
Prepaid
expenses and other current assets
|
|
|
292,957 |
|
|
|
273,156 |
|
|
Insurance
claims receivable
|
|
|
7,250,000 |
|
|
|
7,000,000 |
|
|
Shareholder
note receivable, net of allowance of $1,356,000 as of December 31,
2007
|
|
|
- |
|
|
|
25,000 |
|
|
Other
receivables
|
|
|
138,229 |
|
|
|
180,015 |
|
|
Total
current assets
|
|
|
16,936,256 |
|
|
|
15,688,122 |
|
|
|
|
|
|
|
|
|
|
|
|
Property,
plant and equipment, net
|
|
|
369,981 |
|
|
|
366,954 |
|
|
Investments
in unconsolidated affiliates
|
|
|
- |
|
|
|
450,000 |
|
|
Insurance
claims receivable
|
|
|
38,000,000 |
|
|
|
29,000,000 |
|
|
Other
assets
|
|
|
46,620 |
|
|
|
193,540 |
|
|
Total
Assets
|
|
$ |
55,352,857 |
|
|
$ |
45,698,616 |
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND SHAREHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
|
Current
portion of long-term debt
|
|
$ |
153,290 |
|
|
$ |
113,000 |
|
|
Accounts
payable
|
|
|
999,737 |
|
|
|
1,251,423 |
|
|
Accrued
expenses
|
|
|
1,942,453 |
|
|
|
1,859,048 |
|
|
Reserve
for asbestos liability claims
|
|
|
7,250,000 |
|
|
|
7,000,000 |
|
|
Billings
in excess of costs and estimated earnings on uncompleted
contracts
|
|
|
100,615 |
|
|
|
62,394 |
|
|
Total
current liabilities
|
|
|
10,446,095 |
|
|
|
10,285,865 |
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
debt, less current portion
|
|
|
140,602 |
|
|
|
132,470 |
|
|
Reserve
for asbestos liability claims
|
|
|
38,000,000 |
|
|
|
29,000,000 |
|
|
Total
liabilities
|
|
|
48,586,697 |
|
|
|
39,418,335 |
|
|
|
|
|
|
|
|
|
|
|
|
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; 7,656,147 and
7,616,147 issued and outstanding at December 31, 2008 and 2007,
respectively
|
|
|
811,095 |
|
|
|
807,095 |
|
|
Additional
paid-in capital
|
|
|
69,831,881 |
|
|
|
69,821,881 |
|
|
Accumulated
deficit
|
|
|
(63,876,816 |
) |
|
|
(64,132,186 |
) |
|
Accumulated
other comprehensive loss
|
|
|
- |
|
|
|
(216,509 |
) |
|
Total shareholders’
equity
|
|
|
6,766,160 |
|
|
|
6,280,281 |
|
|
Total Liabilities and
Shareholders’ Equity
|
|
$ |
55,352,857 |
|
|
$ |
45,698,616 |
|
See Notes
to Consolidated Financial Statements
ENTRX
CORPORATION AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
|
|
|
Year Ended December 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contract
revenues
|
|
$ |
27,846,507 |
|
|
$ |
22,358,764 |
|
|
|
|
|
|
|
|
|
|
|
|
Contract
costs and expenses
|
|
|
22,847,031 |
|
|
|
18,352,750 |
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
|
4,999,476 |
|
|
|
4,006,014 |
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
Selling,
general and administrative
|
|
|
3,840,192 |
|
|
|
3,290,670 |
|
|
Change
in allowance on shareholder note receivable
|
|
|
25,000 |
|
|
|
70,000 |
|
|
Gain
on disposal of property, plant and equipment
|
|
|
(18,250 |
) |
|
|
(6,957 |
) |
|
Total operating
expenses
|
|
|
3,846,942 |
|
|
|
3,353,713 |
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income
|
|
|
1,152,534 |
|
|
|
652,301 |
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
40,282 |
|
|
|
59,720 |
|
|
Interest
expense
|
|
|
(7,767 |
) |
|
|
(9,867 |
) |
|
Impairment
charge on available-for-sale securities
|
|
|
(929,679 |
) |
|
|
(80,038 |
) |
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
255,370 |
|
|
|
622,116 |
|
|
|
|
|
|
|
|
|
|
|
|
Other
comprehensive loss
|
|
|
|
|
|
|
|
|
|
Unrealized
losses on available-for-sale securities
|
|
|
- |
|
|
|
(216,509 |
) |
|
Reclassification
adjustment for unrealized losses on available-for-sale securities
recognized in net income
|
|
|
216,509 |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
income
|
|
$ |
471,879 |
|
|
$ |
405,607 |
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number of common shares — basic and diluted
|
|
|
7,653,196 |
|
|
|
7,721,065 |
|
|
|
|
|
|
|
|
|
|
|
|
Net
income per common share — basic and diluted
|
|
$ |
0.03 |
|
|
$ |
0.08 |
|
See Notes
to Consolidated Financial Statements
ENTRX
CORPORATION AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF SHAREHOLDERS’ EQUITY
Years
Ended December 31, 2008 and 2007
|
|
|
|
|
|
Additional
Paid-in
|
|
|
|
|
|
Accumulated
|
|
|
Accumulated
Other
Comprehensive
|
|
|
Total
Shareholders’
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclassification
adjustment for losses recognized in net income
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
216,509 |
|
|
|
216,509 |
|
|
Common
stock issued in exchange for services
|
|
|
40,000 |
|
|
|
4,000 |
|
|
|
10,000 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
14,000 |
|
|
Net
income
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
255,370 |
|
|
|
- |
|
|
|
255,370 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2008
|
|
|
7,656,147 |
|
|
$ |
811,095 |
|
|
$ |
69,831,881 |
|
|
|
- |
|
|
$ |
- |
|
|
$ |
(63,876,816 |
) |
|
$ |
- |
|
|
$ |
6,766,160 |
|
See Notes
to Consolidated Financial Statements
ENTRX
CORPORATION AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|
|
Year Ended December 31,
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
|
Net
income
|
|
$ |
255,370 |
|
|
$ |
622,116 |
|
|
Adjustments
to reconcile net income to net cash provided by (used in) operating
activities:
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
208,633 |
|
|
|
198,239 |
|
|
Gain
on disposal of property, plant and equipment
|
|
|
(18,250 |
) |
|
|
(6,957 |
) |
|
Impairment
charge on investments
|
|
|
929,679 |
|
|
|
80,038 |
|
|
Change
in allowance for doubtful accounts
|
|
|
- |
|
|
|
65,000 |
|
|
Allowance
on shareholder note receivable
|
|
|
25,000 |
|
|
|
70,000 |
|
|
Common
stock issued for services
|
|
|
14,000 |
|
|
|
18,400 |
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
Accounts
receivable, net
|
|
|
(230,195 |
) |
|
|
(1,479,066 |
) |
|
Costs
and estimated earnings in excess of billings on uncompleted
contracts
|
|
|
(435,759 |
) |
|
|
(266,644 |
) |
|
Inventories
|
|
|
(8,552 |
) |
|
|
(79,355 |
) |
|
Prepaid
expenses and other current assets
|
|
|
(19,801 |
) |
|
|
(81,847 |
) |
|
Other
receivables
|
|
|
41,786 |
|
|
|
194,160 |
|
|
Other
assets
|
|
|
146,920 |
|
|
|
8,020 |
|
|
Accounts
payable and accrued expenses
|
|
|
(168,281 |
) |
|
|
677,972 |
|
|
Billings
in excess of costs and estimated earnings on uncompleted
contracts
|
|
|
38,221 |
|
|
|
(43,959 |
) |
|
Net
cash (used in) provided by operating activities
|
|
|
778,771 |
|
|
|
(23,883 |
) |
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
|
Capital
expenditures
|
|
|
- |
|
|
|
(63,919 |
) |
|
Proceeds
from sale of property, plant and equipment, net of
expenses
|
|
|
- |
|
|
|
38,800 |
|
|
Net
cash (used in) provided by investing activities
|
|
|
- |
|
|
|
(25,119 |
) |
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
|
Payments
on long-term debt
|
|
|
(144,988 |
) |
|
|
(113,695 |
) |
|
|
|
|
|
|
|
|
|
|
|
Increase
(decrease) in cash and cash equivalents
|
|
|
633,783 |
|
|
|
(162,697 |
) |
|
Cash
and cash equivalents at beginning of year
|
|
|
1,444,883 |
|
|
|
1,607,580 |
|
|
Cash
and cash equivalents at end of year
|
|
$ |
2,078,666 |
|
|
$ |
1,444,883 |
|
|
|
|
|
|
|
|
|
|
|
|
Non-cash
investing and financing activities:
|
|
|
|
|
|
|
|
|
|
Acquisition
of property, plant and equipment
|
|
|
|
|
|
|
|
|
|
in
exchange for notes payable
|
|
$ |
211,660 |
|
|
$ |
202,076 |
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
|
Interest
paid
|
|
$ |
7,767 |
|
|
$ |
9,867 |
|
See Notes
to Consolidated Financial Statements
ENTRX
CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008 AND 2007
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
(loss). The fair value of the securities was determined by quoted
market prices of the underlying security. For purposes of determining
gross realized gains (losses), 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, 2008
|
|
$ |
296,266 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
296,266
|
|
|
Available
for sale securities – December 31, 2007
|
|
$ |
559,436 |
|
|
$ |
- |
|
|
$ |
216,509 |
|
|
$ |
775,945
|
|
The
Company's net unrealized holding loss was $0 and $216,509 for the years ended
December 31, 2008 and 2007, 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 such
that the change should be reflected in the Company’s financial
statements. 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 our investment, we recognized other than
temporary impairment charge in the amount of $18,389 on our investment in
VioQuest Pharmaceuticals, Inc. during the year ended December 31,
2008.
We
recognized an impairment charge on our Clearwire Corporation investment of
$173,153 during the three months ended March 31, 2008 and an impairment charge
of $115,486 during the three months ended September 30, 2008. Our
determination that the impairment with respect to Entrx’s investment in the
common stock of Clearwire Corporation was other-than-temporary, was based upon
both the length of time that the market value of that stock was below Entrx’s
carrying value, and the severity of the decline in that market
value. As a result of these conditions, Entrx recorded impairment
charges of $173,153 and $115,486 for the three months ended March 31, 2008 and
September 30, 2008, respectively. The impairment charges represented
the differences between the market value on March 31, 2008 and September 30,
2008 and Entrx’s carrying value on those dates. We also recognized an
impairment charge on our Clearwire Corporation investment of $273,934 during the
three months ended December 31, 2008. Our determination that the
impairment with respect to Entrx’s investment in the common stock of Clearwire
Corporation was other-than-temporary, was based upon both the length of time
that the market value of that stock was below Entrx’s previous carrying value of
$11.88 per share, and the severity of the decline in that market
value. Since October 1, 2008, through early March, when Entrx filed
its Form 10-K for the year ended December 31, 2008, the market value of Entrx’s
investment in the common stock of Clearwire Corporation was less than its
cost. In addition, as of December 31, 2008, the market value of
Entrx’s investment was approximately 59% below its carrying value. As
a result of those conditions, Entrx recorded an impairment charge of $273,934,
which represented the difference between the market value on December 31, 2008
and Entrx’s carrying value.
The
Company also has a minority investment in the common stock of Catalytic
Solutions, Inc. which is traded on the London Stock Exchange’s Alternative
International Market for smaller companies (the “AIM” market). Prior
to the third quarter of 2008, this investment was included in investments in
unconsolidated affiliates on the Consolidated Balance Sheets and was carried at
cost based upon our assessment that the AIM market was not of a comparable
breadth and scope to a U.S. market. During the third quarter of 2008,
the Company changed its method of accounting for its investment in the common
stock of Catalytic Solutions, Inc. to reclassify this investment to an
investment in available-for-sale security, based on the continued expansion of
the breadth and scope of the AIM market and the Company’s related
interpretations of SFAS 115.
We recognized an
impairment charge on our Catalytic Solutions, Inc. investment of $150,000 during
the three months ended September 30, 2008, which represented the difference
between the market value quoted on the AIM market on September 30, 2008 and
Entrx’s carrying value. Our determination that there was an
impairment with respect to Entrx’s investment in the common stock of Catalytic
Solutions was based upon the severity of the decline in the quoted market price
below our carrying value and our belief that there had been impairment
indicators as discussed in EITF 03-1, including factors that raise significant
concerns about Catalytic Solution’s ability to continue as a going
concern. We also recognized an
impairment charge on our Catalytic Solutions, Inc. investment of $198,717 during
the three months ended December 31, 2008, which represented the difference
between the market value quoted on the AIM market on December 31, 2008 and
Entrx’s carrying value. Our determination that there was an
impairment with respect to Entrx’s investment in the common stock of Catalytic
Solutions was based upon the severity of the decline in the quoted market price
below our carrying value and our belief that there had been impairment
indicators as discussed in EITF 03-1, including factors that raise significant
concerns about Catalytic Solution’s ability to continue as a going
concern. We previously had been carrying our Catalytic investment at
$.7965 per share. Based upon the last trade on the AIM market on
December 31, 2008, the value would be $.2637 per share (after conversion to US
dollars). As a result of these
conditions, Entrx recorded an impairment charge of $198,717, corresponding to a
remaining carried value of $0.26 per share.
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 and accounts payable 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 $16,366 and $15,265 for the years ended December 31, 2008 and
2007, respectively.
Revenue
Recognition
Fixed
price insulation installation and asbestos abatement contracts are accounted for
by the percentage-of-completion method in the ratio that total costs incurred to
date bear to total estimated costs, 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 with recognition of revenue as the services are
performed. 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, 2008 and 2007.
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 2,155,900 and 2,291,630 shares
were excluded from the computation of diluted earnings per share for the years
ended December 31, 2008 and 2007, 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:
|
|
|
2008
|
|
|
2007
|
|
|
Basic
net income per common share
|
|
|
|
|
|
|
|
Net
income
|
|
$ |
255,370 |
|
|
$ |
622,116 |
|
|
Weighted
average shares outstanding
|
|
|
7,653,196 |
|
|
|
7,721,065 |
|
|
Basic
net income per common share
|
|
$ |
0.03 |
|
|
$ |
0.08 |
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
net income per common share
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$ |
255,370 |
|
|
$ |
622,116 |
|
|
Weighted
average shares outstanding
|
|
|
7,653,196 |
|
|
|
7,721,065 |
|
|
Effect
of dilutive securities
|
|
|
- |
|
|
|
- |
|
|
Weighted
average shares outstanding
|
|
|
7,653,196 |
|
|
|
7,721,065 |
|
|
Diluted
net income per common share
|
|
$ |
0.03 |
|
|
$ |
0.08 |
|
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, 2008.
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 year ended December 31,
2008, the Company recorded a reclassification adjustment of
$216,509. During the year ended December 31, 2007, the Company
recorded other comprehensive loss of $216,509 for unrealized losses on
available-for-sale securities. 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. SFAS No. 157 became effective for most fair value
measurements, other than leases and certain nonfinancial assets and liabilities,
beginning January 1, 2008. SFAS No. 157 establishes a
three-level fair value hierarchy and requires fair value disclosures based on
this hierarchy. The Company adopted SFAS No. 157 on January 1,
2008. The method used to measure the fair value of our available for
sale securities is quoted prices in active markets for identical assets or
liabilities (Level 1).
In
February 2007, the FASB issued SFAS No. 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 adopted SFAS 159 on January 1, 2008 and did not
elect to apply SFAS 159 to its financial assets and
liabilities. Therefore, the adoption of SFAS 159 had no impact on the
Company's financial position and results of operations.
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, Non-controlling 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 a
significant impact on its financial position or results of operations since its
consolidated subsidiaries are wholly owned and non-controlling interests in
consolidated variable interest entities are not material.
In March
2008, the FASB issued Statement of Financial Accounting Standards No. 161, Disclosures about Derivative
Instruments and Hedging Activities, an Amendment of FASB Statement No.
133. SFAS No. 161 amends and expands upon the disclosure
requirements for derivative financial instruments and for hedging activities
required under FASB Statement No. 133 to provide users of financial statements
with an enhanced understanding of how and why an entity uses derivative
financial instruments, how derivative financial instruments are accounted for
under Statement 133 and it related interpretations, and how derivative financial
instruments affect an entity’s financial position, financial performance, and
results of operations. SFAS No. 161 is effective for financial
statement and interim periods beginning after November 15, 2008. The
Company does not currently hold any derivative financial instruments, and
therefore, the Company does not expect that the adoption of SFAS No. 161 will
have a material effect on its financial statements and
disclosures.
In May
2008, the FASB issued Statement of Financial Accounting Standards No. 162, The Hierarchy of Generally Accepted
Accounting Principles. This standard is intended to improve
financial reporting by identifying a consistent framework, or hierarchy, for
selecting accounting principles to be used in preparing financial statements
that are presented in conformity with generally accepted accounting principles
in the United States for non-governmental entities. SFAS No. 162 is effective 60
days following approval by the SEC of the Public Company Accounting Oversight
Board’s amendments to AU Section 411, The Meaning of Present Fairly in Conformity with
Generally Accepted Accounting Principles, or January 15,
2009. The Company does not expect that the adoption of SFAS No. 162
will have a material impact its consolidated financial statements.
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, 2008, Curtom-Metalclad had
assets of $22,000 (all cash) and partners’ equity of
$22,000. Curtom-Metalclad did not have any liabilities at December
31, 2008.
NOTE
3 – ACCOUNTS RECEIVABLE
Accounts
receivable consisted of the following at December 31:
|
|
|
2008
|
|
|
2007
|
|
|
Billed
|
|
|
|
|
|
|
|
Completed
contracts
|
|
$ |
792,363 |
|
|
$ |
1,441,653 |
|
|
Contracts
in process
|
|
|
1,032,762 |
|
|
|
466,590 |
|
|
Time
and material work
|
|
|
3,088,273 |
|
|
|
3,555,965 |
|
|
Material
sales
|
|
|
43,582 |
|
|
|
3,765 |
|
|
Unbilled
retainage
|
|
|
820,104 |
|
|
|
78,916 |
|
|
|
|
|
5,777,084 |
|
|
|
5,546,889 |
|
|
Less:
Allowance for doubtful accounts
|
|
|
(80,000 |
) |
|
|
(80,000 |
) |
|
|
|
$ |
5,697,084 |
|
|
$ |
5,466,889 |
|
NOTE
4 – COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS
Costs and
estimated earnings on uncompleted contracts consisted of the following at
December 31:
|
|
|
2008
|
|
|
2007
|
|
|
Costs
incurred on uncompleted contracts
|
|
$ |
15,902,597 |
|
|
$ |
8,407,635 |
|
|
Estimated
earnings (loss)
|
|
|
4,032,747 |
|
|
|
2,008,008 |
|
|
|
|
|
19,935,344 |
|
|
|
10,415,643 |
|
|
Less
billings to date
|
|
|
(18,968,575 |
) |
|
|
(9,846,412 |
) |
|
|
|
$ |
966,769 |
|
|
$ |
569,231 |
|
The above
information is presented in the balance sheet as follows:
|
|
|
2008
|
|
|
2007
|
|
|
Costs
and estimated earnings in excess of billings on uncompleted
contracts
|
|
$ |
1,067,384 |
|
|
$ |
631,625 |
|
|
Billings
in excess of costs and estimated earnings on uncompleted
contracts
|
|
|
(100,615 |
) |
|
|
(62,394 |
) |
|
|
|
$ |
966,769 |
|
|
$ |
569,231 |
|
NOTE
5 - PROPERTY, PLANT AND EQUIPMENT
Property,
plant and equipment consist of the following:
|
|
|
December 31,
|
|
|
|
|
|
|
|
|
|
|
Machinery
and equipment
|
|
$ |
539,518 |
|
|
$ |
539,519 |
|
|
Leasehold
improvements
|
|
|
41,115 |
|
|
|
35,073 |
|
|
Automotive
equipment
|
|
|
698,544 |
|
|
|
619,411 |
|
|
|
|
|
1,279,177 |
|
|
|
1,194,003 |
|
|
|
|
|
|
|
|
|
|
|
|
Less
accumulated depreciation
and
amortization
|
|
|
(909,196 |
) |
|
|
(827,049 |
) |
|
|
|
$ |
369,981 |
|
|
$ |
366,954 |
|
Depreciation
and amortization expense for the years ended December 31, 2008 and 2007 was
$208,633 and $198,239, respectively.
NOTE
6 – ACCRUED EXPENSES
Accrued
expenses consist of the following:
|
|
|
December 31,
|
|
|
|
|
|
|
|
|
|
|
Wages,
bonuses and taxes
|
|
$ |
1,014,893 |
|
|
$ |
677,096 |
|
|
Union
dues
|
|
|
316,290 |
|
|
|
462,483 |
|
|
Accounting
and legal fees
|
|
|
30,000 |
|
|
|
42,000 |
|
|
Insurance
|
|
|
35,015 |
|
|
|
61,147 |
|
|
Insurance
settlement reserve
|
|
|
375,000 |
|
|
|
375,000 |
|
|
Inventory
purchases
|
|
|
- |
|
|
|
44,871 |
|
|
Other
|
|
|
171,255 |
|
|
|
196,451 |
|
|
|
|
$ |
1,942,453 |
|
|
$ |
1,859,048 |
|
NOTE
7 – 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
8.19% for a period of 36 months with the last payment due in
2011. Principal maturities over the next five years are as
follows:
|
Year ending
December 31,
|
|
|
|
|
|
|
|
|
|
2009
|
|
$ |
153,290 |
|
|
2010
|
|
|
108,982 |
|
|
2011
|
|
|
31,620 |
|
|
2012
|
|
|
- |
|
|
2013
|
|
|
- |
|
|
Totals
|
|
|
293,892 |
|
|
|
|
|
|
|
|
Less
current portion
|
|
|
(153,290 |
) |
|
Long-term
portion
|
|
$ |
140,602 |
|
NOTE
8 - INCOME TAXES
The major
deferred tax items are as follows:
|
|
|
December 31,
|
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
Allowances
established against realization of certain assets
|
|
$ |
1,178,000 |
|
|
$ |
1,344,000 |
|
|
Net
operating loss carryforwards
|
|
|
13,062,000 |
|
|
|
12,145,000 |
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
Accrued
liabilities and other
|
|
|
12,000 |
|
|
|
(4,000 |
) |
|
|
|
|
14,252,000 |
|
|
|
13,485,000 |
|
|
Valuation
allowance
|
|
|
(14,252,000 |
) |
|
|
(13,485,000 |
) |
|
|
|
$ |
- |
|
|
$ |
- |
|
The
valuation allowance increased $767,000 and decreased $302,000 for the years
ended December 31, 2008 and 2007, respectively. The valuation
allowance increased in the current year primarily due to an adjustment in the
amount of $908,000 to increase net operating loss carryforwards and the related
valuation allowance to the proper amounts.
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:
|
|
|
2008
|
|
|
2007
|
|
|
Federal
statutory tax rate
|
|
|
35.0 |
% |
|
|
35.0 |
% |
|
State
tax, net of federal benefit
|
|
|
5.0 |
% |
|
|
5.0 |
% |
|
Change
in valuation allowance
|
|
|
(55.4 |
)% |
|
|
(44.6 |
)% |
|
Permanent
differences
|
|
|
15.4 |
% |
|
|
4.6 |
% |
|
Effective
tax rate
|
|
|
0.0 |
% |
|
|
0.0 |
% |
At
December 31, 2008, the Company has available for U.S. federal income tax
purposes net operating loss carry-forwards of approximately
$32,656,000. These carryforwards expire in the years 2011 through
2026. 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 2005 through
2008. 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, 2008, the
Company recognized no interest and penalties.
NOTE
9 - SHAREHOLDERS’ EQUITY
Stock
Options
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. The 1997 Plan has expired, and while no new options may be
granted under the 1997 Plan, some options granted under that plan remain
exercisable. At December 31, 2008, there were 450,000 options
outstanding under this plan and no 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 could 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, 2008, there were options outstanding under the
2000 Plan for 1,655,900 shares and 344,100 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.
The
following is a summary of options granted:
|
|
|
Year Ended December 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
Average
Exercise
Price
|
|
|
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Options
outstanding at beginning of the year
|
|
|
2,191,630 |
|
|
$ |
2.59 |
|
|
|
2,195,710 |
|
|
$ |
2.61 |
|
|
Granted
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
Exercised
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
Canceled
|
|
|
(85,730 |
) |
|
|
12.25 |
|
|
|
(4,080 |
) |
|
|
14.08 |
|
|
Options
outstanding at end of the year
|
|
|
2,105,900 |
|
|
$ |
2.20 |
|
|
|
2,191,630 |
|
|
$ |
2.59 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
Exercisable
|
|
|
2,105,900 |
|
|
$ |
2.20 |
|
|
|
2,191,630 |
|
|
$ |
2.59 |
|
There is
no intrinsic value at December 31, 2008 for outstanding or exercisable
options.
|
|
|
|
|
|
|
|
|
Number
Outstanding
as of 12/31/08
|
|
|
Weighted
average
remaining
contractual life
in years
|
|
|
Weighted
average
exercise price
|
|
|
Number
exercisable as
of 12/31/08
|
|
|
Weighted
average
exercise price
|
|
|
$0.50
|
|
|
250,000 |
|
|
|
0.89 |
|
|
$ |
0.50 |
|
|
|
250,000 |
|
|
$ |
0.50 |
|
|
$0.55
- $1.20
|
|
|
192,500 |
|
|
|
1.18 |
|
|
$ |
0.84 |
|
|
|
192,500 |
|
|
$ |
0.84 |
|
|
$2.00
|
|
|
510,000 |
|
|
|
2.44 |
|
|
$ |
2.00 |
|
|
|
510,000 |
|
|
$ |
2.00 |
|
|
$2.50
|
|
|
283,400 |
|
|
|
0.24 |
|
|
$ |
2.50 |
|
|
|
283,400 |
|
|
$ |
2.50 |
|
|
$3.00
|
|
|
870,000 |
|
|
|
1.39 |
|
|
$ |
3.00 |
|
|
|
870,000 |
|
|
$ |
3.00 |
|
|
$0.50
- $3.00
|
|
|
2,105,900 |
|
|
|
1.41 |
|
|
$ |
2.20 |
|
|
|
2,105,900 |
|
|
$ |
2.20 |
|
On
November 7, 2002 the Company issued options to purchase a total of 7,500 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 $12.50 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, 2008 and 2007, the
weighted average exercise price for warrants outstanding was $0.75 and $0.63,
respectively.
Summarized
information for stock purchase warrants is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants
outstanding at December 31, 2006
|
|
|
100,000 |
|
|
$ |
0.50
- $0.75 |
|
|
|
|
|
|
|
|
|
|
|
|
Warrants
outstanding at December 31, 2007
|
|
|
100,000 |
|
|
$ |
0.50
- $0.75 |
|
|
Cancelled
|
|
|
(50,000 |
) |
|
$ |
0.50 |
|
|
|
|
|
|
|
|
|
|
|
|
Warrants
outstanding at December 31, 2008
|
|
|
50,000 |
|
|
$ |
0.75 |
|
Common
Stock
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.
During
the year ended December 31, 2008, the Company issued an aggregate of 40,000
shares to four members of the Company’s board of directors. The
shares issued to the board members had a value of $14,000, based upon the market
price at the date of issuance.
NOTE
10 - 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, 2008 and 2007.
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 $1,046,051 and
$717,233 for the years ended December 31, 2008 and 2007,
respectively.
NOTE
11 - SIGNIFICANT CUSTOMERS
Sales to
significant customers were as follows:
|
|
|
Year
Ended
December 31, 2008
|
|
|
Year
Ended
December 31, 2007
|
|
|
|
|
Revenue
|
|
|
%
of Total
Revenue
|
|
|
Revenue
|
|
|
%
of Total
Revenue
|
|
|
Jacobs
Field Services North America, Inc.
|
|
$ |
5,024,000 |
|
|
|
18.0 |
% |
|
$ |
3,884,000 |
|
|
|
17.4 |
% |
|
Black
& Veatch
|
|
$ |
3,345,000 |
|
|
|
12.0 |
% |
|
$ |
0 |
|
|
|
0.0 |
% |
|
B.
P. West Coast Products LLC
|
|
$ |
3,148,000 |
|
|
|
11.3 |
% |
|
$ |
1,517,000 |
|
|
|
6.8 |
% |
|
ARB,
Inc.
|
|
$ |
1,922,000 |
|
|
|
6.9 |
% |
|
$ |
4,008,000 |
|
|
|
17.9 |
% |
Significant
accounts receivable were as follows:
|
|
|
December 31, 2008
|
|
|
December 31, 2007
|
|
|
|
|
Accounts
Receivable
|
|
|
% of Total
Accounts
Receivable
|
|
|
Accounts
Receivable
|
|
|
% of Total
Accounts
Receivable
|
|
|
Southern
California Edison
|
|
$ |
557,000 |
|
|
|
9.8 |
% |
|
$ |
694,000 |
|
|
|
12.7 |
% |
|
Black
& Veatch
|
|
$ |
1,054,000 |
|
|
|
18.5 |
% |
|
$ |
0 |
|
|
|
0.0 |
% |
|
ARB,
Inc.
|
|
$ |
0 |
|
|
|
0.0 |
% |
|
$ |
1,516,000 |
|
|
|
27.7 |
% |
|
Jacobs
Field Services North America, Inc.
|
|
$ |
840,000 |
|
|
|
14.7 |
% |
|
$ |
992,000 |
|
|
|
18.1 |
% |
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
12 - COMMITMENTS AND CONTINGENCIES
Collective Bargaining
Agreements
Approximately
90% of the Company’s employees are covered under collective Bargaining
Agreements. Approximately 95% of the Company’s hourly employees are
covered by the Local No. 5 - International Association of Heat and Frost
Insulators and Asbestos Workers ("Local No. 5") agreement. The
Company’s subsidiary, Metalclad Insulation Corporation, is one of a group of
employers with a collective bargaining agreement with Local No.
5. Our Basic Agreement with Local No. 5 expired in September
2008. Metalclad Insulation Corporation and the other employers have
agreed with the negotiating representatives of Local No. 5 for an extension of
the expired contract while the parties continue their efforts to establish a new
agreement. Such extension is subject to termination upon 72 hour
notice. We continue to negotiate with Local 5 for a new Basic
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.
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 $212,696 and $211,804 for the years
ended December 31, 2008 and 2007, respectively. The Company has
future minimum non-cancelable lease commitments of $168,000, $173,000 and
$178,000 in 2009, 2010 and 2011, 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 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 have fluctuated
from 265 in 2004, to 199 in 2005, to 232 in 2006,. to 163 in 2007 and to 187 in
2008, but overall have exhibited a downward trend. At December 31,
2004, 2005, 2006 and 2007, there were, respectively, approximately 710, 507, 404
and 222 cases pending. As of December 31, 2008, there were 271 cases
pending. These claims are currently defended and covered by
insurance.
Set forth
below is a table for the years ended December 31, 2007 and 2008 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:
|
|
|
2008
|
|
|
2007
|
|
|
New
cases filed
|
|
|
187 |
|
|
|
163 |
|
|
Defense
Judgments and dismissals
|
|
|
109 |
|
|
|
292 |
|
|
Settled
cases
|
|
|
29 |
|
|
|
53 |
|
|
Total
resolved cases (1)
|
|
|
138 |
|
|
|
345 |
|
|
Pending
cases (1)
|
|
|
271 |
|
|
|
222 |
|
|
Total
indemnity payments
|
|
$ |
7,582,550 |
|
|
$ |
7,974,500 |
|
|
Average
indemnity paid on settled cases
|
|
$ |
261,467 |
|
|
$ |
150,462 |
|
|
Average
indemnity paid on all resolved cases
|
|
$ |
54,946 |
|
|
$ |
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.
We have
closely monitored the trend of asbestos related injury claims made against the
Company over the past eight years. That trend, on a year to year
basis, has been somewhat erratic over the past three years, but has been
generally downward over the past eight years. We believe, however,
that it is probable that a general downward trend will continue, although such
continuance cannot be assured. From 2001 and through 2008, the annual
average indemnity paid on over 3,000 resolved cases has fluctuated
significantly, between a low of $14,504 in 2006 and a high of $54,946 in 2008,
with an overall average over that period of approximately
$20,900. During this period, there has been no discernible upward or
downward trend in indemnity payments.
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 $44,359 in 2008. The weighted average defense cost per resolved
claim from 2005 through 2008 was $18,233. 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. Due to this aggressive defensive posture, the new claims
against the Company have tended to have a greater potential liability and
therefore require more resources to defend. We intend to monitor the
defense costs in 2009 and will adjust our estimates if events occur which would cause us to believe
that those estimates need revision. We are currently
projecting those costs to be approximately $18,500 per claim.
In our
Form 10-KSB filed with the Securities and Exchange Commission for the year ended
December 31, 2007, 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. We further 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 and that we would resolve 194 cases in
2008. Accordingly, we previously had 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 previously estimated our liability for current and future
asbestos-related claims at December 31, 2008 to be approximately
$29,000,000. This amounted 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.
As of
December 31, 2008, we re-evaluated our estimates to take into account our
experience in 2008, which was unfavorable compared to previous
years. Primarily as a result of an increase in the number of new
cases commenced during 2008 which exceeded our previous estimates, we now
estimate that there will be 877 asbestos-related injury claims made against the
Company after December 31, 2008. The 877, in addition to the 271
claims existing as of December 31, 2008, totaled 1,148 current and future
claims. Multiplying the average indemnity per resolved claim over the
past eight years of $20,900, times 1,148, we project the probable future
indemnity to be paid on those claims after December 31, 2008 to be equal to
approximately $24 million. In addition, multiplying an estimated cost
of defense per resolved claim of approximately $18,500 times 1,148, we projected
the probable future defense costs to equal approximately $21.25
million. Accordingly, our total estimated future asbestos-related
liability at December 31, 2008 is $45.25 million.
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 general trend of reducing asbestos-related injury
claims experienced prior to 2008 will resume 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
remain solvent and 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, as discussed under “Insurance Coverage Litigation”
below. Regardless of our best estimates of liability for
current and future asbestos-related claims, the liability for these claims could
be higher or lower than estimated by amounts which are not
predictable. We have made material revisions to our projections of
our potential asbestos related liability in the past, and we cannot give any
assurance that our liability for such claims will not ultimately exceed our
available insurance coverage. We believe, however, that our current
insurance is adequate to satisfy additional liability that is reasonably
possible in the event actual losses exceed our estimates. We will
update our estimates of liability and insurance coverage in future filings with
the Securities and Exchange Commission, as events occur which would cause us to
believe that those estimates need revision, based upon the subsequent claim
experience, using the methodology we have employed.
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 2001. 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.
Although
defense costs are included in our insurance coverage, we expended $296,000 and
$128,000 in 2007 and 2008, 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
determined that the minimum probable insurance coverage available to satisfy
asbestos-related injury claims significantly exceeds our estimated future
liability for such claims of $45,250,000 and $36,000,000 as of December 31, 2008
and 2007, respectively. Accordingly, we have included $45,250,000 and
$36,000,000 of such insurance coverage receivable as an asset on our December
31, 2008 and 2007 balance sheets, respectively. Our 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, as discussed below. Regardless of our best
estimates of liability for current and future asbestos-related claims, the
liability for these claims could be higher or lower than estimated by amounts
which are not predictable. We, of course, cannot give any assurance
that our liability for such claims will not ultimately exceed our available
insurance coverage. We believe, however, that our current insurance
is adequate to satisfy additional liability that is reasonably possible in the
event actual losses exceed our estimates. We will update our
estimates of liability and insurance coverage in future filings with the
Securities and Exchange Commission, as events occur which would cause us to
believe that those estimates need revision, based upon the subsequent claim
experience, using the methodology we have employed.
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. The
ACE Lawsuit is principally about coverage responsibility among the several
insurers, as well as total coverage. Regardless of the outcome of
this litigation, Entrx does not believe that the ACE Lawsuit will result in
materially diminishing Entrx’s insurance coverage for asbestos-related
claims. 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, but has accrued $375,000 to cover
potential indemnification obligations. Based upon information known
to date, the Company is unable to predict to what extent its indemnification
obligations are reasonably possible to vary from the amounts
accrued.
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 obligation to satisfy this
award is remote, and we therefore believe that there is no potential liability
to the Company which needs to be recorded in our financial
statements. 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.
Since the
May 2006 Settlement Agreement, the remaining action against Javier Guerra
Cisneros and Promotora Industrial Galeana, S.A. de C.V has experienced repeated
and extended delays in the State Court in Mexico City. In the fourth quarter of
2007, the Company filed an amparo (injunction)
application with the Mexican federal court in Mexico City, requesting that the
State Court take affirmative action in the Company's pending case. That amparo was denied during the
first quarter of 2008 and an appeal was presented to the federal appellate
court. The appeal was denied during the second quarter of
2008. The Company is investigating its options with regard to
pursuing the lawsuit.
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. 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. If Allstate
is required to provide indemnity for Entrx’s asbestos-related lawsuits, it is
likely that Entrx would have to indemnify Allstate for asbestos-related claims
that it defends up to $2,500,000 in the aggregate. If Allstate is not
required to provide indemnity, Entrx would have no liability to
Allstate. Entrx has accrued $375,000 as a potential loss in
connection with the Allstate matter and nothing has come to our attention that
would require us to record a different estimate at December 31,
2008.
Other
Matters
The
Company had under contract uncompleted work at bid prices totaling approximately
$8,727,000 and $12,629,000 at December 31, 2008 and 2007,
respectively.
NOTE
13 - 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. Blake Capital Partners, LLC was current in the payment of
interest on the shareholder note receivable through the payment due March 1,
2006. The payments due after September 1, 2006, however, were not
made. 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 note and applied the $115,000 value of the stock against the outstanding
note balance. The 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 note to $25,000, the approximate value of the remaining collateral
securing the note. In December 2008, the Company received a notice
from the United States Bankruptcy Court that Blake Capital Partners, LLC and Mr.
Mills had filed for Chapter 7 bankruptcy. The Company is exploring
its opportunities to obtain proceeds from the sale of the 25,000 shares (250,000
shares before a one for ten share reverse stock split on April 30, 2008) of
VioQuest Pharmaceuticals, Inc. common stock pledged as collateral on the note,
but any proceeds are expected to be de minimis. As such, the Company
has completely written-off the note from Blake Capital Partners, LLC as of
December 31, 2008.
An
officer of the Company was employed by a corporation which received payments for
rent and health insurance of $44,346 and $43,715 for the years ended December
31, 2008 and 2007, respectively.
|
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, 2008, 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, 2008 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, 2008. 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, 2008, 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
|
|
68
|
|
President,
Chief Executive Officer, Chairman of the Board and
Director
|
|
|
|
|
|
|
|
|
|
Joseph
M. Caldwell(1)(2)(3)
|
|
2002
|
|
41
|
|
Director
|
|
|
|
|
|
|
|
|
|
E.
Thomas Welch(4)
|
|
2004
|
|
70
|
|
Director
|
|
|
|
|
|
|
|
|
|
David
E. Cleveland(5)
|
|
2008
|
|
75
|
|
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. In July 2008, Mr. Hauser founded, and is
the owner of, Standard Health, Inc., with offices in St. Paul,
Minnesota. Standard Health, Inc. engages in the marketing of a
proprietary software system called HealthAccountPro™, for health care claim
administration and accounting serving the consumer-driven health care plans
through third-party health care administrators, for unions and self-directed
corporate health care plans. Mr. Hauser was a founder, and was the
principal owner and chairman of the board of directors, of Health Care Financial
Solutions, Inc., from March 2003 until July 2008. Healthcare
Financial Solutions, Inc., with its office located in St. Paul, Minnesota, was
engaged in the development and marketing of the software system now being
marketed by Standard Health, Inc. From 1967 until June 2003, Mr.
Hauser was engaged in the securities brokerage industry. During that
period, 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. 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 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 Corp. 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 privately held Internet
service provider, providing services in over 1,300 cities nationwide and
over 110 cities internationally, with its principal office at 12450 Wayzata
Blvd, #121, Minnetonka, Minnesota, 55305. 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, located at 730 2nd Ave South, # 1400, Minneapolis, Minnesota 55402,
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, located at 1801 Riverside
Avenue, Minneapolis, Minnesota 55454, 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, 2008, the Board of Directors held five
meetings. Each member of the Board of Directors was present for all
of the meetings.
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, 2008.
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, 2008.
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. No meeting of the nominating committee was held in
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 2009, after May 31, 2009.
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, 2008, 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
|
|
45
|
|
Treasurer
and Chief Financial Officer
|
|
|
|
|
|
|
|
David
R. Trueblood
|
|
38
|
|
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. Mr. Niebur has a Bachelor of Arts degree in accounting
and is a certified public accountant (inactive). Since July 2000, Mr.
Niebur has acted as a vice president and controller for Wyncrest Capital, Inc.
located at 800 Nicollet Mall Suite 2690 Minneapolis, Minnesota 55402, a
privately held venture capital firm. Mr. Niebur’s primary duties for
Wyncrest Capital, Inc. have been to act as chief financial officer and a
director for Spectre Gaming, Inc. (OTCBB: SGMG), in which Wyncrest
Capital, Inc. had made an equity investment, from January 2003 until November
2005. Spectre Gaming, Inc. was engaged in the business of developing
and marketing electronic gaming systems for the Native American gaming
market. Mr. Niebur’s duties for Wyncrest Capital, Inc. also included
acting from January 2005 until March 2007 as Chief Financial Officer and
Secretary of Ready Credit Corporation (Pink Sheets: RCTC), another corporation
in which Wyncrest Capital, Inc. has an investment, with offices in Minneapolis,
Minnesota, and from January 2005 until May 2008 as a member of the board of
directors of Ready Credit Corporation.
David
R. Trueblood was elected
as President of Entrx’s wholly owned subsidiary, Metalclad Insulation
Corporation, on February 1, 2007. 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 project manager, bidding upon, securing and managing a
number of Metalclad’s 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, 2008, 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 required to
filed by a member of the Board of Directors, David E. Cleveland, upon his
election on January 28, 2008, was filed one day late on February 8,
2008.
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, 2008, 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 2008. The
foregoing persons are collectively referred to in this Form 10-K as the “Named
Executive Officers.” Compensation information is shown for fiscal
years 2008 and 2007.
|
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
|
|
2008
|
|
|
78,750 |
|
|
|
— |
|
|
|
3,500 |
(4)
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
82,250 |
|
|
Officer
|
|
2007
|
|
|
75,000 |
|
|
|
— |
|
|
|
7,200 |
(4))
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
82,200 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Brian
D. Niebur
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Treasurer
and Chief
|
|
2008
|
|
|
82,688 |
|
|
|
30,215 |
(2)
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
112,903 |
|
|
Financial
Officer
|
|
2007
|
|
|
78,750 |
|
|
|
15,310 |
(2)
|
|
|
1,600 |
(5)
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
95,660 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
David R. Trueblood(1)
|
|
2008
|
|
|
141,845 |
|
|
|
55,397 |
(3)
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
197,242 |
|
|
President
of Metalclad
|
|
2007
|
|
|
126,969 |
|
|
|
26,021 |
(3)
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
152,990 |
|
|
Insulation
Corporation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 2008, 2007 and 2006, equal to $44,303,
$30,215 and $15,310, respectively. The 2008 bonus was paid in
2009 and is not included in the table above, the 2007 bonus was paid in
2008 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 2008, 2007 and 2006, equal to $88,758, $55,785
and $20,821, respectively. $4,812 of the 2008 bonus was paid in
December 2008, with the remaining amount paid in 2009 and is not included
in the table above, $5,200 of the 2007 bonus was paid in December 2007,
with the remaining amount paid in 2008. The 2006 bonus was paid
in 2007.
|
|
(4)
|
Common
stock awards of 10,000 and 45,000 valued at $3,500 and $7,200,
respectively, were granted to Mr. Hauser in 2008 and 2007, 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 $1,600, was granted to Mr. Niebur in
2007, for services as a member of the Metalclad Insulation Corporation
Board of Directors.
|
Outstanding Option Awards at
Year End
The
following table provides certain information regarding unexercised options to
purchase common stock, stock options that have not vested, and equity-incentive
plan awards outstanding at December 31, 2008, for each Named Executive
Officer.
|
Outstanding Equity Awards At Fiscal Year-End
|
|
|
Name
|
|
Option Awards
|
|
Stock Awards
|
|
|
|
|
Number of
Securities
Underlying
Unexercised
Options
(#)
Exercisable
|
|
|
Number of
Securities
Underlying
Unexercised
Options
(#)
Unexercisable
|
|
|
Equity
Incentive Plan
Awards:
Number of
Securities
Underlying
Unexercised
Unearned
Options (#)
|
|
|
Option
Exercise
Price ($)
|
|
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.
|
|
|
200,000 |
|
|
|
0 |
|
|
|
0 |
|
|
$ |
0.50 |
|
10/15/09
|
|
|
0 |
|
|
|
n/a |
|
|
|
0 |
|
|
|
0 |
|
| Hauser
|
|
|
10,000 |
|
|
|
0 |
|
|
|
0 |
|
|
$ |
0.55 |
|
12/31/09
|
|
|
0 |
|
|
|
n/a |
|
|
|
0 |
|
|
|
0 |
|
|
Brian
D.
|
|
|
50,000 |
|
|
|
0 |
|
|
|
0 |
|
|
$ |
2.50 |
|
3/10/10
|
|
|
0 |
|
|
|
n/a |
|
|
|
0 |
|
|
|
0 |
|
| Niebur
|
|
|
20,000 |
|
|
|
0 |
|
|
|
0 |
|
|
$ |
0.65 |
|
3/04/09
|
|
|
0 |
|
|
|
n/a |
|
|
|
0 |
|
|
|
0 |
|
|
David
R. Trueblood
|
|
|
7,000
|
|
|
|
0
|
|
|
|
0
|
|
|
$ |
1.20
|
|
9/23/09
|
|
|
0
|
|
|
|
n/a
|
|
|
|
0
|
|
|
|
0
|
|
Director
Compensation
The
following table sets forth the compensation paid to our directors for our fiscal
year ended December 31, 2008, 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
($)
|
|
|
Joseph M. Caldwell (2)
|
|
|
0 |
|
|
|
3,500 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
3,500 |
|
|
David E. Cleveland(3)
|
|
|
0 |
|
|
|
3,500 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
3,500 |
|
|
E. Thomas Welch (4)
|
|
|
0 |
|
|
|
3,500 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
3,500 |
|
|
(1)
|
On
January 28, 2008, the Company issued each of its three independent
directors 10,000 shares of common stock. The stock was valued
at $0.35 per share, the fair market value on January 28,
2008.
|
|
(2)
|
At
December 31, 2008, Mr. Caldwell had exercisable options to purchase 90,000
shares of our common stock: (i) 50,000 shares at $2.50 per
share, expiring on June 24, 2009); (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.
Cleveland was elected to the board of directors on January 28,
2008.
|
|
(4)
|
At
December 31, 2008, 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 28, 2009, 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,
2009.
|
|
(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 28,
2009, plus it assumes in each case that the shareholder exercised all
vested options available to that person as of April 29,
2009.
|
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 28, 2009. 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 |
|
|
|
12.6 |
% |
|
Wayne
W. Mills
2125
Hollybush Road
Medina,
MN 55340
|
|
|
445,000 |
|
|
|
5.8 |
% |
|
Grant
S. Kesler
3739
Brighton Point Drive
Salt
Lake City, UT 84121
|
|
|
764,335 |
|
|
|
9.2 |
% |
|
Anthony
C. Dabbene
26921
Magnolia Court
Laguna
Hills, CA 92653
|
|
|
487,200 |
|
|
|
6.0 |
% |
|
George
W. Holbrook, Jr.
1157
S.W. 30th
Street
Suite
E
Box
1938
Palm
City, FL 34991
|
|
|
451,615 |
|
|
|
5.9 |
% |
|
James
R. McGoogan
1157
S.W. 30th
Street
Suite
E
Box
1938
Palm
City, FL 34991
|
|
|
387,740 |
|
|
|
5.1 |
% |
|
Bradley
Resources Company
1157
S.W. 30th
Street
Suite
E
Box
1938
Palm
City, FL 34991
|
|
|
376,255 |
|
|
|
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 on a Form 13 D/A on February 14, 2008, Mr. Mills owns 225,000
shares held in his Individual Retirement Account, and 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 463,100 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 28, 2009, 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, 2008, 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
|
|
|
2,105,900 |
(1)
|
|
$ |
2.20 |
|
|
|
344,100 |
|
|
Equity
compensation plans not approved by security holders
|
|
|
50,000 |
(2)
|
|
$ |
0.75 |
|
|
None
|
|
|
Total
|
|
|
2,155,900 |
|
|
$ |
2.16 |
(3)
|
|
|
344,100 |
|
|
(1)
|
Options
for 1,655,900 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 450,000 shares were
granted under similar plans which were previously adopted and approved by
the shareholders, and which have been
terminated.
|
|
(2)
|
Warrants
for 50,000 shares have been issued to one person in connection with
concessions. The warrants are exercisable at $0.75 per share,
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 $3.00 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 was not repaid on the 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.
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.
In
October 2003, the Company negotiated an amendment to the Note and Pledge
Agreement with Blake Capital Partners and Mr. Mills, 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. 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 indicated to the Company that he was 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. In December 2008, the Company
received a notice from the United States Bankruptcy Court that Blake Capital
Partners, LLC and Mr. Mills had filed for Chapter 7 bankruptcy. The
Company is exploring its opportunities to obtain proceeds from the sale of the
25,000 shares (250,000 shares before a one for ten share reverse stock split on
April 30, 2008) of VioQuest Pharmaceuticals, Inc. common stock pledged as
collateral on the note, but any proceeds are expected to be de
minimis. As such, the Company has completely written-off the note
from Blake Capital Partners, LLC as of December 31, 2008.
(a)
The
following exhibits are being filed with this Annual Report on Form 10-K and/or
are incorporated by reference therein in accordance with the designated footnote
references:
|
|
3.
|
Restated
and Amended Certificate of Incorporation and Bylaws of the Company, and
all amendments thereto. (1)
|
|
|
3.2
|
Amended
and Restated Bylaws adopted February 14, 2002.
(2)
|
|
|
3.3
|
Certificate
of Amendment to Certificate of Incorporation effective June 25, 2002.
(3)
|
|
|
4.1
|
Form
of Certificate for Common Stock.
(4)
|
|
|
10.1
|
Form
of 1997 Omnibus Stock Option and Incentive Plan.
(5)
|
|
|
10.2
|
Form
of 2000 Omnibus Stock Option and Incentive Plan.
(6)
|
|
|
10.3
|
Curtom-Metalclad
Partnership Agreement and Amendment.
(7)
|
|
|
10.4
|
Secured
Promissory Note of Blake Capital Partners and Guarantee of Wayne W. Mills
dated November 1, 2003. (8)
|
|
|
10.5
|
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. (9)
|
|
|
10.6
|
Settlement
Agreement and Full Policy Release between the Company and one of its
insurers dated June 22, 2004. (10)
|
|
|
10.7
|
Settlement
Agreement between the Company and Ventana Global Environmental
Organizational Partnership, L.P. and North America Environmental Fund,
L.P. dated May 31, 2006. (11)
|
|
|
21.
|
List
of Subsidiaries of the Registrant.
(13)
|
|
|
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 Proxy Statement dated April 17, 1997 and incorporated
herein by this reference.
|
|
(6)
|
Filed
with the Company’s Proxy Statement dated October 20, 2000 and incorporated
herein by this reference.
|
|
(7)
|
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.
|
|
(8)
|
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.
|
|
(9)
|
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.
|
|
(10)
|
Filed
with the Company's Form 8-K on June 25, 2004 as Exhibit 10.1 and
incorporated herein by this
reference.
|
|
(11)
|
Filed
with the Company's Form 8-K on June 2, 2006 as Exhibit 1 and incorporated
herein by this reference.
|
|
(12)
|
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.
|
|
(13)
|
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
23, 2008, upon the recommendation and approval of the Audit Committee, Entrx
engaged Virchow, Krause & Company, LLP (“Virchow Krause”), independent
registered public accountants with an office in Minneapolis, Minnesota, to audit
Entrx’s consolidated financial statements for 2008 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, 2007 and 2008 fiscal years.
Audit
Fees
Virchow
Krause billed Entrx $82,058 and $93,002 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 2007 and 2008 fiscal years,
respectively. Included in this category in 2008 were fees paid to Virchow Krause
for assistance related to our Securities and Exchange Commission comment
letters.
Audit-Related
Fees
Virchow
Krause billed Entrx no amounts during 2007 or 2008 for assurance and related
services provided to Entrx that are not included under the caption “Audit Fee”
above.
Tax Fees
Virchow
Krause billed Entrx $16,370 and $23,200 for services in connection with tax
compliance, tax advice and tax planning for the 2007 and 2008 fiscal years,
respectively. The services billed for in 2007 and 2008 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 2007 or 2008.
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 2007 and 2008,
and to provide its report thereon, (ii) the preparation of our 2007 and 2008
federal and state income tax returns, and (iii) the review of our quarterly
reports on Form 10Q filed in 2007 and 2008. No other services, other
than those set forth in the foregoing sentence, were performed by Virchow Krause
on our behalf in 2007 or 2008.
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 25, 2009
|
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
25, 2009
|
|
Peter
L. Hauser
|
|
(Principal
Executive Officer)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
/s/ Brian D. Niebur
|
|
Chief
Financial Officer
|
|
March
25, 2009
|
|
Brian
D. Niebur
|
|
(Principal
Financial and Accounting Officer)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
/s/ Joseph M. Caldwell
|
|
Director
|
|
March
25, 2009
|
|
Joseph
M. Caldwell
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
/s/ David E. Cleveland
|
|
Director
|
|
March
25, 2009
|
|
David
E. Cleveland
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
/s/ E. Thomas Welch
|
|
Director
|
|
March
25, 2009
|
|
E.
Thomas Welch
|
|
|
|
|