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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
 OR (    )
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the year ended December 31, 2003 Commission File Number 0-2000 Entrx Corporation  Delaware
(State or other jurisdiction of
incorporation or organization)
    
    95-2368719
(I.R.S. Employer ID No.)
 800 Nicollet Mall, Suite 2690
Minneapolis , Minnesota
(Address of Principal Executive Office)
    
    55402
(Zip Code)
 Registrants telephone number, including area code (612) 333-0614 
 Securities registered pursuant to Section 12(b) of the Act: Title of each class
    
    Name of each exchange
on which registeredNone
    
    None
 Securities registered pursuant to Section 12(g) of the Act: Common Stock  $.10 Par Value
(Title of Class)   Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes   ( X )    No (   ) Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrants knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. (  ) Indicate by check mark whether the registrant is an accelerated filer
(as defined by rule 12b-2 of the Act). Yes (   ) No ( X ) The aggregate market value of the Common Stock held by non-affiliates of
the registrant on March 9, 2004 was approximately $8,082,080, based upon the
average of the bid and asked prices of the Common Stock, as reported on The
Nasdaq Stock Market®. The number of shares of the Common Stock of the registrant outstanding as
of March 9, 2004 was 7,244,215. Documents incorporated by reference: Portions of the Companys Proxy Statement to be filed with the Securities
and Exchange Commission in connection with the Companys 2004 Annual Meeting of
Stockholders are incorporated by reference into Part III hereof.




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TABLE OF CONTENTS  PART IITEM 1. BUSINESSITEM 2. PROPERTIESITEM 3. LEGAL PROCEEDINGSITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERSPART IIITEM 5. MARKET FOR THE REGISTRANTS COMMON EQUITY AND RELATED STOCK HOLDER MATTERSITEM 6. SELECTED FINANCIAL DATAITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSItem 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATAITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSUREITEM 9A. CONTROLS AND PROCEDURESPART IIIITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANTITEM 11. EXECUTIVE COMPENSATIONITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONSITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICESPART IVITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-KSIGNATURESITEM 15(A)(1) and (2)REPORT OF INDEPENDENT AUDITORSINDEPENDENT AUDITORS REPORTCONSOLIDATED BALANCE SHEETSCONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITYCONSOLIDATED STATEMENTS OF CASH FLOWSNOTES TO CONSOLIDATED FINANCIAL STATEMENTSSCHEDULE II  VALUATION AND QUALIFYING ACCOUNTSSecured Convertible Promissory NotePledge AgreementRegistration Rights AgreementWarrant issued to Pandora Select Partners L.P.Code of EthicsList of Subsidiaries of the RegistrantRule 13a-14(a) Certification of CEORule 13a-14(a) Certification of CFOSection 1350 Certification    Table of Contents  All statements, other than statements of historical fact, included in this
Form 10-K, including without limitation the statements under Managements
Discussion and Analysis of Financial Condition and Results of Operations and
Business are, or may be deemed to be, forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, 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; the outcome of existing litigation; competitive
pricing and other pressures from other businesses in the Companys markets;
adequacy of insurance, including the adequacy of insurance to cover potential
future asbestos-related injury claims; the valuation of the Companys
investments; economic conditions generally and in the Companys primary
markets; availability of capital; the adequacy of the Companys cash and cash
equivalents; cost of labor; and other risk factors detailed herein and in other
of the Companys filings with the Securities and Exchange Commission. The
forward-looking statements are made as of the date of this Form 10-K and the
Company assumes no obligation to update the forward-looking statements or to
update the reasons actual results could differ from those projected in such
forward-looking statements. Therefore, readers are cautioned not to place
undue reliance on these forward-looking statements. 
 PART I References to we, us, our, the registrant and the Company in this annual report on form 10K shall mean
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. 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. Between May and September 2002, we acquired approximately 90% of the
outstanding shares of Surg II, Inc. (Surg II) (Nasdaq: SURG), and on October
22, 2002, we distributed 3,791,576 shares of Surg II to our shareholders as a
dividend. We still own 190,566 shares of Surg II common stock. Surg II is now
known as Chiral Quest, Inc., and trades on the OTC Bulletin Board under the
symbol CQST. For over 30 years, the Company and its predecessors have been providing
insulation and asbestos abatement services, primarily on the West Coast. We
currently provide these services through Metalclad Insulation Corporation to a
wide range of industrial, commercial and public agency clients. Our principal executive offices are located at 800 Nicollet Mall, Suite
2690, Minneapolis, Minnesota 55402, and our telephone number is (612)
333-0614. Metalclad Insulation Corporations principal facilities are located
at 2198 South Dupont Drive, Anaheim, California 92806. 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 contractor and typically provides project
management, labor, tools, equipment and materials necessary to complete the
installation. We perform substantially all of the work required to complete most
contracts, while generally subcontracting to others the scaffolding, painting
and other trades not performed by Metalclad Insulation. In a typical
insulation project, we obtain plans and specifications prepared by




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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 material with water and a wetting agent to minimize fiber
release. Dry removal is conducted in special cases where wetting is not
feasible, provided Environmental Protection Agency (EPA) approval is
obtained. 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. Under these types of 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 full-time employees engaged in
asbestos abatement activities are required to attend a minimum four-day course
approved by the EPA and the Occupational Safety and Health Administration
(OSHA), and all supervisors of abatement projects are required to attend an
eight-hour first aid/CPR/safety course and an eight-hour EPA/AHERA refresher
course annually. One of our full-time salaried employees and 22 hourly
employees have been trained and certified as competent individuals under EPA
regulations relating to the training of asbestos abatement workers. All
employees are issued detailed training materials. 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 field employees. During removal
procedures, asbestos containing material is generally treated to minimize fiber
release, and filtration devices are used to reduce contamination levels. Air
monitoring to determine asbestos fiber contamination levels is conducted on all
abatement projects involving the removal of friable asbestos. 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. 3




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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,
the National 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, which qualifies for
preferential contract bidding because of minority status. Metalclad Insulation
Corporation owns a 49% interest in the joint venture. The joint venture, known
as Curtom-Metalclad, submits bids for insulation and asbestos abatement
services. When contracts are obtained by the joint venture, we perform the
work specified in the contract as a subcontractor to the joint venture. We
also receive an interest in 49% of the profits or losses of the joint venture.
Sales for the year ended December 31, 2003 to Curtom-Metalclad were
approximately $5,113,000 or 40.2% of our revenue, compared to $6,384,000 or
45.2% of revenue in 2002. While the revenues and gross profit of
Curtom-Metalclad are significant to us, the assets, liabilities and earnings of
that joint venture are insignificant, and not material. The termination of the
Curtom-Metalclad joint venture and the loss of revenues that joint venture
generates, would have a material adverse affect on us. 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 installations, schools, hospitals, institutions, an array of
manufacturing/commercial facilities, and the general or mechanical construction
contractors. During 2003, we received a significant portion of our revenues
from Southern California Edison Company (17.5%) and LA Power Joint Venture
(14.1%), both through our Curtom-Metalclad joint venture. Shell Oil Products
US accounted for 10% of our revenues. We cannot project whether a significant
portion of our revenues derived from these customers in 2004. (See Note 19 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. 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, 2003 and
December 31, 2002 was $5,559,000 and $5,848,000, 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 15% 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, 2003 will be completed during the next eighteen months. 4




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Insurance and Bonding. Our combined general liability and contractor pollution insurance policy
provides base coverage of $1,000,000 per occurrence and excess liability
coverage of $5,000,000. Prior to 1975, the Company was engaged in the sale and installation of
asbestos related insulation materials, and has been the subject of 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. The number of asbestos related claims which have been initiated naming the
us (primarily our subsidiary, Metalclad Insulation Corporation) as a defendant
had increased from 254 in 1999 to 527 in 2000 and 685 in 2001. The number of
claims initiated slightly decreased to 583 in 2002, and further decreased to
337 in 2003. As of December 31, 2003, there were approximately 1,212 asbestos
cases pending, of which approximately 390 have been settled but not yet closed
for lack of final documentation or payment. At December 31, 2000, 2001 and
2002, there were, respectively, approximately 860, 1,450 and 1,635 cases
pending. It had been previously improperly reported in the Companys Form 10K
for the period ended December 31, 2002, filed with the Securities and Exchange
Commission, that there were approximately 660 cases pending at December 31,
2002, and 700 cases pending at the end of 2001. Although, the number of claims
made in 2002 and 2003 reflected a downward trend from 2001, and the number of
cases pending on December 31, 2003, dropped from those pending on December 31,
2002, it cannot be assumed that this trend will continue. The sympathies of
juries, the aggressiveness of the plaintiffs bar, and the declining defendant
base as a result of business failures, has also led to a trend of larger
payments and settlements per claim. It is difficult to determine if we have adequate insurance to cover these
claims. The terms of such insurance policies are complex, and the coverage for
many types of claims is limited. If the current trend of the claim occurrence
and amounts is not significantly reversed, it will likely have a material
adverse effect on our financial condition and business in the future. Because
of our insurance coverage, we do not anticipate any adverse effect on our
financial condition to develop for at least the next four to five years.
Beyond that, however, the effect of those claims is uncertain. In 2003, the United States Congress considered legislation to create a
privately funded, publicly administered fund to provide the necessary resources
for an asbestos injury claims resolution program. The latest draft of the
legislation called for the fund to be funded 50% by asbestos defendant
companies, of which the Company is one, and 50% by insurance companies. The
impact, if any, this potential legislation will have on us cannot be determined
at this time, although the latest draft of the legislation did not appear
favorable to us. While our current insulation and asbestos abatement services customers
generally do not require performance bonds, an increasing number of customers
have requested such bonds. Due to changes in the bonding industry, we had
difficulty obtaining performance bonds for two large projects in 2003. We
obtained bonds for these two projects by having Arrowhead Consulting Group post
a letter of credit with the bonding company. The bonding company required a
credit enhancement and accepted the letters of credit as the credit
enhancement. The Company paid Arrowhead Consulting Group cash consideration
for these letters of credit and issued them three-year warrants to purchase
100,000 shares of our common stock at $1.50 per share, which were valued at
fair market value and expensed during the year ended December 31, 2003. 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. Employees. As of December 31, 2003, we had two part-time salaried employees in our
executive offices and 14 full-time salaried employees in our insulation
business in California, for a total of 16 employees. These included three
executive officers, project managers/estimators, purchasing, accounting, and
office staff. As of December 31, 2003, our subsidiary, Metalclad Insulation Corporation,
employed approximately 87 hourly employees for insulation contracting services,
nearly all of whom are members of the International Association of Heat and
Frost Insulators and Asbestos Workers (AFL-CIO) or Laborers Local Union 300.
Metalclad Insulation Corporation is a party to agreements with various 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 5




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hourly
 employees and the
unions representing them to be good, and have not experienced any recent work
stoppages due to strikes by such employees. Additionally, the trade union
agreements we are a party to include no strike, no work stoppage provisions.
One agreement, the Maintenance Agreement with Local No. 5 of the
International Association of Heat and Frost Insulators and Asbestos Workers
expired in December 2003. The Maintenance Agreement is currently under
negotiation. The Basic Agreement with Local No. 5 of the International
Association of Heat and Frost Insulators and Asbestos Workers expires in August
2004. An agreement with the Laborers Local 300 was signed in January 2004 and
expires in December 2006. 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 ACM and asbestos insulation,
establish procedures for handling ACM during demolition and renovations, and
prohibit visible emissions during removal, transportation and disposal of ACM. We believe that we are substantially in compliance with all regulations
relating to its asbestos abatement operations, and currently have all material
government permits, licenses, qualifications and approvals required for our
operations. 
 ITEM 2. PROPERTIES Our executive offices are located in Minneapolis, Minnesota, which
consists of approximately 2,400 square feet leased at a current rate of $5,400
per month, on a month-to-month basis. Our wholly owned subsidiary, Metalclad Insulation Corporation, is housed
in a facility in Anaheim, California. This facility consists of 26,000 square
feet of office and warehouse space. In May, 2002 we purchased this facility
for $2,047,000. An inactive subsidiary of the Company owns an approximately 92-hectare
parcel (approximately 227 acres) of land in Santa Maria del Rio near San Luis
Potosi, Mexico. We are presently attempting to dispose of this property. Such
sale or disposition will not have a material effect on the Company. We believe that the properties currently owned and leased by us are
adequate for our operations for the foreseeable future. 
 ITEM 3. LEGAL PROCEEDINGS Asbestos Related Claims Prior to 1975, we were engaged in the sale and installation of asbestos
related insulation materials, and have been the subject of 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. 6




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The number of asbestos related claims which have been initiated naming us
(primarily our subsidiary, Metalclad Insulation Corporation) as a defendant had
increased from 254 in 1999, 527 in 2000 to 685 in 2001. The number of claims
initiated slightly decreased to 583 in 2002, and further decreased to 337 in
2003. As of December 31, 2003, there were approximately 1,212 asbestos cases
pending, of which approximately 390 have been settled but not yet closed for
lack of final documentation or payment. At December 31, 2000, 2001 and 2002,
there were, respectively, approximately 860, 1,450 and 1,635 cases pending. It
had been previously improperly reported in the Companys Forms 10K for the
period ended December 31, 2002, filed with the Securities and Exchange
Commission, that there were approximately 660 cases pending at December 31,
2002, and 700 cases pending at the end of 2001. Although, the number of claims
made in 2002 and 2003 reflected a downward trend from 2001, and the number of
cases pending on December 31, 2003, dropped from those pending on December 31,
2002, it cannot be assumed that this trend will continue. The sympathies of
juries, the aggressiveness of the plaintiffs bar, and the declining defendant
base as a result of business failures, has also led to a trend of larger
payments and settlements per claim. In the past we believed that we had adequate insurance to cover these
claims; however, the terms of such insurance policies are complex and the
coverage for many types of claims is limited. If the current trend of the
claim occurrence and amounts is not significantly reversed, it will likely have
a material adverse effect on our financial condition and business in the
future. Because of our insurance coverage, we do not anticipate any adverse
effect on our financial condition to develop for at least the next four to five
years. Beyond that, however, the effect of those claims is uncertain. In 2003 the United States Congress considered legislation to create a
privately funded, publicly administered fund to provide the necessary resources
for an asbestos injury claims resolution program. The latest draft of the
legislation called for the fund to be funded 50% by asbestos defendant
companies, of which the Company is one, and 50% by insurance companies. The
impact, if any, this potential legislation will have on us cannot be determined
at this time although the latest draft of the legislation did not appear
favorable to us. Claim Against Former Employee, Etc. In October 1999, we completed the sale of our operating businesses and
development project located in Aguascalientes, Mexico. That sale specifically
excluded those Mexican assets involved in the Companys NAFTA claim which was
settled in 2001. Under the terms of the sale we received an initial cash
payment of $125,000 and recorded a receivable for $779,000. 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. We have fully reserved for the $779,000 note receivable,
which was recorded at the date of sale. 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.
Most of the evidentiary hearings on the merits of the former employees claim
have taken place and we are preparing for final arguments. We believe this
claim is without merit and intend to vigorously defend against it. Claim by Former Attorney On February 5, 2003, a Notice of Involuntary Lien was filed against the
Company with the County Recorder for Orange County California in the amount of
$104,046. This lien relates to a judgment against the Company for attorney
fees in the Companys NAFTA settlement. The total amount of the claim
including interest and collection costs was $111,406. Subsequent to the lien
being filed, $27,050 was paid to the lien holder from a trust fund established
by the Company and a third party to pay for any judgments and defense costs
related to this lawsuit. We agreed to pay the remaining $84,356 of the claim
in three installments. As of December 31, 2003, the Company has paid the
judgment in full. 7




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The Company has been indemnified by the third party against any judgments
and costs related to this lawsuit in excess of the trust fund and has contacted
the third party seeking indemnification. The third party has refused to honor
its indemnification obligation and the Company has therefore initiated legal
proceedings against the third party. The third party has filed a
cross-complaint against the Company seeking $100,000 due to undue influence,
duress, fraud, unconscionability and conspiracy related to the original
indemnification agreement. The Company believes the cross-complaint is without
merit. 
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None 8




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PART II 
 ITEM 5. MARKET FOR THE REGISTRANTS COMMON EQUITY AND RELATED STOCK HOLDER MATTERS Market for Common Stock Our Common Stock is traded on The Nasdaq SmallCap Market under the symbol
ENTX. The following table sets forth, for the fiscal periods indicated, the
high and low bid prices for the Common Stock as reported by Nasdaq: Bid PriceHigh
    
    LowFiscal Year Ended December 31, 2002Quarter Ended March 31, 2002
    
    $
    3.65
    
    
    $
    1.80Quarter Ended June 30, 2002
    
    
    2.40
    
    
    
    1.59Quarter Ended September 30, 2002
    
    
    1.92
    
    
    
    0.80Quarter Ended December 31, 2002
    
    
    2.00
    
    
    
    0.70Fiscal Year Ended December 31, 2003Quarter Ended March 31, 2003
    
    $
    0.81
    
    
    $
    0.34Quarter Ended June 30, 2003
    
    
    1.71
    
    
    
    0.37Quarter Ended September 30, 2003
    
    
    1.45
    
    
    
    1.00Quarter Ended December 31, 2003
    
    
    1.35
    
    
    
    0.77
 As of March 9, 2004, the closing bid price for the common shares on The
Nasdaq SmallCap Market was $1.41. On December 11, 2002, we received a notice from The Nasdaq Stock Market,
Inc. advising us that because the minimum bid price of our Common Stock was not
at least $1.00 for thirty consecutive trading days, we did not meet the
requirements for continued listing on The Nasdaq SmallCap Market. We had 180
calendar days from the notice, or until June 9, 2003, to regain compliance,
obtain an extension or be delisted. On June 11, 2003, we received a 180 day
extension to December 8, 2003, in order to come back in compliance or be
delisted. On July 14, 2003, we received a notice from The Nasdaq Stock Market
that we had regained compliance with the $1.00 minimum bid price and that the
matter was closed. Shareholders of Record As of March 9, 2004, the approximate number of record holders of our
Common Stock was 1,553. 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. On October 22,
2002, we distributed 3,791,576 shares of Surg II, Inc. common stock which we
owned as a dividend to our shareholders of record as of the close of business
on October 11, 2002. The dividend was equal to one share of Surg II, Inc.
common stock for each two shares of the Companys common stock owned. Since
that date, Surg II, Inc. has changed its name to Chiral Quest, Inc., and its
shares are being traded on the over-the-counter Bulletin Board under the symbol
CQST. 9




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##### Table of Contents



Unregistered Sales of Securities The following table sets forth certain information regarding the sale of
common stock by the Company during the calendar year 2003 in transactions which
were not registered under the Securities Act of 1933 (the Act). Number of
    
    
    
    
    
    Exemption fromDate of
    
    Shares
    
    
    
    
    
    Registration ReliedSale
    
    Sold
    
    Person(s) to Whom Sold
    
    Consideration Paid
    
    Upon Under the Act4/8/03
    
    Options for 100,000
Shares
    
    President of wholly
owned subsidiary,
Metalclad Insulation
Corporation
    
    Services  Options
exercisable at
$0.50 per Share
through 4/6/10
    
    Section 4(2) of the
Securities Act of
1933, as a
transaction not
involving a public
offering.4/11/03
    
    Options for
110,000 Shares
    
    Members of the Board
of Directors of Entrx
Corporation (4
members) and its
subsidiary, Metalclad
Insulation
Corporation (1
member), and the
Chief Financial
Officer of Entrx
Corporation
    
    Services  50,000
Share options
exercisable at
$0.50 per Share,
40,000 Share
options exercisable
at $0.80 per Share,
and 20,000 Share
options exercisable
at $0.65 per Share
    
    Section 4(2) of the
Securities Act of
1933, as a
transaction not
involving a public
offering.
 10




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##### Table of Contents



ITEM 6. SELECTED FINANCIAL DATA The following selected financial data is derived from the consolidated
financial statements of the Company and should be read in conjunction with the
consolidated financial statements, related notes and other financial
information included herein. Year Ended December 31,2003
    
    2002 (4)
    
    2001
    
    2000
    
    1999(in thousands, except share and per share amounts)Statement of Operations Data(1)Revenues from continuing operations
    
    $
    12,733
    
    
    $
    15,021
    
    
    $
    18,008
    
    
    $
    17,769
    
    
    $
    13,422Loss from continuing operations
    
    
    (3,006
    )
    
    
    (5,286
    )
    
    
    (1,503
    )
    
    
    (1,702
    )
    
    
    (1,971
    )Income (loss) from discontinued operations
    
    
    
    
    
    
    
    
    
    
    7,079
    
    
    
    (63
    )
    
    
    (2,228
    )Net income (loss)
    
    
    (3,006
    )
    
    
    (5,286
    )
    
    
    5,576
    
    
    
    (1,765
    )
    
    
    (4,199
    )Earnings per share: (2)Loss per share of common stock,
continuing operationsbasic
    
    $
    (0.42
    )
    
    $
    (0.69
    )
    
    $
    (0.21
    )
    
    $
    (0.31
    )
    
    $
    (0.50
    )Loss per share of common stock,
continuing operationsdiluted
    
    $
    (0.42
    )
    
    $
    (0.69
    )
    
    $
    (0.21
    )
    
    $
    (0.31
    )
    
    $
    (0.50
    )Income (loss) per share of common stock,
discontinued operationsbasic
    
    $
    
    
    
    $
    
    
    
    $
    0.98
    
    
    $
    (0.01
    )
    
    $
    (0.57
    )Income (loss) per share of common stock,
discontinued operationsdiluted
    
    $
    
    
    
    $
    
    
    
    $
    0.97
    
    
    $
    (0.01
    )
    
    $
    (0.57
    )Income (loss) per share of common stockbasic
    
    $
    (0.42
    )
    
    $
    (0.69
    )
    
    $
    0.77
    
    
    $
    (0.32
    )
    
    $
    (1.07
    )Income (loss) per share of common stockdiluted
    
    $
    (0.42
    )
    
    $
    (0.69
    )
    
    $
    0.77
    
    
    $
    (0.32
    )
    
    $
    (1.07
    )Weighted average shares outstandingbasic (2)
    
    
    7,303,338
    
    
    
    7,608,823
    
    
    
    7,200,490
    
    
    
    5,470,002
    
    
    
    3,918,912Weighted average shares outstandingdiluted (2)
    
    
    7,303,338
    
    
    
    7,608,823
    
    
    
    7,261,568
    
    
    
    5,470,002
    
    
    
    3,918,912Balance Sheet DataTotal assets
    
    $
    8,664
    
    
    $
    11,063
    
    
    $
    17,792
    
    
    $
    11,422
    (3)
    
    $
    9,472
    (3)Convertible notes
    
    
    914
    
    
    
    
    
    
    
    
    
    
    
    1,029
    
    
    
    2,071Convertible debentures
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    310
    
    
    
    360Long-term debt
    
    
    297
    
    
    
    308
    
    
    
    241
    
    
    
    186
    
    
    
    149Mortgage payable
    
    
    1,587
    
    
    
    1,494
    
    
    
    
    
    
    
    
    
    
    
    Shareholders equity
    
    
    3,339
    
    
    
    6,509
    
    
    
    13,692
    
    
    
    6,891
    (3)
    
    
    5,155
    (3)Common shares outstanding (2)
    
    
    7,244,215
    
    
    
    7,504,215
    
    
    
    7,448,015
    
    
    
    6,581,114
    
    
    
    4,859,498
   (1)
    
    In the forth quarter of 1998, the company committed to a plan to
discontinue its operations in Mexico and to seek a buyer. Consequently,
the Statement of Operations Data has been restated to reflect this
decision.(2)
    
    Effective July 2, 1999, the Company implemented a 1 for 10 reverse stock
split. All prior periods have been restated.(3)
    
    Restated to reflect reclassification of certain related party
receivables.(4)
    
    Includes the operations of the Companys majority-owned subsidiary Surg
II, Inc. for the period May 30, 2002 through October 22, 2002. No dividends were paid or declared during the years ended December 31,
2003, 2001, 2000, or 1999. On October 22, 2002 the Company distributed
3,791,576 shares of Surg II, Inc. common stock as dividend to its shareholders
of record as of the close of business on October 11, 2002. The dividend was
equal to one share of Surg II, Inc. common stock for each two shares of Entrx
Corporation common stock owned. 11




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##### Table of Contents



ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Summary. Our revenues have decreased over the past two years from $18,008,000 in
2001 to $12,733,000 in 2003. Gross margin percentages have also decreased over
the same two-year period, from 13.7% in 2001 to 11.2% in 2003. We do not
anticipate that our revenues will continue to decrease in 2004, and anticipate
that gross margin percentages in 2004 will exceed those of 2003. We had net losses in 2002 and 2003 of approximately $5,286,000 and
$3,006,000, respectively. Included in these losses is $3,333,000 in 2002
resulting from a restructuring charge, and $1,000,000 in losses in 2003 as the
result of an impairment charge on one of our investments in a privately-held
company. While we anticipate an improvement in overall operating results in
2004, we still project an operating loss for 2004. We currently have an investment in two privately-held companies, totaling
$1,757,000, both of which are in the early stages of their business
development. One of these investments incurred an impairment in 2003. Either
or both of these investments could be further impaired in the future. Our revenues from maintenance contracts as opposed to new installation
contracts have declined over the past, reflecting greater competition in our
markets. While efforts are underway to reverse that trend, we are not sure
these efforts will be successful. In December of 2003, our operating subsidiary, Metalclad Insulation
Corporation, obtained a line of credit financing from the Far East National
Bank, Newport Beach, California. While the line of credit is for up to
$1,500,000, Metalclad Insulation Corporation is required to maintain a cash
balance with the Far East Bank for borrowings greater than $1,000,000 on a
dollar-for-dollar basis. Whether Far East Bank will be willing to renew this
line of credit in December of 2004 will be partially contingent upon our
financial condition and compliance with certain loan covenants. Currently, the
loan covenants require, among other things, that we maintain a net worth of
$4,400,000. We may not be in compliance with all of the loan covenants at the
end of 2004, in which case Far East National Bank may not provide us with any
debt financing. We obtained a $1,300,000 loan in December of 2003 from Pandora Select
Partners, LP, a British Virgin Islands limited partnership. The proceeds of
this loan should provide us with sufficient cash to operate through 2004. Our subsidiary, Metalclad Insulation Corporation, continues to be engaged
in lawsuits involving asbestos-related injury or potential injury claims. The
337 claims made in 2003 were down from the 685 and 583 claims made in 2001 and
2002 respectively, although the average severity of each claim has slightly
increased. These claims are currently defended and covered by insurance. We
have projected that we have sufficient insurance to provide coverage for the
next four to five years. This projection assumes that there is not a
significant increase in the annual number of new claims and that the severity
of each claim does not increase significantly. The projection also assumes
that the insurance companies live up to what we believe their obligation to
continue to cover our exposure with regards to these claims. Whether we will
be able to continue in business when our insurance coverage runs out is subject
to a significant number of variables, which are impossible to predict. In
addition, we paid approximately $175,000 in 2003 in legal fees to assess and
monitor the asbestos-related claims, and to assess and monitor our insurance
coverage and insurance company activities involving the defense and payment of
these claims. We anticipate that this cost will continue. Presentation of Consolidated Financial Statements The consolidated financial statements of the Company reflect our ongoing
business in the insulation contracting segment and the discontinuance in 1999
of our waste management segment in Mexico. Certain amounts have been
reclassified from previously reported categories. Results of Operations General.Our revenues have been generated primarily from insulation
services and sales of insulation products and related materials in the 12




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United
States. Until 1999, we received revenues from the collection of waste oils and
solvents for recycling, rental of parts washing machines, brokering the
disposal of waste and remediation services in Mexico. Our financial statements
for 1999 and subsequent years reflect the winding down of those operations. In 1997, we filed a claim against the United Mexican States under the
North American Free Trade Agreement (NAFTA) to recover the value of our
investment in a completed, but unopened, treatment, storage and disposal
facility in San Luis Potosi. During the fourth quarter of 1998, we determined
that, due to political opposition in Mexico, our Mexican operations would not
be successful, and we committed to a plan to discontinue our operations and
investment in Mexico to minimize future losses. We settled our claims against
the Mexican Government in October 2001 for $16,002,000. This settlement
completed our activities in Mexico and essentially closed out all discontinued
operations in Mexico. Year Ended December 31, 2003 Compared to Year Ended December 31, 2002. Revenue.Total revenues were $12,733,000 in 2003 as compared to
$15,021,000 for 2002, a decrease of 15.2%. The decrease was primarily a result
of the competitive nature of the construction industry, the general economic
business environment and our efforts, in the last half of the year, to
concentrate on higher gross margin projects. Cost of Revenue and Gross Margin.Total cost of revenue for the year
ended December 31, 2003 was $11,312,000 as compared to $13,158,000 for the year
ended December 31, 2002, a decrease of 14.0%. This decrease was primarily due
to the decrease in revenue. The gross margin as a percentage of revenue was
approximately 11.2% for the year ended December 31, 2003 compared to 12.4% for
the year ended December 31, 2002. The gross margin percentage decreased
primarily due to unanticipated costs on certain fixed bid projects during the
first quarter of 2003. Throughout the year our gross margin as a percentage of
revenue steadily increased from (1.7)% in the first quarter, to 14.3% in the
second quarter, to 16.7% in the third quarter and finally to 20% in the fourth
quarter. Selling, General and Administrative Expenses.Selling, general and
administrative expenses were $3,786,000 for the year ended December 31, 2003 as
compared to $3,658,000 for the year ended December 31, 2002, an increase of
3.5% due primarily to increases in insurance expense, consulting and financing
expenses offset by a decrease in legal and travel expenses. Insurance expense
increased due to the increased cost of Directors and Officers insurance and to
charges related to workers compensation insurance. Financing expenses
increased due to the costs associated with obtaining a new bank line of credit
and a mortgage on our facilities in California, and the obtaining of additional
financing through the issuance of convertible promissory notes. Other Operating Expense.For the year ended December 31, 2003, we
reversed an allowance of $387,000 related to a non-recourse loan to an
affiliate of a person who subsequently became a corporate officer. During
2003, we amended the note with this officers affiliate to our net benefit,
such that the new note is now with full recourse to this affiliate, and
guaranteed by the officer. Since this was a non-recourse loan, we had adjusted
the carrying value of the note to the value of the collateral as of December
31, 2002, and then recorded an allowance of $387,000. The collateral consists
of 500,000 shares of the Companys common stock and 250,000 shares of the $0.01
par value common stock of Chiral Quest, Inc. (OTC Bulletin Board: CQST). Restructuring Charges.On December 20, 2001, Wayne Mills filed Form 13D/A
with the Securities and Exchange Commission, indicating his intent to seek a
change in management and the Board of Directors of the Company. Mr. Mills
indicated that, absent a cooperative solution, he would seek shareholder
consents to replace the entire Board. It was managements decision that the shareholders would benefit by not
involving the Company in a proxy contest. Consequently, on February 13, 2002,
Grant S. Kesler, Anthony C. Dabbene and Bruce H. Haglund resigned as members of
the Board of Directors of the Company. The three remaining members of the
Board of Directors elected Messrs. Wayne W. Mills, Kenneth W. Brimmer, Gary W.
Copperud and Joseph M. Senser to fill an existing vacancy on the Board of
Directors and the vacancies created by the resignations of Messrs. Kesler,
Dabbene and Haglund. In addition, Messrs. Kesler and Dabbene resigned as
officers of the Company, and Mr. Mills was elected President and Chief
Executive Officer and Brian D. Niebur was elected Treasurer and Chief Financial
Officer. In connection with their resignations, and in lieu of compensation which
would otherwise be due under change of control provisions contained in
previously executed and adopted employment contracts, which were amended and
restated as of January 1, 2002, the Company issued Mr. Kesler 140,000 shares of
the Companys common stock valued at $359,800, forgave a loan due from Mr.
Kesler in the amount of $543,000 in exchange for future consulting services and
paid Mr. Kesler $832,000 in cash. In addition, the Company issued Mr. Dabbene 86,000
shares of the Companys common stock valued at $221,020 and paid Mr. Dabbene
$637,000 in cash. In addition, all outstanding unvested stock options held by
the prior 13




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##### Table of Contents



Board of Directors, including Messrs. Kesler and Dabbene, were
immediately vested and became exercisable. Messrs. Kesler and Dabbene each
agreed to act as our consultants under two-year and three-month consulting
agreements, respectively. In addition to the payment discussed above, Mr.
Dabbenes compensation for consulting was $5,000 per month. A portion of the
cash payments due to Mr. Kesler and Mr. Dabbene ($482,000 and $425,000,
respectively) was deposited by us as income and payroll tax withholding on the
total compensation paid to each of them. In March 2002, we reimbursed Mr. Mills $100,000 for legal fees expended by
him in excess of that amount to effect this change in management. During the year ended December 31, 2002, we recognized $3,333,000 of
expense related to the change of management, including insurance premiums,
legal fees, severance pay and relocation of the Companys headquarters. The
cash payments related to these expenses were approximately $2,008,000. The
non-cash charges primarily relate to the forgiveness of the loan due from Mr.
Kesler, the issuance of common stock to Messrs. Kesler and Dabbene, the expense
pursuant to APB No. 25 and the related interpretations related to the
accelerated vesting of stock options for the prior directors. Interest Income and Expense.Interest income for the year ended December
31, 2003 was $154,000 as compared with $293,000 for the year ended December 31,
2002. The decrease in 2003 was primarily due to lower average cash and cash
equivalent balances in 2003 as compared to 2002 generating lower interest
income, partially offset by an increase in interest income related to an
interest-bearing loan to a corporate officer. Interest expense was $172,000
for the year ended December 31, 2003 compared to interest expense of $119,000
for the year ended December 31, 2002. This increase in interest expense was
primarily due to the mortgage which was obtained on Metalclad Insulation
Corporations building; which mortgage was outstanding for the entire year
ended December 31, 2003, as compared to only a portion of the year ended
December 31, 2002. In addition, there were loans with Venture Bank and a
convertible promissory note outstanding for part of the year ended December 31,
2003, that increased interest expense as compared with the year ended December
31, 2002. Other Income and Expense.For the year ended December 31, 2003, we
recognized an impairment charge of $1,000,000 related to one of our investments
in a privately-held company. The impairment charge was due to the decline in
the fair value below the cost basis that was judged to be other than temporary.
We recognized a $15,000 loss on sale of available-for-sale securities in the
year ended December 31, 2003, and a $57,000 gain on sale of available-for-sale
securities in the year ended December 31, 2002. In March 2003, the Company converted a note receivable from Zamba Corporation into
415,340 shares of NextNet Wireless, Inc. Series A Preferred Stock owned by Zamba. NextNet is a privately held provider of non-line-of-sight plug-and-play broadband
wireless access systems. Each preferred share is convertible into three shares of common stock. On February 23, 2004, however, the Company was notified of a proposed merger
between NextNet and a recently formed privately owned company (the "Acquirer"), to which we gave our consent. The Acquirer has experience in the wireless communication
industry. Under the terms of the merger, the Company will receive warrants to purchase 290,738 shares of the
class A common stock of the Acquirer in exchange for the 415,340 shares of Series A Preferred Stock that it owns of NextNet. The warrants the Company will receive from the
Acquirer will have an exercise price of $4.00 per share, are immediately exercisable and have a term which terminates after the earlier of six years or upon the occurrence
of certain events which gives the holders of the warrant liquidity with respect to the underlying common stock. The Company has been informed that the merger was completed
on March 16, 2004. Based upon the foregoing, the Company determined that there had been an other-than-temporary decline in the fair value of its investment below the cost
and recorded an impairment charge of $1,000,000 for the year ended December 31, 2003. The Company valued the warrants received using the Black-Scholes pricing model using
113% as the volatility, 1.24% as the risk free interest rate, an expected life of six years and no expected dividends. The Company has not obtained, and will not obtain, an
independent appraisal of the value of the warrants. Net Loss.We experienced a net loss of $3,006,000 (or a loss of $0.41 per
share) for the year ended December 31, 2003, as compared to net loss of
$5,286,000 (or a loss of $0.69 per share) for the comparable period ended
December 31, 2002. The $5,286,000 net loss from continuing operations for the
year ended December 31, 2002, included the restructuring charges of $3,333,000,
and the net loss of $3,006,000 for the year ended December 2003 included a
$1,000,000 impairment charge on one of our investments in a privately-held
company. Year Ended December 31, 2002 Compared to Year Ended December 31, 2001. Revenue.Total revenues were $15,021,000 in 2002 as compared to
$18,008,000 for 2001, a decrease of 17%. Contract revenues for the year ended
December 31, 2002 were $14,837,000 as compared to $17,865,000 for the year
ended December 31, 2001, a decrease of 17%. The decrease was primarily
attributable to fires at two of our customers sites that generated incremental
revenue in the year ended December 31, 2001, and was also due to the general
economic slowdown in 2002. Cost of Revenue and Gross Margin.Total cost of revenue for the year
ended December 31, 2002 was $13,158,000 as compared to $15,540,000 for the year
ended December 31, 2001, a decrease of 15%. This decrease was primarily due to
the decrease in revenue. The gross margin as a percentage of revenue was
approximately 12.4% for the year ended December 31, 2002 compared to 13.7% for
the year ended December 31, 2001. The decrease in gross margin as a percentage
of revenue was primarily attributed to the performance of several major
emergency jobs in response to major fires at a refinery and power plant that
allowed for higher contract margins in the year ended December 31, 2001. Selling, General and Administrative Expenses.Selling, general and
administrative expenses were $3,658,000 for the year ended December 31, 2002 as
compared to $3,015,000 for the year ended December 31, 2001, an increase of
21.3% due primarily to an increase in legal and professional fees, insurance expense
and board fees, offset by a decrease in salaries and bonus expense. 14




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##### Table of Contents



Other Operating Expense.For the year ended December 31, 2002, the
Company recorded an allowance of $387,000 related to a non-recourse loan made
to an affiliate of a person who subsequently became a corporate officer. The
Company adjusted the carrying value of the note to the value of the collateral
as of December 31, 2002. The collateral consists of 500,000 shares of the
Companys common stock and 250,000 shares of the $0.01 par value common stock
of Chiral Quest, Inc. (OTC Bulletin Board: CQST). Restructuring Charges.On December 20, 2001, Wayne Mills filed Form 13D/A
with the Securities and Exchange Commission, indicating his intent to seek a
change in management and the Board of Directors of the Company. Mr. Mills
indicated that, absent a cooperative solution, he would seek shareholder
consents to replace the entire Board. It was managements decision that the shareholders would benefit by not
involving the Company in a proxy contest. Consequently, on February 13, 2002,
Grant S. Kesler, Anthony C. Dabbene and Bruce H. Haglund resigned as members of
the Board of Directors of the Company. The three remaining members of the
Board of Directors elected Messrs. Wayne W. Mills, Kenneth W. Brimmer, Gary W.
Copperud and Joseph M. Senser to fill an existing vacancy on the Board of
Directors and the vacancies created by the resignations of Messrs. Kesler,
Dabbene and Haglund. In addition, Messrs. Kesler and Dabbene resigned as
officers of the Company, and Mr. Mills was elected President and Chief
Executive Officer and Brian D. Niebur was elected Treasurer and Chief Financial
Officer. In connection with their resignations, and in lieu of compensation which
would otherwise be due under change of control provisions contained in
previously executed and adopted employment contracts, which were amended and
restated as of January 1, 2002, the Company issued Mr. Kesler 140,000 shares of
the Companys common stock valued at $359,800, forgave a loan due from Mr.
Kesler in the amount of $543,000 in exchange for future consulting services and
paid Mr. Kesler $832,000 in cash. In addition, the Company issued Mr. Dabbene
86,000 shares of the Companys common stock valued at $221,020 and paid Mr.
Dabbene $637,000 in cash. In addition, all outstanding unvested stock options
held by the prior Board of Directors, including Messrs. Kesler and Dabbene,
were immediately vested and became exercisable. Messrs. Kesler and Dabbene each
agreed to act as our consultants under two-year and three-month consulting
agreements, respectively. In addition to the payment discussed above, Mr.
Dabbenes compensation for consulting was $5,000 per month. A portion of the
cash payments due to Mr. Kesler and Mr. Dabbene ($482,000 and $425,000,
respectively) was deposited by us as income and payroll tax withholding on the
total compensation paid to each of them. In March 2002, we reimbursed Mr. Mills $100,000 for legal fees expended by
him in excess of that amount to effect this change in management. During the year ended December 31, 2002, we recognized $3,333,000 of
expense related to the change of management, including insurance premiums,
legal fees, severance pay and relocation of the Companys headquarters. The
cash payments related to these expenses were approximately $2,008,000. The
non-cash charges primarily relate to the forgiveness of the loan due from Mr.
Kesler, the issuance of common stock to Messrs. Kesler and Dabbene, the expense
pursuant to APB No. 25 and the related interpretations related to the
accelerated vesting of stock options for the prior directors. Interest Income and Expense.Interest income for the year ended December
31, 2002 was $293,000 as compared with $80,000 for the year ended December 31,
2001. The increase in 2002 was primarily due to the larger cash balances, that
resulted from the receipt of the NAFTA award and to an interest-bearing loan to
a corporate officer in December 2001 that remained outstanding at December 31,
2002. Interest expense was $119,000 for the year ended December 31, 2002
compared to interest expense of $132,000 for the year ended December 31, 2001.
This reduction in interest expense was primarily due to the conversion of debt
into 266,901 shares of our common stock, and the repayment of convertible zero
coupon notes, with an interest rate of 15%, in the year ended December 31,
2001. This reduction was partially offset by interest payable one bank
borrowings outstanding for all of 2002, as compared to only a portion of 2001. Other Income and Expense.We recognized a $57,000 gain on sale of
available-for-sale securities in the year ended December 31, 2002. Other
expense of $904,000 in 2001 consisted principally of the reserve established
for a note receivable related to the sale of our Mexican assets not included in
the NAFTA claim. Discontinued Operations.The gain of $7,079,000 in 2001 was a result of
the settlement of the NAFTA claim, net of all fees and expenses, including the
write-off of all assets associated with the claim. No future costs are
anticipated. If any future costs arise, they will be charged to operations as
incurred. Net Income (Loss).We experienced a net loss of $5,286,000 (or a loss of
$0.69 per share) for the year ended December 31, 2002, as compared to net
income of $5,576,000 (or income of $0.77 per share) for the comparable period
ended December 31, 2001. The net income for the year ended December 31, 2001,
was due to the receipt of the proceeds from the 15




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NAFTA claim. The net loss from
continuing operations for the year ended December 31, 2002, was primarily
related to the restructuring charges. This net loss compares with the net loss
from continuing operations of $1,503,000 for the comparable period ended
December 31, 2001. Liquidity and Capital Resources As of December 31, 2003, we had $1,644,000 in cash and cash equivalents
and $279,000 in available-for-sale securities. The Company had working capital
of $1,519,000 as of December 31, 2003. Our subsidiary, Metalclad Insulation
Corporation, has a line of credit with Far East National Bank, Los Angeles,
California. The line of credit agreement with Far East National Bank matures
on October 28, 2004, and bears interest at a floating rate based upon the
banks prime rate plus 1%. Borrowings under the agreement are limited to
$1,000,000 plus the amount of cash collateral posted, up to $500,000, in the
form of certificate of deposit at the bank. At December 31, 2003, we had a
balance of $1,000,000 outstanding on this line of credit. Cash provided by continuing operations was $227,000 for 2003, compared
with cash used in continuing operations of $6,939,000 in 2002. For 2001,
$1,187,000 of cash was provided by continuing operations. Cash flows were used
primarily to fund operating losses for continuing operations in each of the
years 2003, 2002 and 2001, which were partially offset by non-cash expenses for
depreciation and amortization. In 2003, there was also a $1,000,000 non-cash
expense related to an impairment charge for one of our investments in a
privately-held company. In 2002, we placed $2,111,000 of cash in a certificate
of deposit at a bank to secure a standby letter of credit payable to a customer
in lieu of a performance bond. The letter of credit and the certificate of
deposit matured on July 1, 2003. At December 31, 2002, we recorded the
certificate of deposit as restricted cash. On March 25, 2003, the letter of
credit was cancelled and the CD was released as collateral which provided
$2,111,000 of cash in 2003. $814,000 of cash was also provided from continuing
operations in 2003 due to a decrease in costs and estimated earnings in excess
of billings on uncompleted contracts, a decrease in other receivables, and an
increase in billings in excess of costs and estimated earnings on uncompleted
contracts. There was also a non-cash item related to the allowance on
officers receivable that decreased cash flows by $387,000 in 2003. A decrease
in accounts payable used $486,000 of cash in 2003. During 2002, we recognized $3,333,000 of expense related to the change of
management, including insurance premiums, legal fees, severance pay and
relocation of our headquarters. The cash payments related to these expenses
were approximately $2,044,000. The non-cash charges of $1,156,000 primarily
relate to the forgiveness of a loan due from Mr. Kesler and the issuance of
common stock to Messrs. Kesler and Dabbene. We used $1,057,000 of cash in 2002 to decrease our accounts payable and
accrued expenses. These uses were partially offset by non-cash expenses for
stock based compensation, the adjustment of the carrying value of the loan to a
corporate officer and the forgiveness of the loan to Mr. Kesler. In 2001, the positive cash flow from continuing operations was primarily
the result of a $2,105,000 decrease in accounts receivable. The large workload
in the fourth quarter of 2000 as compared with 2001 resulted in a larger
accounts receivable balance at December 31, 2000 as compared with December 31,
2001. There was also a non-cash expense due to the provision for uncollectible
notes receivable related to the 1999 sale of certain Mexican assets in 2001.
Increases in prepaid expenses and other current assets, primarily related to
prepaid insurance also resulted in decreased cash flows from continuing
operations in 2001 of $225,000. Cash provided by discontinued operations was $13,450,000 for 2001. In
2001, the positive cash flow from discontinued operations was primarily the
result of the $16,002,000 received from the Mexican government as settlement of
our claim under the North American Free Trade Agreement, offset by expenses
related to the settlement. Net investing activities used $643,000, $6,723,000 and $1,230,000 of cash
in 2003, 2002 and 2001, respectively. Of these uses, $150,000, $2,258,000 and
$231,000 was used for additions to property and equipment in 2003, 2002 and
2001, respectively, primarily for our subsidiary, Metalclad Insulation
Corporation. On November 4, 2002, we entered an agreement whereby we would lend up to
$2.5 million to Zamba Corporation (Zamba) in the form of a collateralized
convertible note. The note, when fully funded, was convertible into common
stock of Zamba, or at the Companys option, was payable by Zamba in shares of
NextNet Wireless, Inc. (NextNet) Series A Preferred Stock owned by Zamba and
which collateralized the note. The note was not repayable in cash. The
agreement also gave us the option to acquire additional shares of NextNet
Series A Preferred Stock. We had advanced $1,000,000 on the 16




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note as of
December 31, 2002. On January 13, 2003, we advanced $100,000, and on February
17, 2003, advanced an additional $650,000 on the note. On February 17, 2003,
we amended the agreement with Zamba whereby the total amount we would lend to
Zamba was reduced to $1,750,000. In connection with this amendment, provisions
allowing us to convert the loan into Zambas common stock and our option to
purchase an additional 750,000 shares of NextNet Series A Preferred Stock from
Zamba were removed. The loan was not repayable in cash, but was repayable
through conversion into shares of Zambas NextNet Series A Preferred Stock.
The note matured on March 31, 2003, and was then converted into 415,340 shares
of NextNet Series A Preferred Stock. Each share of NextNet Series A Preferred
Stock is convertible into three shares of NextNet common stock. On November 4,
2002, Wayne W. Mills, the Companys President, owned approximately 6.3% of the
outstanding common stock of Zamba and approximately 3.3% of NextNet and as of
December 31, 2003, Mr. Mills owned approximately 1.4% of NextNet. Subsequent to December 31, 2003, the stockholders of NextNet have been
presented with a merger proposal, which will likely be adopted. Under
the merger proposal, the privately held acquiring company would issue warrants
to purchase 290,738 shares of its class A common stock in exchange for all of
the 415,340 shares of NextNet Series A Preferred Stock held by us. The
warrants as proposed, will be exercisable over six years at $4.00 per share.
We have approved of the merger. As a result of the anticipated merger, we have
reduced the fair value of our investment in NextNet by $1,000,000 effective for
the year ended December 31, 2003. In 2002, $2,047,000 of the additions to property related to the purchase
of the building housing the business at Metalclad Insulation Corporation. Also
in 2002, we used $3,300,000 to acquire and distribute 3,791,576 shares of Surg
II, Inc. common stock to our shareholders as a dividend. Additionally in 2002
we used $197,000 for net purchases of available-for-sale securities. In 2001, we used $1,000,000 of cash to make an equity investment in
Catalytic Solutions, Inc., a privately held company. Cash provided by financing activities totaled $1,216,000 in 2003 compared
with cash provided by financing activities of $1,372,000 in 2002 and cash used
in financing activities of $628,000 in 2001. Long-term borrowings provided
$121,000, $190,000 and $202,000 of cash in 2003, 2002 and 2001, respectively.
We used $159,000 and $222,000 of cash in 2003 and 2002, respectively, to
repurchase 260,000 and 194,800 shares, respectively, of our outstanding common
stock. In 2003, our subsidiary, Metalclad Insulation Corporation, obtained a new
line of credit and mortgage with Far East National Bank (Far East), and
repaid its prior line of credit and mortgage with Community Bank. The line of
credit agreement with Far East matures in October 2004 and bears interest at a
floating rate based upon the banks prime rate plus 1% (5.00% on the date of
the loan). The line of credit is secured by certain assets of the Company.
Borrowings under the agreement are limited to $1,000,000 plus the amount of
cash collateral posted, up to $500,000, in the form of certificate of deposit
at the bank. Metalclad Insulation Corporation also obtained a $1,596,000
mortgage on the building from Far East that matures in October 2008, and bears
interest at a floating rate based upon the banks prime rate plus 1% (5.00% on
the date of the loan). The line of credit and mortgage are guaranteed by our
President, Wayne W. Mills, who received a fee for such guarantees of $92,880. In December 2003, we issued a $1,300,000, 10% convertible promissory note.
The note is payable interest only through April 15, 2004, and thereafter is
payable in equal monthly installments over the next 33 months. The note is
convertible by the noteholder into common stock of the Company at $1.35 per
share, and allows us, subject to certain conditions and limitations, to make
monthly installment payments with our common stock at a price per share
approximating the then market value. In connection with the financing we paid
a 3% origination fee, issued a five year warrant for the purchase of 400,000
shares of the Companys common stock at $1.50 per share, and granted the
noteholder a security interest in 249,200 shares of NextNet Wireless, Inc.
Series A Preferred Stock, and 33,800 shares of Catalytic Solutions, Inc. Series
C Preferred Stock, owned by the Company. The proceeds of $1,300,000 were
allocated between the note, and the fair value of the warrants based on using
the Black Scholes pricing model. The resulting original issue discount, the
fair value of the warrant, and the beneficial conversion of the note payable
into common stock as defined in EITF 00-27 (Application of Issue No. 98-5 to
Certain Convertible Instruments), is being amortized over the life of the note
using the straight-line method, which approximates the interest method. In
addition, we agreed to file a registration statement with the U.S. Securities
and Exchange Commission, covering the issuance or resale of the shares of the
Companys common stock which may be issued in connection with the note and
warrant issued to the noteholder. In addition, the note is personally
guaranteed by the Companys President, Wayne W. Mills, for which he was not
compensated. During 2003, we obtained and repaid a $750,000 loan from a bank. 17




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In 2001, $1,255,000 was loaned to an affiliate of Wayne W. Mills, Blake
Capital Partners, 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. The Board of Directors of the Company negotiated an amendment to the
security agreement (the Amended and Restated Security Agreement) which it
believed to be beneficial to the Company. The Note as amended (the New Note)
is in the principal amount of $1,496,370, and now provides for an October 31,
2007 due date, with interest at 2% over the prime rate established by Wells
Fargo Bank, NA in Minneapolis, Minnesota, adjusted on March 1 and September 1
of each year, instead of the 12% rate established in the Note. Interest only
is payable commencing March 1, 2004, and at the end of each six-month period
thereafter. The New Note is with full recourse to Blake Capital Partners. The
Amended and Restated Security Agreement, unlike the original Security
Agreement, does not require us, or permit Blake Capital Partners or Mr. Mills,
to cancel the shares of the Companys common stock held as collateral as full
payment of the loan, or require us to apply the value of those cancelled shares
at $2.50 per share against the principal balance of the amounts due. In
addition, Mr. Mills has personally guaranteed the repayment of the New Note. We obtained a mortgage to purchase the building housing Metalclad
Insulation Corporation that provided net cash of $1,494,000 in 2002. During
2002, net cash of $37,500 was provided by proceeds from the exercise of common
stock warrants. We used $1,176,000 of cash to repay long-term borrowings in 2001,
primarily to repay Five-Year Zero Coupon Notes originally issued in December
1997, and $123,000 to repay long long-term borrowings in 2002. The uses of
cash in 2001 were partially offset by the Company obtaining an accounts
receivable revolving line of credit that provided $1,000,000 of cash flow,
which was primarily used to repay the Five-Year Zero Coupon Notes discussed
above. A private placement of the Companys common stock and warrants
completed by us in March 2001 also provided $600,000 of cash flow in 2001. Prior to 1975, we were engaged in the sale and installation of asbestos
related insulation materials, and has been the subject of 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. The number of asbestos related claims which have been initiated naming the
us (primarily Metalclad Insulation Corporation) as a defendant had increased
from 254 in 1999, 527 in 2000 and 685 in 2001. The number of claim initiated
slightly decreased to 583 in 2002, and further decreased to 337 in 2003. As of
December 31, 2003, there were approximately 1,212 asbestos cases pending, of
which approximately 390 have been settled but not yet closed for lack of final
documentation or payment. At December 31, 2000, 2001 and 2002, there were,
respectively, approximately 860, 1,450 and 1,635 cases pending. It had been
previously improperly reported in the Companys Forms 10K for the period ended
on December 31, 2002, filed with the Securities and Exchange Commission, that
there were approximately 660 cases pending at December 31, 2002, and 700 cases
pending at the end of 2001. Although, the number of claims made in 2002 and
2003 reflected a downward trend from 2001, and the number of cases pending on
December 31, 2003, dropped from those pending on December 31, 2002, it cannot
be assumed that this trend will continue. The sympathies of juries, the
aggressiveness of the plaintiffs bar, and the declining defendant base as a
result of business failures, has also led to a trend of larger payments and
settlements per claim. It is difficult to determine if we have adequate insurance to cover these
claims. The terms of such insurance policies are complex, and the coverage for
many types of claims is limited. If the current trend of the claim occurrence
and amounts is not significantly reversed, it will likely have a material
adverse effect on our financial condition and business in the future. Because
of our insurance coverage, we do not anticipate any adverse effect on our
financial condition to develop for at least the next four to five years.
Beyond that, however, the effect of those claims is uncertain. In 2003, the United States Congress considered legislation to create a
privately funded, publicly administered fund to provide the necessary resources
for an asbestos injury claims resolution program. The latest draft of the
legislation calls for the fund to be funded 50% by asbestos defendant
companies, of which the Company is one, and 50% by insurance
companies. The impact, if any, this potential legislation will have on us
cannot be determined at this time, although the latest draft of the legislation
did not appear favorable to us. 18




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The following summarizes our contractual obligations at December 31, 2003.
The long-term debt consists of various notes payable to a finance company for
vehicles used in the ordinary course of the Companys insulation business ( See
Note 13). Total
    
    1 Year or Less
    
    1-3 Years
    
    4-5 Years
    
    Over 5 YearsLong-term debt
    
    $
    296,823
    
    
    $
    133,243
    
    
    $
    159,053
    
    
    $
    4,527
    
    
    $
    Capitalized lease obligation
    
    
    30,476
    
    
    
    30,476
    
    
    
    
    
    
    
    
    
    
    
    Note payable to bank
    
    
    1,000,000
    
    
    
    1,000,000
    
    
    
    
    
    
    
    
    
    
    
    Mortgage payable
    
    
    1,586,528
    
    
    
    47,635
    
    
    
    105,422
    
    
    
    1,433,471
    
    
    
    Note payable
    
    
    1,300,000
    
    
    
    283,264
    
    
    
    1,016,736
    
    
    
    
    
    
    
    Total
    
    $
    4,213,827
    
    
    $
    1,494,618
    
    
    $
    1,281,211
    
    
    $
    1,437,998
    
    
    $
    
 During 2003, 2002, and 2001, we did not pay or declare any cash dividends
and do not intend to pay any cash dividends in the near future. We believe that our cash, cash equivalents and borrowings available under
the credit agreement should be sufficient to satisfy our cash requirements for
at least the next 12 months. Foreign Currency Translation In the past we have been exposed to foreign currency translation risk due
to our Mexican operations. Since we have discontinued our Mexican operations,
we no longer have exposure to these risks. Impact of Inflation We reflect price escalations in our quotations to our insulation customers
and in the estimation of costs for materials and labor. For construction
contracts based on a cost-plus or time-and-materials basis, the effect of
inflation on us is negligible. For projects on a fixed-price basis, the effect
of inflation may result in reduced profit margin or a loss as a result of
higher costs to us as the contracts are completed; however, the majority of our
contracts are completed within 12 months of their commencement and we believe
that the impact of inflation on such contracts is insignificant. Significant Accounting Policies Our critical accounting policies are those both having the most impact to
the reporting of our financial condition and results, and requiring significant
judgments and estimates. Our critical accounting policies include those
related to (a) revenue recognition, (b) investments in unconsolidated
affiliates and (c) allowance for uncollectible accounts receivable. 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. We have made investments in
privately-held companies, which can still be considered to be in the startup or
development stages. The investments at less than 20% of ownership are
initially recorded at cost and the carrying value is evaluated quarterly. We
monitor these investments for impairment and make appropriate reductions in
carrying values if we determine an impairment charge is required based
primarily on the financial condition and near-term prospects of these
companies. 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. 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 customer. Future changes in the
financial condition of a customer may require an adjustment to the allowance
for uncollectible accounts receivable. 19




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New Accounting Pronouncements In April 2003, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 149, Amendment of
Statement 133 on Derivative Instruments and Hedging Activities, effective for
contracts entered into or modified after June 30, 2003. This amendment
clarifies when a contract meets the characteristics of a derivative, clarifies
when a derivative contains a financing component and amends certain other
existing pronouncements. The adoption of SFAS No. 149 did not have a material
effect on our consolidated financial statements. In May 2003, the FASB issued SFAS No. 150, Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity.
SFAS No. 150 is effective for financial instruments entered into or modified
after May 31, 2003, and otherwise is effective at the beginning of the first
interim period beginning after June 15, 2003. SFAS No. 150 requires the
classification as a liability of any financial instruments with a mandatory
redemption feature, an obligation to repurchase equity shares, or a conditional
obligation based on the issuance of a variable number of its equity shares. We
do not have any financial instruments as defined by SFAS No. 150. The adoption
of SFAS No. 150 did not have a material effect on our consolidated financial
statements. In November 2002, the FASB issued FASB Interpretation No. 45, Guarantors
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others (FIN 45). FIN 45 clarifies the
requirements for a guarantors accounting for and disclosure of certain
guarantees issued and outstanding. The initial recognition and initial
measurement provisions of FIN 45 were applicable to guarantees issued or
modified after December 31, 2002. The disclosure requirements of FIN 45 are
effective for financial statements for periods ending after December 15, 2002.
The adoption of FIN 45 did not have a material effect on our consolidated
financial statements. In December 2003, the FASB issued FASB Interpretation No. 46 (Revised
December 2003), Consolidation of Variable Interest Entities, an Interpretation
of ARB No. 51 (FIN 46R). This standard replaces FIN 46, Consolidation of
Variable Interest Entities that was issued in January 2003. FIN 46R modifies
or clarifies various provisions of FIN 46. FIN 46R addresses the consolidation
of business enterprises of variable interest entities (VIEs), as defined by
FIN 46R. FIN 46R exempts certain entities from its requirements and provides
for special effective dates for entities that have fully or partially applied
FIN 46 prior to issuance of FIN46R. Otherwise, application of FIN 46R is
required in financial statements of public entities that have interest in
structures commonly referred to as special purpose entities for periods ending
after December 15, 2003. Application by the Company for all other types of
VIEs is required in financial statements for periods ending no later than the
quarter ended January 31, 2005. The Company does not expect the adoption of
FIN 46R to have a material effect on our consolidated financial statements. 
 Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The fair value of our investments in available-for-sale securities at
December 31, 2003 was approximately $279,000. The Companys investment policy
is to manage its available-for-sale securities portfolio to preserve principal
and liquidity while maximizing the return on the investment portfolio. The
principal available-for-sale securities are shares of Chiral Quest, Inc. stock
(OTCBB CQST). Specific changes in the value of the common stock of Chiral
Quest, Inc. will affect the fair value of the available-for-sale securities
portfolio; however, such gains or losses would not be realized unless the
investments were sold. Our long-term debt, note payable, and mortgage payable are subject to
interest rate risk since the interest rate is not a fixed rate. We do not
expect any fluctuations in the interest rates to have a material effect on our
consolidated financial position or results of operations. 
 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The consolidated financial statements and schedules listed in the
accompanying Index to Consolidated Financial Statements are attached hereto and
filed as a part of this Report under Item 15. 20




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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE On April 4, 2002, Moss Adams LLP, the independent accountants previously
engaged by us to conduct an audit of our accounts for 2001 and prior years,
resigned as our auditors. On April 16, 2002 we engaged Virchow, Krause &
Company, LLP, with offices in Minneapolis, Minnesota, to audit our financial
statements for the year ending December 31, 2002. We had not previously
engaged or consulted with Virchow, Krause & Company, LLP on any matter prior to
that engagement. The reports of Moss Adams LLP on our financial statements for the years
2001 and 2000 did not contain an adverse opinion or a disclaimer of opinion,
and were not qualified or modified as to audit scope or accounting principles,
but the report for 2000 did contain a paragraph regarding the uncertainty of
the ability of the Company to remain a going concern. The opinion of Moss
Adams LLP with respect to the financial statements for the period ended
December 31, 2000, indicated that there was substantial doubt about our ability
to continue as a going concern without obtaining additional debt or equity
capital. The engagement of Virchow, Krause & Company, LLP was approved by our Board
of Directors. During our fiscal years 2000 and 2001, and during the subsequent interim
period through April 4, 2002, (i) there were no disagreements between the
management of the Company and Moss Adams LLP with respect our financial
statements on any matter of accounting principles or practices, financial
statement disclosure or auditing scope or procedure, which if not resolved to
the satisfaction of Moss Adams LLP, would have caused Moss Adams LLP to make
reference to the subject matter of the disagreement in connection with its
reports, and (ii) and there were no reportable events, as defined in Item
304(a)(1)(v) of Regulation S-K of the U.S. Securities and Exchange Commission. 
 ITEM 9A. CONTROLS AND PROCEDURES We carried out an evaluation, with the participation of our chief
executive and chief financial officers, of the effectiveness, as of December
31, 2003, of our disclosure controls and procedures (as defined in Rules
13a-14(c) and 15d-14(c) of the Securities Exchange Act of 1934). Based upon
that evaluation, made at the end of the period, our chief executive officer and
chief financial officer concluded that our disclosure controls and procedures
are effective in alerting them on a timely basis to material information
required to be disclosed in our periodic reports to the Securities and Exchange
Commission, and that there has been no significant change in such internal
control, or other factors which could significantly affect such controls
including any corrective actions with regard to significant deficiencies or
material weaknesses, since our evaluation. Management is aware that there is lack of segregation of duties due to
the small number of employees dealing with general administrative and financial
matters. However, management has determined that considering the employees
involved and the control procedures in place, risks associated with such lack
of segregation are insignificant and the potential benefits of adding employees
to clearly segregate duties does not justify the expenses associated with such
increases. 21




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##### Table of Contents



PART III 
 ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information required by Items 401, 405 and 406 of Regulation S-K is
set forth in the Companys 2004 Annual Meeting Proxy Statement which will be
filed with the Securities and Exchange Commission not later than 120 days after
December 31, 2003. The Companys 2004 Annual Meeting Proxy Statement,
exclusive of the information set forth under the captions Report of the
Compensation Committee and Company Performance, are incorporated herein by
this reference. 
 ITEM 11. EXECUTIVE COMPENSATION The information required by Item 402 of Regulation S-K is set forth in the
Companys 2004 Annual Meeting Proxy Statement which will be filed with the
Securities and Exchange Commission not later than 120 days after December 31,
2003. The Companys 2004 Annual Meeting Proxy Statement, exclusive of the
information set forth under the captions Report of the Compensation Committee
and Company Performance, are incorporated herein by this reference. 
 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTER The information required by Items 201(d) and 403 of Regulation S-K is set
forth in the Companys 2004 Annual Meeting Proxy Statement which will be filed
with the Securities and Exchange Commission not later than 120 days after
December 31, 2003. The Companys 2004 Annual Meeting Proxy Statement,
exclusive of the information set forth under the captions Report of the
Compensation Committee and Company Performance, are incorporated herein by
this reference. 
 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by Item 404 of Regulation S-K is set forth in the
Companys 2004 Annual Meeting Proxy Statement, which will be filed with the
Securities and Exchange Commission not later than 120 days after December 31,
2003. The Companys 2004 Annual Meeting Proxy Statement, exclusive of the
information set forth under the captions Report of the Compensation Committee
and Company Performance are incorporated herein by this reference. 
 ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES The information required by Item 9(e) of Schedule 14A is set forth in the
Companys 2004 Annual Meeting Proxy Statement, which will be filed with the
Securities and Exchange Commission not later than 120 days after December 31,
2003. The Companys 2004 Annual Meeting Proxy Statement, exclusive of the
information set forth under the captions Report of the Compensation Committee
and Company Performance are incorporated herein by this reference. 22




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PART IV 
 ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K. (a) The following documents are filed as part of this report on Form 10-K:  1
    
    Financial Statements
Reports of Independent Auditors
Consolidated Balance Sheets
Consolidated Statements of Operations and Other Comprehensive Income (Loss)
Consolidated Statements of Shareholders Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements2
    
    Schedules to Financial Statements
Schedule II  Valuation and Qualifying Accounts All schedules, other than those listed above, are omitted, as the
information is not required, is not material or is otherwise furnished.  3.
    
    Exhibits The following exhibits are being filed with this Annual Report on Form
10-K and/or are incorporated by reference therein in accordance with the
designated footnote references:  3.
    
    Restated and Amended Certificate of Incorporation and Bylaws of
the Company, and all amendments thereto. (1)3.2
    
    Certificate of Amendment to Certificate of Incorporation effective June 25, 2002. (2)4.1
    
    Form of Certificate for Common Stock. (3)10.1
    
    Form of 1993 Omnibus Stock Option and Incentive Plan. (4)10.2
    
    Form of 1996 Omnibus Stock Option and Incentive Plan. (5)10.3
    
    Form of 2000 Omnibus Stock Option and Incentive Plan. (6)10.4
    
    Decision of NAFTA Tribunal dated August 30, 2000. (7)10.5
    
    Non-Recourse Security and Pledge Agreement Between the Company
and Wayne W. Mills dated December 10, 2001. (8)10.6
    
    Non-Recourse Secured Note dated December 10, 2001. (9)10.7
    
    Catalytic Solutions Shareholders Agreement dated November
15, 2001. (10)10.8
    
    Amended and Restated Articles of Incorporation of Catalytic
Solutions, Inc. a California Corporation. (11)10.9
    
    Amended and Restated Employment Agreement between Grant S.
Kesler and Metalclad Corporation dated January 1, 2002. (12)10.10
    
    Amended and Restated Employment Agreement between Anthony C.
Dabbene and Metalclad Corporation dated January 1, 2002. (13)10.11
    
    Consulting Agreement between Grant S. Kesler and Metalclad
Corporation dated February 14, 2002. (14)10.12
    
    Amended and Restated Bylaws adopted February 14, 2002. (15)10.13
    
    Agreement of Purchase and Sale of Anaheim facility at 2198
South Dupont Drive, Anaheim, California. (16) 23




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##### Table of Contents



10.14
    
    Curtom-Metalclad Partnership Agreement and Amendment. (17)10.15
    
    Stock Purchase Agreement among the Company, Surg II, Inc.,
Theodore A. Johnson and Charles B. McNeil dated May 29, 2002. (18)10.16
    
    Loan Agreement between the Company and Zamba Corporation dated
November 4, 2002. (19)10.17
    
    Amendment No. 1 to Loan Agreement between the Company and
Zamba Corporation dated February 19, 2003. (20)10.18
    
    Employment agreement between Metalclad Insulation, Entrx
Corporation and Geoffrey B. Larson dated March 19, 2003. (21)10.19
    
    Employment Agreement between Entrx Corporation and Wayne W.
Mills dated October 1, 2003. (22)10.20
    
    Secured Promissory Note of Blake Capital Partners and
Guarantee of Wayne W. Mills dated November 1, 2003. (23)10.21
    
    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. (24)10.22
    
    Secured Convertible Promissory Note between the Company and
Pandora Select Partners L.P. dated December 3, 2003.10.23
    
    Pledge Agreement between the Company and Pandora Select
Partners L.P. dated December 3, 2003.10.24
    
    Registration Rights Agreement between the Company and Pandora
Select Partners L.P. dated December 3, 2003.10.25
    
    Warrant issued to Pandora Select Partners L.P. dated December
3, 2003.14.
    
    Code of Ethics16.1
    
    Letter of concurrence from Moss Adams LLP dated April 9, 2002. (25)21.
    
    List of Subsidiaries of the Registrant.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 Annual Report on Form 10-K for the year ended
December 31, 2002 as Exhibit 3.2 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 4.1 and incorporated herein by this reference(4)
    
    Filed with the Companys Transition Report on Form 10-K for the five
months ended May 31, 1993 and incorporated herein by this reference.(5)
    
    Filed with the Companys 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 Form 8-K dated September 5, 2000 and
incorporated herein by this reference.(8)
    
    Filed with the Companys Form 8-K on December 21, 2001 as Exhibit A and
incorporated herein by this reference.(9)
    
    Filed with the Companys Form 8-K on December 21, 2001 as Exhibit B and
incorporated herein by this reference. 24




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##### Table of Contents



(10)
    
    Filed with the Companys Form 8-K on December 21, 2001 as Exhibit C and
incorporated herein by this reference.(11)
    
    Filed with the Companys Form 8-K on December 21, 2001 as Exhibit D and
incorporated herein by this reference.(12)
    
    Filed with the Companys Form 8-K on February 28, 2002 as Exhibit (i) and
incorporated herein by this reference.(13)
    
    Filed with the Companys Form 8-K on February 28, 2002 as Exhibit (ii)
and incorporated herein by this reference.(14)
    
    Filed with the Companys Form 8-K on February 28, 2002 as Exhibit (iii)
and incorporated herein by this reference.(15)
    
    Filed with the Companys Form 8-K on February 28, 2002 as Exhibit (v) and
incorporated herein by this reference.(16)
    
    Filed with the Companys Annual Report on Form 10-K for the year ended
December 31, 2001 as Exhibit 10.19 and incorporated herein by this
reference.(17)
    
    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.(18)
    
    Filed with the Companys Annual Report on Form 10-K for the year ended
December 31, 2002 as Exhibit 10.19 and incorporated herein by this
reference.(19)
    
    Filed with the Companys Annual Report on Form 10-K for the year ended
December 31, 2002 as Exhibit 10.20 and incorporated herein by this
reference.(20)
    
    Filed with the Companys Annual Report on Form 10-K for the year ended
December 31, 2002 as Exhibit 10.21 and incorporated herein by this
reference.(21)
    
    Filed with the Companys Quarterly Report on Form 10-Q for the period
ended March 31, 2003 as Exhibit 10.1 and incorporated herein by this
reference.(22)
    
    Filed with the Companys Quarterly Report on Form 10-Q for the period
ended September 30, 2003 as Exhibit 10.1 and incorporated herein by this
reference.(23)
    
    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.(24)
    
    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.(25)
    
    Filed with the Companys Form 8-K on April 18, 2002 and incorporated
herein by this reference. (b) Reports on Form 8-K None 25




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##### Table of Contents



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 CORPORATIONBy:
    
    /s/Brian D. NieburBrian D. NieburChief Financial OfficerDate: March 24, 2004
 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/Wayne W. Mills

Wayne W. Mills
    
    Chief Executive Officer and Director
(Principal Executive Officer)
    
    March 24, 2004/s/Brian D. Niebur

Brian D. Niebur
    
    Chief Financial Officer
(Principal Financial and Accounting Officer)
    
    March 24, 2004/s/Kenneth W. Brimmer

Kenneth W. Brimmer
    
    Director, Chairman
    
    March 24, 2004/s/Joseph M. Caldwell

Joseph M. Caldwell
    
    Director
    
    March 24, 2004/s/Joseph M. Senser

Joseph M. Senser
    
    Director
    
    March 24, 2004
 26




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##### Table of Contents



ITEM 15(A)(1) and (2) ENTRX CORPORATION AND SUBSIDIARIES INDEX TO CONSOLIDATED FINANCIAL STATEMENTS The following Consolidated Financial Statements of Entrx Corporation and
subsidiaries are included in Item 8: Reports of Independent Auditors on Consolidated Financial Statements:Report of Virchow, Krause & Company, LLP
    
    
    F-1Report of Moss Adams LLP
    
    
    F-2Financial Statements:Consolidated Balance
Sheets  December 31, 2003 and 2002
    
    
    F-3Consolidated
Statements of Operations and Comprehensive Income (Loss) 
Years Ended December 31, 2003, 2002 and 2001
    
    
    F-4Consolidated Statements of
Shareholders Equity  Years Ended December 31, 2003, 2002 and 2001
    
    
    F-5Consolidated Statements of Cash
Flows  Years Ended December 31, 2003, 2002 and 2001
    
    
    F-6Notes to Consolidated Financial
Statements
    
    
    F-7Supplementary Financial
Statement Schedules:Schedule II  Valuation
and Qualifying Accounts
    
    
    F-28
 27




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##### Table of Contents



REPORT OF INDEPENDENT AUDITORS To the Shareholders, Audit Committee and Board of Directors
Entrx Corporation
Minneapolis, Minnesota We have audited the accompanying consolidated balance sheets of Entrx
Corporation as of December 31, 2003 and 2002 and the related consolidated
statements of operations and comprehensive income (loss), 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 auditing standards generally
accepted in the United States of America. 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. 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

as of December 31, 2003 and 2002 and the results of their operations and their
cash flows for the years then ended in conformity with accounting principles
generally accepted in the United States of America. /s/Virchow, Krause & Company, LLP Minneapolis, Minnesota
February 23, 2004 F-1




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##### Table of Contents



INDEPENDENT AUDITORS REPORT The Board of Directors and Shareholders of
Entrx Corporation (formerly Metalclad Corporation): We have audited the accompanying consolidated statements of operations, shareholders equity and
cash flows of Entrx Corporation (a Delaware Corporation) and Subsidiaries for the year ended December 31, 2001. These financial
statements are the responsibility of the Companys management. Our
responsibility is to express an opinion on these financial statements based on
our audit. We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Entrx Corporation and
subsidiaries as of December 31, 2001, and the results of their operations and
their cash flows for the year in the period ended December 31, 2001 in
conformity with accounting principles generally accepted in the United States
of America. Our audit was made for the purpose of forming an opinion on the basic financial
statements taken as a whole. The schedule listed in the index of financial
statements is presented for purposes of complying with the Securities and
Exchange Commissions rules and is not part of the basic financial statements.
The data for the year ended December 31, 2001 has been subjected to the
auditing procedures applied in the audit of the basic financial statements and,
in our opinion, fairly state in all material respects the financial data
required to be set forth therein in relation to the basic financial statements
taken as a whole. MOSS ADAMS LLP
Irvine, California
March 15, 2002 F-2




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##### Table of Contents



ENTRX CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS December 31,
    
    December 31,2003
    
    2002ASSETSCurrent assets:Cash and cash equivalents
    
    $
    1,644,311
    
    
    $
    844,384Available-for-sale securities
    
    
    278,658
    
    
    

    592,547Restricted cash
    
    
    
    
    
    
    2,110,870Accounts receivable, less allowance for doubtful accounts of $65,000 and
$61,500 as of December 31, 2003 and 2002, respectively
    
    
    1,718,881
    
    
    
    1,639,528Costs and estimated earnings in excess of billings on uncompleted contracts
    
    
    179,654
    
    
    
    526,219Inventories, net
    
    
    134,823
    
    
    
    157,527Prepaid expenses and other current assets
    
    
    224,389
    
    
    
    229,926Other receivables
    
    
    187,790
    
    
    
    429,007Total current assets
    
    
    4,368,506
    
    
    
    6,530,008Property, plant and equipment, net
    
    
    2,472,284
    
    
    
    2,474,815Investment in unconsolidated affiliates
    
    
    1,756,889
    
    
    
    1,000,000Note receivable
    
    
    
    
    
    
    1,000,000Other assets
    
    
    66,360
    
    
    
    58,539$
    8,664,039
    
    
    $
    11,063,362LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Note payable to bank
    
    $
    1,000,000
    
    
    $
    996,002Current portion of convertible note payable, net of original issue discount
    
    
    151,265
    
    
    
    Current portion of capital lease obligation
    
    
    20,205
    
    
    
    Current portion of long-term debt
    
    
    133,243
    
    
    
    100,328Current portion of mortgage payable
    
    
    47,635
    
    
    
    75,740Accounts payable
    
    
    525,639
    
    
    
    1,093,375Accrued expenses
    
    
    731,299
    
    
    
    649,558Billings in excess of costs and estimated earnings on uncompleted contracts
    
    
    239,950
    
    
    
    13,352Total current liabilities
    
    
    2,849,236
    
    
    
    2,928,355Long-term debt, less current portion
    
    
    163,580
    
    
    
    208,060Convertible note payable, net of original issue discount, less current portion
    
    
    763,072
    
    
    
    Capital lease obligation, less current portion
    
    
    10,271
    
    
    
    Mortgage payable, less current portion
    
    
    1,538,893
    
    
    
    1,418,419Total liabilities
    
    
    5,325,052
    
    
    
    4,554,834Commitments and contingenciesShareholders equity:Preferred stock, par value $1; 5,000,000 shares authorized; none issued
    
    
    
    
    
    
    Common stock, par value $.10; 80,000,000 shares authorized; 7,699,015 and
7,244,215 issued and outstanding, respectively, as of December 31, 2003,
and 7,699,015 and 7,504,215 issued and outstanding, respectively, as of
December 31, 2002
    
    
    769,901
    
    
    
    769,901Additional paid-in capital
    
    
    70,047,305
    
    
    
    69,531,352Less treasury stock at cost, 454,800 and 194,800 shares as of December 31,
2003 and 2002, respectively
    
    
    (380,765
    )
    
    
    (222,159
    )Accumulated deficit
    
    
    (65,674,169
    )
    
    
    (62,667,676
    )Officers receivable, net
    
    
    (1,511,375
    )
    
    
    (984,438
    )Deferred compensation
    
    
    
    
    
    
    (66,065
    )Accumulated other comprehensive income
    
    
    88,090
    
    
    
    147,6133,338,987
    
    
    
    6,508,528$
    8,664,039
    
    
    $
    11,063,362
 See Notes to Consolidated Financial Statements F-3




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##### Table of Contents



ENTRX CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS) Year Ended December 31,2003
    
    2002
    
    2001Contract revenues
    
    $
    12,732,922
    
    
    $
    15,020,571
    
    
    $
    18,007,921Contract costs and expenses
    
    
    11,312,485
    
    
    
    13,158,482
    
    
    
    15,539,952Gross margin
    
    
    1,420,437
    
    
    
    1,862,089
    
    
    
    2,467,969Operating expenses:Selling, general and administrative
    
    
    3,786,405
    
    
    
    3,658,488
    
    
    
    3,015,367Change in allowance on officers receivable
    
    
    (387,000
    )
    
    
    387,000
    
    
    
    Restructuring charges
    
    
    
    
    
    
    3,332,726
    
    
    
    Total operating expenses
    
    
    3,399,405
    
    
    
    7,378,214
    
    
    
    3,015,367Operating loss
    
    
    (1,978,968
    )
    
    
    (5,516,125
    )
    
    
    (547,398
    )Interest income
    
    
    154,028
    
    
    
    293,073
    
    
    
    80,136Interest expense
    
    
    (171,993
    )
    
    
    (118,812
    )
    
    
    (131,566
    )Gain (loss) on sale of available-for-sale securities
    
    
    (14,989
    )
    
    
    57,056
    
    
    
    Impairment charge on investment in privately-held company
    
    
    (1,000,000
    )
    
    
    
    
    
    
    Other income (expense), net
    
    
    5,429
    
    
    
    (3,794
    )
    
    
    (904,190
    )Minority interest in net loss
    
    
    
    
    
    
    2,228
    
    
    
    Loss from continuing operations
    
    
    (3,006,493
    )
    
    
    (5,286,374
    )
    
    
    (1,503,018
    )Income from discontinued operations
    
    
    
    
    
    
    
    
    
    
    7,078,726Net income (loss)
    
    
    (3,006,493
    )
    
    
    (5,286,374
    )
    
    
    5,575,708Other comprehensive income (loss)
    
    
    (59,523
    )
    
    
    147,613
    
    
    
    Comprehensive income (loss)
    
    $
    (3,066,016
    )
    
    $
    (5,138,761
    )
    
    $
    5,575,708Weighted average number of common shares  basic
    
    
    7,303,338
    
    
    
    7,608,823
    
    
    
    7,200,490Weighted average number of common shares  diluted
    
    
    7,303,338
    
    
    
    7,608,823
    
    
    
    7,261,568Loss per share of common stock, continuing operationsbasic
    
    $
    (0.41
    )
    
    $
    (0.69
    )
    
    $
    (0.21
    )Loss per share of common stock, continuing operationsdiluted
    
    $
    (0.41
    )
    
    $
    (0.69
    )
    
    $
    (0.21
    )Income per share of common stock, discontinued operationsbasic
    
    $
    
    
    
    $
    
    
    
    $
    0.98Income per share of common stock, discontinued operationsdiluted
    
    $
    
    
    
    $
    
    
    
    $
    0.97Income (loss) per share of common stock  basic
    
    $
    (0.41
    )
    
    $
    (0.69
    )
    
    $
    0.77Income (loss) per share of common stock  diluted
    
    $
    (0.41
    )
    
    $
    (0.69
    )
    
    $
    0.77
 See Notes to Consolidated Financial Statements F-4




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##### Table of Contents



ENTRX CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY Years Ended December 31, 2003, 2002 and 2001 Common Stock
    
    Additional Paid-in
    
    Treasury
    
    AccumulatedShares
    
    Amounts
    
    Capital
    
    Stock
    
    DeficitBalance at December 31, 2000
    
    
    6,581,114
    
    
    $
    658,111
    
    
    $
    67,659,747
    
    
    $
    
    
    
    $
    (59,871,257
    )Debt conversions and interest
    
    
    266,901
    
    
    
    26,690
    
    
    
    297,124
    
    
    
    
    
    
    
    Sale of common stock and
warrants
    
    
    600,000
    
    
    
    60,000
    
    
    
    540,000
    
    
    
    
    
    
    
    Officers loan and interest
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Foreign currency translation
realized in NAFTA settlement
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,575,708Balance at December 31, 2001
    
    
    7,448,015
    
    
    
    744,801
    
    
    
    68,496,871
    
    
    
    
    
    
    
    (54,295,549
    )Common stock issued related to
restructuring
    
    
    226,000
    
    
    
    22,600
    
    
    
    558,220
    
    
    
    
    
    
    
    Stock option compensation
related to restructuring
    
    
    
    
    
    
    
    
    
    
    348,600
    
    
    
    
    
    
    
    Purchase of treasury stock
    
    
    (194,800
    )
    
    
    
    
    
    
    
    
    
    
    (222,159
    )
    
    
    Issuance of common stock upon
exercise of stock warrants
    
    
    25,000
    
    
    
    2,500
    
    
    
    35,000
    
    
    
    
    
    
    
    Allowance on officers
receivable
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Interest on officers receivable
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Unrealized gain on
available-for-sale securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Distribution of Surg II, Inc.
common stock as dividend
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,085,753
    )Value of stock options issued
of unrelated entity
    
    
    
    
    
    
    
    
    
    
    92,661
    
    
    
    
    
    
    
    Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (5,286,374
    )Balance at December 31, 2002
    
    
    7,504,215
    
    
    
    769,901
    
    
    
    69,531,352
    
    
    
    (222,159
    )
    
    
    (62,667,676
    )Purchase of treasury stock
    
    
    (260,000
    )
    
    
    
    
    
    
    
    
    
    
    (158,606
    )
    
    
    Allowance on officers
receivable
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Interest on officers receivable
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Unrealized loss on
available-for-sale securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Expense related to stock
options issued of unrelated
entity
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Stock warrants issued for
services
    
    
    
    
    
    
    
    
    
    
    119,956
    
    
    
    
    
    
    
    Stock warrants issued related
to note payable
    
    
    
    
    
    
    
    
    
    
    372,020
    
    
    
    
    
    
    
    Beneficial conversion of note
payable
    
    
    
    
    
    
    
    
    
    
    23,977
    
    
    
    
    
    
    
    Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,006,493
    )Balance at December 31, 2003
    
    
    7,244,215
    
    
    $
    769,901
    
    
    $
    70,047,305
    
    
    $
    (380,765
    )
    
    $
    (65,674,169
    )
   [Continued from above table, first column(s) repeated] AccumulatedOther
    
    TotalOfficers
    
    Deferred
    
    Comprehensive
    
    ShareholdersReceivable
    
    Comp.
    
    Income
    
    EquityBalance at December 31, 2000
    
    $
    
    
    
    $
    
    
    
    $
    (1,555,423
    )
    
    
    6,891,178Debt conversions and interest
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    323,814Sale of common stock and
warrants
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    600,000Officers loan and interest
    
    
    (1,254,521
    )
    
    
    
    
    
    
    
    
    
    
    (1,254,521
    )Foreign currency translation
realized in NAFTA settlement
    
    
    
    
    
    
    
    
    
    
    1,555,423
    
    
    
    1,555,423Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,575,708Balance at December 31, 2001
    
    
    (1,254,521
    )
    
    
    
    
    
    
    
    
    
    
    13,691,602Common stock issued related to
restructuring
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    580,820Stock option compensation
related to restructuring
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    348,600Purchase of treasury stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (222,159
    )Issuance of common stock upon
exercise of stock warrants
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    37,500Allowance on officers
receivable
    
    
    387,000
    
    
    
    
    
    
    
    
    
    
    
    387,000Interest on officers receivable
    
    
    (116,917
    )
    
    
    
    
    
    
    
    
    
    
    (116,917
    )Unrealized gain on
available-for-sale securities
    
    
    
    
    
    
    
    
    
    
    147,613
    
    
    
    147,613Distribution of Surg II, Inc.
common stock as dividend
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,085,753
    )Value of stock options issued
of unrelated entity
    
    
    
    
    
    
    (66,065
    )
    
    
    
    
    
    
    26,596Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (5,286,374
    )Balance at December 31, 2002
    
    
    (984,438
    )
    
    
    (66,065
    )
    
    
    147,613
    
    
    
    6,508,528Purchase of treasury stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (158,606
    )Allowance on officers
receivable
    
    
    (387,000
    )
    
    
    
    
    
    
    
    
    
    
    (387,000
    )Interest on officers receivable
    
    
    (139,937
    )
    
    
    
    
    
    
    
    
    
    
    (139,937
    )Unrealized loss on
available-for-sale securities
    
    
    
    
    
    
    
    
    
    
    (59,523
    )
    
    
    (59,523
    )Expense related to stock
options issued of unrelated
entity
    
    
    
    
    
    
    66,065
    
    
    
    
    
    
    
    66,065Stock warrants issued for
services
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    119,956Stock warrants issued related
to note payable
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    372,020Beneficial conversion of note
payable
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    23,977Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,006,493
    )Balance at December 31, 2003
    
    $
    (1,511,375
    )
    
    $
    
    
    
    $
    88,090
    
    
    $
    3,338,987
 See Notes to Consolidated Financial Statements F-5




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##### Table of Contents



ENTRX CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS Year Ended December 31,2003
    
    2002
    
    2001Cash flows from operating activities:Net income (loss)
    
    $
    (3,006,493
    )
    
    $
    (5,286,374
    )
    
    $
    5,575,708Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities:Elimination of Surg II, Inc. loss due to deconsolidation, net
of minority interest
    
    
    
    
    
    
    23,681
    
    
    
    Gain from discontinued operations
    
    
    
    
    
    
    
    
    
    
    (7,078,726
    )Depreciation and amortization
    
    
    181,199
    
    
    
    161,256
    
    
    
    128,580(Gain) loss on disposal of property, plant and equipment
    
    
    (5,429
    )
    
    
    18,117
    

    
    
    8,933Interest on notes receivable
    
    
    (6,889
    )
    
    
    
    
    
    
    Compensation related to stock options issued of unrelated entity
    
    
    66,065
    
    
    
    26,596
    
    
    
    Loss (gain) on sale of available-for-sale securities
    
    
    14,989
    
    
    
    (57,056
    )
    
    
    Impairment charge on investment in privately-held company
    
    
    1,000,000
    
    
    
    
    
    
    
    Provision for losses on accounts receivable
    
    
    41,459
    
    
    
    4,000
    
    
    
    7,500Provision for losses on note receivable, sale of Mexican assets
    
    
    
    
    
    
    
    
    
    
    779,402Forgiveness of related party receivable related to restructuring
    
    
    
    
    
    
    537,794
    
    
    
    Stock option compensation related to restructuring
    
    
    
    
    
    
    348,600
    
    
    
    Common stock issued related to restructuring
    
    
    
    
    
    
    580,820
    
    
    
    Allowance on officers receivable
    
    
    (387,000
    )
    
    
    387,000
    
    
    
    Interest income recorded on officers receivable
    
    
    (139,937
    )
    
    
    (116,917
    )
    
    
    Issuance of stock for services and interest
    
    
    
    
    
    
    
    
    
    
    13,813Issuance of stock warrants for services
    
    
    119,956
    
    
    
    
    
    
    
    Amortization of original issue discount
    
    
    10,332
    
    
    
    
    
    
    
    Changes in operating assets and liabilities:Restricted cash
    
    
    2,110,870
    
    
    
    (2,110,870
    )
    
    
    Accounts receivable
    
    
    (120,812
    )
    
    
    209,762
    
    
    
    2,105,186Costs and estimated earnings in excess of billings on
uncompleted contracts
    
    
    346,565
    
    
    
    (371,618
    )
    
    
    (71,681
    )Inventories, net
    
    
    22,704
    
    
    
    2,397
    
    
    
    (45,795
    )Prepaid expenses and other current assets
    
    
    5,537
    
    
    
    132,959
    
    
    
    (225,400
    )Other receivables
    
    
    241,217
    
    
    
    (429,007
    )
    
    
    Receivables from related parties
    
    
    
    
    
    
    
    
    
    
    182,204Other assets
    
    
    (7,821
    )
    
    
    102,913
    
    
    
    (135,687
    )Accounts payable and accrued expenses
    
    
    (485,995
    )
    
    
    (1,056,819
    )
    
    
    (89,344
    )Billings in excess of costs and estimated earnings on
uncompleted contracts
    
    
    226,598
    
    
    
    (45,762
    )
    
    
    32,390Net cash provided by (used in) continuing operations
    
    
    227,115
    
    
    
    (6,938,528
    )
    
    
    1,187,083Net cash provided by discontinued operations
    
    
    
    
    
    
    
    
    
    
    13,449,766Net cash provided by (used in) operating activities
    
    
    227,115
    
    
    
    (6,938,528
    )
    
    
    14,636,849Cash flows from investing activities:Capital expenditures
    
    
    (150,029
    )
    
    
    (2,257,549
    )
    
    
    (231,169
    )Purchase of available-for-sale securities
    
    
    
    
    
    
    (766,880
    )
    
    
    Sale of available-for-sale securities
    
    
    239,379
    
    
    
    569,568
    
    
    
    Distribution of Surg II, Inc. common stock
    
    
    
    
    
    
    (3,300,000
    )
    
    
    Advances on note receivable
    
    
    (750,000
    )
    
    
    (1,000,000
    )
    
    
    Proceeds from sale of assets
    
    
    17,200
    
    
    
    32,013
    
    
    
    1,500Investment, at cost
    
    
    
    
    
    
    
    
    
    
    (1,000,000
    )Net cash used in investing activities
    
    
    (643,450
    )
    
    
    (6,722,848
    )
    
    
    (1,229,669
    )Cash flows from financing activities:Proceeds from long-term debt
    
    
    121,172
    
    
    
    189,879
    
    
    
    202,438Proceeds from mortgage payable
    
    
    1,596,000
    
    
    
    1,535,000
    
    
    
    Net advances (repayments) on note payable to bank
    
    
    3,998
    
    
    
    (3,998
    )
    
    
    1,000,000Proceeds from convertible note payable and common stock warrants
    
    
    1,300,000
    
    
    
    
    
    
    
    Borrowing by an officer/shareholder
    
    
    
    
    
    
    
    
    
    
    (1,254,521
    )Payments on long-term debt
    
    
    (132,737
    )
    
    
    (122,932
    )
    
    
    (1,176,131
    )Payments on mortgage payable
    
    
    (1,503,631
    )
    
    
    (40,841
    )
    
    
    Payments on capital lease obligation
    
    
    (9,934
    )
    
    
    
    
    
    
    Proceeds from sale of stock and warrants
    
    
    
    
    
    
    
    
    
    
    600,000Purchase of treasury stock
    
    
    (158,606
    )
    
    
    (222,159
    )
    
    
    Proceeds from exercise of warrants
    
    
    
    
    
    
    37,500
    
    
    
    Net cash provided by (used in) financing activities
    
    
    1,216,262
    
    
    
    1,372,449
    
    
    
    (628,214
    )Increase (decrease) in cash and cash equivalents
    
    
    799,927
    
    
    
    (12,288,927
    )
    
    
    12,778,966Cash and cash equivalents at beginning of year
    
    
    844,384
    
    
    
    13,133,311
    
    
    
    354,345Cash and cash equivalents at end of year
    
    $
    1,644,311
    
    
    $
    844,384
    
    
    $
    13,133,311
 See Notes to Consolidated Financial Statements F-6




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##### Table of Contents



ENTRX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1  DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES  Description of Business  Entrx Corporation, formerly Metalclad Corporation (the Company) is engaged
in insulation services, including asbestos abatement and material sales, to
customers primarily in California (the Insulation Business). Until 1999,
the Company was engaged in the development of hazardous and non-hazardous
industrial waste treatment and storage facilities, as well as the collection
and recycling of industrial waste for disposition to landfills or as
alternative fuels for cement kilns in Mexico (the Mexican Business).  In 1997, the Company filed a claim against the United Mexican States under
the North American Free Trade Agreement (NAFTA) to recover the value of
its investment in a completed, but unopened, treatment, storage and disposal
facility in San Luis Potosi. During the fourth quarter of 1998, the Company
determined, that due to political opposition in Mexico, its Mexican
operations would not be successful and committed to a plan to discontinue
its Mexican operations to minimize future losses and halted any further
investment in Mexico. The Company settled its claims against the Mexican
Government in October 2001 for $16,002,000. This settlement completed the
Companys activities in Mexico and essentially closed out all discontinued
operations in Mexico.  Principles of Consolidation  The consolidated financial statements include the accounts of the Company
and its wholly-owned and majority-owned subsidiaries. Significant
intercompany accounts and transactions have been eliminated in
consolidation.  The accompanying consolidated financial statements include the accounts of
Surg II, Inc. from May 30, 2002, the date on which the Company first owned
over 50% of the voting stock of Surg II, Inc., to October 22, 2002, the date
on which the Company owned less than 50% of the voting stock of Surg II,
Inc.  Cash and Cash Equivalents  The Company considers all highly liquid investments with original maturities
of three months or less to be cash equivalents. The carrying amount
approximates fair value because of the short maturity of those instruments.
The Company deposits its cash in high credit quality financial institutions.
The balances, at times, may exceed federally insured limits.  Investments  Investments held by the Company are classified as available-for-sale
securities. Available-for-sale securities are reported at fair value with
all unrealized gains or losses included in other comprehensive income. The
fair value of the securities was determined by quoted market prices of the
underlying security. Proceeds of $239,379 and $569,568 was received and a
loss on sale of available-for-sale securities of $14,989, net of
reclassification adjustment for loss included in net loss of $14,368 and a
gain on sale of available-for-sale securities of $57,056 was recorded on the
consolidated statements of operations and comprehensive income (loss) for
the years ended December 31, 2003 and 2002, respectively. For purposes of
determining gross realized gains, the cost of available-for-sale securities
is based on specific identification.  The Company also has minority investments in privately held companies. These
investments are included in investments in unconsolidated affiliates on the
Consolidated Balance Sheets and are carried at cost unless the fair value of
the investment below the cost basis is judged to be other-than-temporary.
The Company monitors these investments for impairment and makes appropriate
reductions in carrying values. (See Note 24) F-7




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##### Table of Contents



Restricted Cash  At December 31, 2002, restricted cash of $2,110,870 consisted of balances
legally restricted as to withdrawal and comprise a certificate of deposit
collateralizing a letter of credit issued by Community Bank for the benefit
of a customer of the Companys insulation subsidiary. The letter of credit
was in lieu of a performance and payment bond required by the contract with
the customer and the certificate of deposit was released on March 25, 2003.  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. 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 approximates fair value.
The carrying amounts for cash and cash equivalents, accounts receivable,
accounts payable and accrued expenses approximate fair value because of the
short maturity of these instruments. The fair value of long-term debt, note
payable to bank, convertible note payable, mortgage payable and capital
lease obligation approximates the carrying amounts 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 and thirty years for the building and related
improvements. Maintenance, repairs and minor renewals are expensed when
incurred.  Advertising Cost  Advertising costs are expensed as incurred. Advertising costs totaled
approximately $0, $2,400 and $1,400 for the years ended December 31, 2003,
2002 and 2001, respectively.  Revenue Recognition  Fixed price insulation installation and asbestos abatement contracts are
accounted for by the percentage-of-completion method wherein costs and
estimated earnings are included in revenues as the work is performed. If a
loss on a fixed price contract is indicated, the entire amount of the
estimated loss is accrued when known. Time and material contracts are
accounted for under a cost plus fee basis. Retentions by customers under
contract terms are due at contract completion.  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, warrants and
convertible debt using the treasury stock method. Options and warrants
totaling 3,448,080 and F-8




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##### Table of Contents



3,207,333 were excluded from the computation of diluted earnings per share
for the years ended December 31, 2003 and 2002, respectively, as their
effect was antidilutive. Following is a reconciliation of basic and diluted
net income (loss) per share: 2003
    
    2002
    
    2001Net income (loss) per share  basicNet income (loss)
    
    $
    (3,006,493
    )
    
    $
    (5,286,374
    )
    
    $
    5,575,708Weighted average shares outstanding
    
    
    7,303,338
    
    
    
    7,608,823
    
    
    
    7,200,490Net income (loss) per share  basic
    
    $
    (0.41
    )
    
    $
    (0.69
    )
    
    $
    0.77Net income (loss) per share  dilutedNet income (loss)
    
    $
    (3,006,493
    )
    
    $
    (5,286,374
    )
    
    $
    5,575,708Weighted average shares outstanding
    
    
    7,303,338
    
    
    
    7,608,823
    
    
    
    7,200,490Effect of diluted securities
    
    
    
    
    
    
    
    
    
    
    61,078Weighted average shares outstanding
    
    
    7,303,338
    
    
    
    7,608,823
    
    
    
    7,261,568Net income (loss) per share  diluted
    
    $
    (0.41
    )
    
    $
    (0.69
    )
    
    $
    0.77
  Stock-Based Compensation  In accordance with Accounting Principles Board (APB) Opinion No. 25 and
related interpretations, the Company uses the intrinsic value-based method
for measuring stock-based compensation cost which measures compensation cost
as the excess, if any, of the quoted market price of the Companys common
stock at the grant date over the amount the employee must pay for the stock.
The Companys general policy is to grant stock options and warrants at fair
value at the date of grant. Options and warrants issued to non-employees
are recorded at fair value, as required by SFAS No. 123 Accounting for
Stock Based Compensation (Statement 123), using the Black-Scholes pricing
model. The Company adopted the disclosure-only requirement of SFAS No.148,
Stock Based Compensation.  The Company applies APB No. 25 and related interpretations in accounting for
its stock options and warrants. Accordingly, $186,021 and $959,016 of
compensation cost has been recognized in the accompanying consolidated
statements of operations and comprehensive income (loss) for the years ended
December 31, 2003 and 2002. Had compensation costs for the Companys stock
options and warrants been determined based on the fair value at the grant
dates consistent with the method of SFAS No. 123, the Companys net income
(loss) and income (loss) per share would have been changed to the
approximate pro forma amounts indicated below: Year Ended December 31,2003
    
    2002
    
    2001Net income (loss):As reported
    
    $
    (3,006,493
    )
    
    $
    (5,286,374
    )
    
    $
    5,575,708Pro forma
    
    
    (3,291,713
    )
    
    
    (5,589,177
    )
    
    
    4,917,935Basic net income (loss) per shareAs reported
    
    $
    (0.41
    )
    
    $
    (0.69
    )
    
    $
    0.77Pro forma
    
    
    (0.45
    )
    
    
    (0.73
    )
    
    
    0.68Diluted net income (loss) per shareAs reported
    
    $
    (0.41
    )
    
    $
    (0.69
    )
    
    $
    0.77Pro forma
    
    
    (0.45
    )
    
    
    (0.73
    )
    
    
    0.68Stock-based compensationAs reported
    
    $
    186,021
    
    
    $
    959,016
    
    
    $
    Pro forma
    
    
    285,220
    
    
    
    302,803
    
    
    
    657,773
 F-9




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##### Table of Contents



The following significant assumptions were utilized to calculate the fair
value information presented utilizing the Black-Scholes pricing model: Year Ended December 31,2003
    
    2002
    
    2001Risk Free interest rate
    
    
    2.93
    %
    
    
    3.63
    %
    
    
    3.00
    %Expected life
    
    
    4.1
    years
    
    
    3.5
    years
    
    
    3.0
    yearsExpected volatility
    
    
    140
    %
    
    
    156
    %
    
    
    147
    %Expected dividends
    
    
    
    
    
    
    
    
    
    
    Weighted average fair value
of options granted
    
    $
    0.31
    
    
    $
    1.56
    
    
    $
    1.26
  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 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 and its components. Comprehensive income
consists of net income, unrealized gains on available-for-sale securities
and foreign currency translation adjustments and is presented in the
Consolidated Statements of Shareholders Equity. During the years ended
December 31, 2003 and 2002, the Company recorded other comprehensive loss of
$59,523 and other comprehensive income of $147,613, respectively, for
unrealized gains on available-for-sale securities. The Company previously
recorded other comprehensive income (loss) on its Mexican subsidiaries for
foreign currency translation gains (losses). During the year ended December
31, 2001, as a result of the NAFTA settlement and the write-off of the
remaining Mexican assets from discontinued operations, the Company realized
$1,555,423 of foreign currency translation losses. The amount is included
in the net gain from discontinued operations in 2001.  Reclassifications  Certain reclassifications have been made to the prior year consolidated
financial statements to conform with the current year presentation.  New Accounting Pronouncements  In April 2003, the Financial Accounting Standards Board (FASB) issued SFAS
No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging
Activities, effective for contracts entered into or modified after June 30,
2003. This amendment clarifies when a contract meets the characteristics of
a derivative, clarifies when a derivative contains a financing component and
amends certain other existing pronouncements. The adoption of SFAS No. 149
did not have a material effect on the Companys consolidated financial
statements.  In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity. SFAS No.
150 is effective for financial instruments entered into or modified after
May 31, 2003, and otherwise is effective at the beginning of the first
interim period beginning after June 15, 2003. SFAS No. 150 requires the
classification as a liability of any financial instruments with a mandatory
redemption feature, an F-10




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##### Table of Contents



obligation to repurchase equity shares, or a conditional obligation based on
the issuance of a variable number of its equity shares. The Company does
not have any financial instruments as defined by SFAS No. 150. The adoption
of SFAS No. 150 did not have a material effect on the Companys consolidated
financial statements.  In November 2002, the FASB issued FASB Interpretation No. 45, Guarantors
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others (FIN 45). FIN 45 clarifies the
requirements for a guarantors accounting for and disclosure of certain
guarantees issued and outstanding. The initial recognition and initial
measurement provisions of FIN 45 were applicable to guarantees issued or
modified after December 31, 2002. The disclosure requirements of FIN 45 are
effective for financial statements for periods ending after December 15,
2002. The adoption of FIN 45 did not have a material effect on the
Companys consolidated financial statements.  In December 2003, the FASB issued FASB Interpretation No. 46 (Revised
December 2003), Consolidation of Variable Interest Entities, an
Interpretation of ARB No. 51 (FIN 46R). This standard replaces FIN 46,
Consolidation of Variable Interest Entities that was issued in January
2003. FIN 46R modifies or clarifies various provisions of FIN 46. FIN 46R
addresses the consolidation of business enterprises of variable interest
entities (VIEs), as defined by FIN 46R. FIN 46R exempts certain entities
from its requirements and provides for special effective dates for entities
that have fully or partially applied FIN 46 prior to issuance of FIN46R.
Otherwise, application of FIN 46R is required in financial statements of
public entities that have interest in structures commonly referred to as
special purpose entities for periods ending after December 15, 2003.
Application by the Company for all other types of VIEs is required in
financial statements for periods ending no later than the quarter ended
January 31, 2005. The Company does not expect the adoption of FIN 46R to
have a material effect on the Companys 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, including property and intangible
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.
To date, there have been no such losses. NOTE 2  DISCONTINUED OPERATIONS  In 1991, the Company embarked on a strategy to develop an integrated
industrial waste management business in Mexico. After seven years of
developing this business, the Company determined that its efforts would not
be successful due to political opposition in Mexico. Consequently, in the
fourth quarter of 1998, Management committed to a plan to sell its Mexican
operations to a third party.  The Companys discontinued operations contained two components: 1) ongoing
operations and development and 2) the landfill assets associated with its
NAFTA claim. In the fourth quarter of 1999, the Company completed a sale of
its ongoing operations and development.  In October 2001, the Company settled its claim against the United Mexican
States for $16,002,433. After writing off all assets associated with the
settlement of the claim and recognizing expenses related to the settlement,
the Company realized a net gain of $7,079,000. The gain is the $16,002,433
settlement amount net of legal fees of $1,171,991, NAFTA related bonuses of
$840,000, the write-off of all assets associated with the settlement of the
Companys claim of $5,356,293 and a foreign currency translation write-off
of $1,555,423. No future costs are anticipated, however, if any arise, they
will be charged to operations as incurred. This completed the Companys
activities in Mexico and essentially closed out all discontinued operations
in Mexico. F-11




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The consolidated financial statements for prior periods have been restated
to reflect the accounting for discontinued operations.  Selected financial data from discontinued operations are as follows: Year Ended December 31,2003
    
    2002
    
    2001Net sales
    
    $
    
    
    
    $
    
    
    
    $
    Operating loss
    
    
    
    
    
    
    
    
    
    
    Interest expense
    
    
    
    
    
    
    
    
    
    
    Income (loss) from discontinued operations
    
    
    
    
    
    
    
    
    
    
    7,078,726
 NOTE 3  ACQUISITIONS  On May 29, 2002, the Company acquired 145,000,000 shares of Surg II, Inc.
(Surg II) common stock, constituting approximately 90% of the outstanding
shares of Surg II for $3,000,000 invested into Surg II, and on September 25,
2002 acquired an additional 14,285,714 shares by investing an additional
$300,000 into Surg II. Goodwill from these transactions was $387,994, which
is not deductible for tax purposes. Prior to the acquisition, Surg II had
sold all of its assets and discontinued its former business of manufacturing
and marketing medical products.  The 159,285,714 shares of no par value common stock of Surg II owned by the
Company became 3,982,142 shares of $0.01 par value common stock as of the
close of business on October 4, 2002, as the result of a one for 40 reverse
stock split of Surg IIs common stock.  On October 22, 2002, the Company distributed 3,791,576 shares of Surg II to
its shareholders as a dividend. Each shareholder of record as of October
11, 2002 received one share of Surg II, Inc. common stock for every two
shares of Entrx Corporation common stock held. The Company still owns
190,566 shares of Surg II common stock.  The consolidated balance sheet for December 31, 2002 would remain the same
since the acquisition and dividend of Surg II both occurred during 2002.  The results of operations on an unaudited pro forma basis for the year ended
December 31, 2002 are not presented separately as the results do not differ
significantly from historical amounts presented herein.  Information for the periods ended December 31, 2003 and 2001 would remain
the same since the acquisition and dividend of Surg II both occurred during
2002. NOTE 4  RESTRUCTURING  In connection with their resignations and corporate restructuring, and in
lieu of compensation which would otherwise be due under change of control
provisions contained in previously executed and adopted employment
contracts, which were amended and restated as of January 1, 2002, the
Company issued the Companys former Chief Executive Officer 140,000 shares
of the Companys common stock, forgave a loan due from the officer in the
amount of $543,000 in exchange for future consulting services and paid the
officer $832,000 in cash. In addition the Company issued the Companys
former Chief Financial Officer 86,000 shares of the Companys common stock
and paid the officer $637,000 in cash. In addition, all outstanding
unvested stock options held by the prior Board of Directors, including the
former Chief Executive and Financial Officers, were immediately vested and
became exercisable. The former Chief Executive Officer and Chief Financial
Officer each agreed to act as consultants to the Company under two-year and
three-month consulting agreements, respectively. In addition to the payment
discussed above, the former Chief Financial Officers compensation for
consulting was $5,000 per month.  In March 2002, the Company reimbursed Mr. Wayne Mills, the Companys Chief
Executive Officer, $100,000 for legal fees expended by him to effect this
change in management. F-12




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##### Table of Contents



For the year ended December 31, 2002, the Company recognized $3,332,726 of
expense related to the change of management, including insurance premiums,
legal fees, severance pay and relocation of the Companys headquarters. The
cash payments related to these expenses were approximately $2,008,000. The
non-cash charges primarily relate to the forgiveness of the loan due from
the former Chief Executive Officer, the issuance of common stock to the two
former officers, the expense pursuant to APB No. 25 and related
interpretations related to the accelerated vesting of stock options for the
prior directors. NOTE 5  ACCOUNTS RECEIVABLE  Accounts receivable consisted of the following at December 31: 2003
    
    2002BilledCompleted contracts
    
    $
    526,686
    
    
    $
    386,804Contracts in process
    
    
    326,823
    
    
    
    397,410Time and material work
    
    
    693,673
    
    
    
    675,833Material sales
    
    
    26,953
    
    
    
    52,381Unbilled retainage
    
    
    209,746
    
    
    
    188,6001,783,881
    
    
    
    1,701,028Less: Allowance for doubtful accounts
    
    
    (65,000
    )
    
    
    (61,500
    )$
    1,718,881
    
    
    $
    1,639,528
 NOTE 6  COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS  Costs and estimated earnings on uncompleted contracts consisted of the
following at December 31: 2003
    
    2002Costs incurred on uncompleted contracts
    
    $
    3,487,624
    
    
    $
    2,137,492Estimated earnings
    
    
    853,884
    
    
    
    348,5884,341,508
    
    
    
    2,486,080Less billings to date
    
    
    (4,401,804
    )
    
    
    (1,973,213
    )$
    (60,296
    )
    
    $
    512,867
 The above information is presented in the balance sheet as follows: 2003
    
    2002Costs and estimated earnings in excess of
billings on uncompleted contracts
    
    $
    179,654
    
    
    $
    526,219Billings in excess of costs and estimated
earnings on uncompleted contracts
    
    
    (239,950
    )
    
    
    (13,352
    )$
    (60,296
    )
    
    $
    512,867
 NOTE 7  NOTE RECEIVABLE  On November 4, 2002 the Company entered an agreement whereby it would lend
up to $2.5 million to Zamba Corporation (Zamba) in the form of a
collateralized convertible note. The note, when fully funded, was
convertible into common stock of Zamba, or at the Companys option, was
payable by Zamba in shares of NextNet Wireless, Inc. (NextNet) Series A
Preferred Stock owned by Zamba and which collateralized the note. The note
was not repayable in cash. The agreement also gave the Company the option
to acquire additional shares of NextNet Series A Preferred Stock. The
Company had advanced $1,000,000 on the note as of December 31, 2002. On
January 13, 2003, the Company advanced $100,000 and on February 17, 2003,
advanced an additional $650,000 on the note. On February 17, 2003, the
Company amended its agreement with Zamba whereby the total amount the
Company would lend to Zamba was reduced to $1,750,000, the provision
allowing the Company to convert the loan into Zambas F-13




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##### Table of Contents



common stock was removed and the option the Company had to purchase an
additional 750,000 shares of NextNet Series A Preferred Stock from Zamba was
also removed. The loan was not repayable in cash, but was repayable through
conversion into shares of Zambas NextNet Series A Preferred Stock. The
note matured on March 31, 2003, and was converted in to 415,340 shares of
NextNet Series A Preferred Stock. Each share of NextNet Series A Preferred
Stock is convertible into three shares of NextNet common stock. On November
4, 2002, Mr. Wayne Mills, the CEO of the Company, owned approximately 6.3%
of the outstanding common stock of Zamba and approximately 3.3% of NextNet
and as of December 31, 2003 Mr. Mills owns approximately 1.4% of NextNet.
(See Notes 8 and 22) NOTE 8  INVESTMENTS IN UNCONSOLIDATED AFFILIATES  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.
Curtom-Metalclads operations and financial position are not material to the
Company taken as a whole. Additionally, the assets and liabilities held by
the joint venture are insignificant.  In November 2001, the Company purchased 56,338 shares of Series C
Convertible Preferred Stock of Catalytic Solutions, Inc. for $1,000,000.
Catalytic Solutions is a privately held materials science technology company
focused on applying its technology to improve the performance and reduce the
cost of automotive catalytic converters. Each preferred share may be
converted into one share of common stock at any time by the Company, subject
to customary adjustments for stock splits, stock combinations, stock
dividends, reclassifications and the like. All preferred shares will
automatically convert into fully paid and nonassessable shares of common
stock (1) if Catalytic Solutions closes a firmly underwritten public
offering of shares of common stock with aggregate net proceeds of at least
$20 million and a per share public offering price of at least 1.5 times the
per share purchase price of the preferred shares or (2) upon the consent or
agreement of the holders of a majority of the outstanding shares of Series C
Preferred Stock.  In March 2003, the Company converted a note receivable from Zamba
Corporation into 415,340 shares of NextNet Wireless, Inc. Series A Preferred
Stock owned by Zamba. NextNet is a privately held provider of
non-line-of-sight plug-and-play broadband wireless access systems. Each
preferred share is convertible into one share of common stock. (See Note
24) NOTE 9  PROPERTY, PLANT AND EQUIPMENT  Property, plant and equipment consists of the following: December 31,2003
    
    2002Building and land
    
    $
    2,047,364
    
    
    $
    2,047,364Machinery and equipment
    
    
    395,457
    
    
    
    341,033Automotive equipment
    
    
    593,860
    
    
    
    614,467Building improvements
    
    
    32,718
    
    
    
    16,1813,069,399
    
    
    
    3,019,045Less accumulated depreciation
and amortization
    
    
    (597,115
    )
    
    
    (544,230
    )$
    2,472,284
    
    
    $
    2,474,815
  Depreciation and amortization expense for the years ended December 31, 2003,
2002 and 2001 was $181,199, $161,256 and $128,580, respectively. F-14




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NOTE 10  ACCRUED EXPENSES Accrued expenses consist of the following: December 31,2003
    
    2002Accrued interest
    
    $
    16,657
    
    
    $
    10,173Wages, bonuses and taxes
    
    
    160,982
    
    
    
    71,419Union dues
    
    
    125,566
    
    
    
    142,367Accounting and legal fees
    
    
    55,456
    
    
    
    60,000Insurance
    
    
    193,964
    
    
    
    195,420Other
    
    
    178,674
    
    
    
    170,179$
    731,299
    
    
    $
    649,558
 NOTE 11  CONVERTIBLE DEBT  Convertible Promissory Note  In December 2003, the Company issued a $1,300,000, 10% convertible
promissory note (effective interest rate of 39.3%). The note requires
interest only payments through April 15, 2004, and thereafter is payable in
equal monthly installments over the next 33 months. The note is convertible
by the noteholder into common stock of the Company at $1.35 per share, and
allows the Company, subject to certain conditions and limitations, to make
monthly installment payments with its common stock at a price per share
approximating the then market value. In connection with the financing the
Company paid a 3% origination fee, issued a five year warrant for the
purchase of 400,000 shares of the Companys common stock at $1.50 per share,
and granted the noteholder a security interest in 249,200 shares of NextNet
Wireless, Inc. Series A Preferred Stock, and 33,800 shares of Catalytic
Solutions, Inc. Series C Preferred Stock, owned by the Company. The
proceeds of $1,300,000 were allocated between the note, and the fair value
of the warrants based on using the Black Scholes pricing model. The
resulting original issue discount, the fair value of the warrant, and the
beneficial conversion of the note payable into common stock as defined in
EITF 00-27 Application of Issue No. 98-5 to Certain Convertible
Instruments), is being amortized over the life of the note using the
straight-line method, which approximates the interest method. In addition,
the Company agreed to file a registration statement with the U.S. Securities
and Exchange Commission, covering the issuance or resale of the shares of
the Companys common stock which may be issued in connection with the note
and warrant issued to the noteholder. In addition, the note is personally
guaranteed by the Companys Chief Executive Officer. Principal maturities
over the next five years are as follows: Year endingDecember 31,2004
    
    $
    283,2642005
    
    
    461,7682006
    
    
    510,1212007
    
    
    44,847Total
    
    
    1,300,000Less original issue discount and beneficial conversion of note
payable into common stock
    
    
    (385,663
    )Total long-term debt
    
    
    914,337Less current portion
    
    
    (151,265
    )Long-term debt, net
    
    $
    763,072
 F-15




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NOTE 12  BANK CREDIT FACILITY, NOTE PAYABLE  The Company, through its subsidiary Metalclad Insulation Corporation, had a
line of credit agreement with Community Bank, Anaheim, California, for
$1,000,000, which matured on October 2, 2003. Borrowings under the
agreement were limited to the lower of $1,000,000 or the Companys borrowing
base, which consisted of a specified percentage of certain accounts
receivable. Although the line of credit originally matured on May 1, 2003,
and the Company was not in compliance with certain of the covenants
contained in the line of credit agreement, during the third quarter
Community Bank extended the maturity date of the line to October 2, 2003.
On November 5, 2003, Metalclad Insulation Corporation obtained a new line of
credit with Far East National Bank, Los Angeles, California and repaid the
line of credit with Community Bank.  The line of credit agreement with Far East National Bank matures in October
2004 and bears interest at a floating rate based upon the banks prime rate
plus 1% (5.00% at December 31, 2003). The line of credit is collateralized
by certain assets of the Company and personally guaranteed by the Companys
CEO. Borrowings under the agreement are limited to $1,000,000 plus the
amount of cash collateral posted, up to $500,000, in the form of certificate
of deposit at the bank.  At December 31, 2003, $1,000,000 was outstanding on the credit agreement
with available borrowings of $0. The loan terms stipulate that the Company
maintain compliance with certain financial covenants and ratios. At
December 31, 2003, the Company was in compliance with these covenants.  On February 14, 2003, the Company entered into a loan agreement with Venture
Bank, Bloomington, Minnesota, to borrow $750,000. On April 1, 2003, the
Company repaid the $750,000 loan with Venture Bank along with all accrued
interest. NOTE 13  LONG-TERM DEBT  Long-term debt consists of various notes payable to finance companies for
vehicles used in the ordinary course of the Companys insulation business.
The notes are collateralized by the vehicles and bear interest at rates
ranging from 0% to 8.99% for periods of 36 to 60 months with the last
payment due in 2007. Principal maturities over the next five years are as
follows: Year endingDecember 31,2004
    
    $
    133,2432005
    
    
    117,0002006
    
    
    42,0532007
    
    
    4,527Totals
    
    
    296,823Less current portion
    
    
    (133,243
    )Long-term portion
    
    $
    163,580
 NOTE 14  MORTGAGE PAYABLE  In May 2002, the Company purchased the facilities in Anaheim, California,
housing the industrial insulation services operations. The purchase price
was $2,047,000. The Company obtained a $1,535,000 mortgage on the building
from Community Bank that matured on May 1, 2017 and bore interest at a
floating rate based upon the banks reference rate plus .25% (4.5% at
December 31, 2002).  In November 2003, the Companys subsidiary, Metalclad Insulation
Corporation, refinanced the facilities in Anaheim. Metalclad Insulation
Corporation obtained a $1,596,000 mortgage on the building from Far East
National Bank, Los Angeles, California that matures in October 2008 and
bears interest at a floating rate based upon the banks prime rate plus 1%
(5.00% on the date of the loan). On December 31, 2003 the interest rate was
5%. The mortgage F-16




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##### Table of Contents



is guaranteed by the Companys CEO. At December 31, 2003, the remaining
balance on the mortgage was $1,586,528. The mortgage is collateralized by
the building. Principal maturities on the mortgage are as follows: Year endingDecember 31,2004
    
    $
    47,6352005
    
    
    51,3962006
    
    
    54,0262007
    
    
    56,7902008
    
    
    1,376,681Totals
    
    
    1,586,528Less current portion
    
    
    (47,635
    )Long-term portion
    
    $
    1,538,893
 NOTE 15  CAPITAL LEASE OBLIGATION  During the year ended December 31, 2003, the Company entered into a lease
agreement for the use of equipment. The lease agreement expires in July,
2005. The lease was recorded as a capital lease obligation and bears
interest at 13.3%. The obligation is secured by the property under lease.
The total cost of the leased equipment was $35,288 and accumulated
amortization on the leased equipment was $2,941 at December 31, 2003.  The following is a schedule of future minimum lease payments under capital
lease together with the present value of the net minimum lease payments for
the years ending December 31: Future minimum lease payments due at:2004
    
    $
    22,9082005
    
    
    11,623Total
    
    
    34,531Less: amounts representing interest
    
    
    (4,055
    )Present value of future minimum lease payments
    
    
    30,476Less; current portion
    
    
    (20,205
    )Capital lease obligation, less current portion
    
    $
    10,271
 F-17




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NOTE 16  INCOME TAXES The major deferred tax items are as follows: December 31,2003
    
    2002Assets:Allowances established against
realization of certain assets
    
    $
    583,000
    
    
    $
    405,000Net operating loss carryforwards
    
    
    13,567,000
    
    
    
    12,666,000Liabilities:Accrued liabilities and other
    
    
    (63,000
    )
    
    
    (27,000
    )14,087,000
    
    
    
    13,044,000Valuation allowance
    
    
    (14,087,000
    )
    
    
    (13,044,000
    )$
    
    
    
    $
    
  The change in valuation allowance was $1,043,000, $7,867,000 and
$(7,124,000) for the years ended December 31, 2003, 2002 and 2001,
respectively.  Income tax computed at the U.S. federal statutory rate reconciled to the
effective tax rate is as follows for the years ended December 31: 2003
    
    2002
    
    2001Federal statutory tax rate benefits
    
    
    (35.0
    %)
    
    
    (35.0
    %)
    
    
    35.0
    %State tax, net of federal benefit
    
    
    (5.0
    %)
    
    
    (5.0
    %)
    
    
    5.0
    %Change in valuation allowance
    
    
    34.7
    %
    
    
    39.5
    %
    
    
    (40.5
    %)Permanent differences
    
    
    5.3
    %
    
    
    0.5
    %
    
    
    0.5
    %Effective tax rate
    
    
    0.0
    %
    
    
    0.0
    %
    
    
    0.0
    %
  At December 31, 2003, the Company has available for U.S. federal income tax
purposes net operating loss carryforwards of approximately $33,000,000.
These carryforwards expire in the years 2010 through 2023. 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. NOTE 17  SHAREHOLDERS EQUITY  Stock Options  On August 18, 1992, the Company adopted an omnibus stock option plan (the
1992 Plan) which authorized options to acquire 160,000 shares of the
Companys common stock. At December 31, 2003, there were options
outstanding under the 1992 Plan for 2,250 shares, and no shares available
for grant. These options will expire 10 years from the date of grant.
Under the terms of the plan, the Board of Directors may grant options and
other stock-based awards to key employees to purchase shares of the
Companys common stock. The options are exercisable at such times, in
installments or otherwise, as the Board of Directors may determine.  On March 24, 1993, the Company adopted an omnibus stock option plan (the
1993 Plan) which authorized options to acquire 100,000 shares of the
Companys common stock. The terms of the 1993 Plan are the same as the 1992
Plan. At December 31, 2003, there were options outstanding under the 1993
Plan for 8,300 shares, and no shares available for grant. These options
expire 10 years from the date of the grant. Under the terms of the plan,
the Board of Directors may grant options and other stock-based awards to key
employees to purchase shares of the Companys F-18




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common stock. The options are exercisable at such times, in installments or
otherwise, as the Board of Directors may determine.  On May 15, 1997, the Company adopted an omnibus stock option plan (the 1997
Plan) which authorized options to acquire 600,000 shares of the Companys
common stock. At December 31, 2003, there were 450,000 options outstanding
under this plan and 150,000 options available for grant. These options
expire 10 years from the date of the grant. Under the terms of the plan,
the Board of Directors may grant options and other stock-based awards to key
employees to purchase shares of the Companys common stock. The options are
exercisable at such times, in installments or otherwise, as the Board of
Directors may determine.  On November 20, 2001, the Company adopted an omnibus stock option plan (the
2000 Plan) which authorized options to acquire 2,000,000 shares of the
Companys stock. At December 31, 2003, there were options outstanding under
the 2000 plan for 1,619,150 shares and 380,850 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 Board
of Directors may grant options and other stock-based awards to key employees
to purchase shares of the Companys common stock. The options are
exercisable at such times, in installments or otherwise, as the Board of
Directors may determine.  At December 31, 2003, there were options, that were granted outside of the
stock option plans, outstanding to acquire 217,700 shares of the Companys
stock.  The following is a summary of options granted: Year Ended December 31,2003
    
    2002
    
    2001Weighted
    
    
    
    
    
    Weighted
    
    
    
    
    
    WeightedAverage
    
    
    
    
    
    Average
    
    
    
    
    
    AverageExercise
    
    
    
    
    
    Exercise
    
    
    
    
    
    ExerciseShares
    
    Price
    
    Shares
    
    Price
    
    Shares
    
    PriceOptions outstanding at
beginning of the year
    
    
    2,150,500
    
    
    $
    4.62
    
    
    
    1,693,500
    
    
    $
    5.43
    
    
    
    1,452,800
    
    
    $
    8.92Granted
    
    
    210,000
    
    
    
    0.57
    
    
    
    500,000
    
    
    
    2.24
    
    
    
    520,000
    
    
    
    2.00Exercised
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Canceled
    
    
    (63,100
    )
    
    
    2.55
    
    
    
    (43,000
    )
    
    
    8.51
    
    
    
    (279,300
    )
    
    
    17.22Options outstanding at end of
the year
    
    
    2,297,400
    
    
    $
    4.31
    
    
    
    2,150,500
    
    
    $
    4.62
    
    
    
    1,693,500
    
    
    $
    5.43Options Exercisable
    
    
    1,935,484
    
    
    $
    4.70
    
    
    
    1,699,254
    
    
    $
    5.11
    
    
    
    783,911
    
    
    $
    8.53
 Options Outstanding
    
    Options ExercisableWeightedaverageNumber
    
    remaining
    
    Weighted
    
    Number
    
    WeightedRange of
    
    outstanding
    
    contractual life
    
    average
    
    exercisable as
    
    averageexercise prices
    
    as of 12/31/03
    
    in years
    
    exercise price
    
    of 12/31/03
    
    exercise price$0.50-$1.20
    
    
    275,750
    
    
    
    6.10

    
    
    $
    0.72
    
    
    
    107,000
    
    
    $
    0.72$2.00
    
    
    510,000
    
    
    
    7.44
    
    
    $
    2.00
    
    
    
    510,000
    
    
    $
    2.00$2.50
    
    
    413,400
    
    
    
    4.49
    
    
    $
    2.50
    
    
    
    230,234
    
    
    $
    2.50$3.00
    
    
    870,000
    
    
    
    6.39
    
    
    $
    3.00
    
    
    
    870,000
    
    
    $
    3.00$12.50-$45.00
    
    
    228,250
    
    
    
    2.39
    
    
    $
    22.09
    
    
    
    218,250
    
    
    $
    22.07$0.50-$45.00
    
    
    2,297,400
    
    
    
    5.85
    
    
    $
    4.31
    
    
    
    1,935,484
    
    
    $
    4.70
  On November 7, 2002 the Company issued options to purchase a total of 75,000
shares of its available-for-sale securities holdings in Chiral Quest, Inc.
to three members of the Companys Board of Directors. The options vested as
to 25% immediately and as to an additional 25% on each of November 5, 2003,
2004 and 2005. Further, the options fully vest upon a change of control
of Chiral Quest, Inc., which event occurred on February 14, 2003. The
options have an exercise price of $1.25 per share. The Company recorded
compensation cost of $26,596 for the year F-19




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##### Table of Contents



ended December 31, 2002 related to the options granted and the remaining
deferred compensation of $66,065 was recognized in the year ended December
31, 2003.Stock Purchase Warrants 
In connection with various debt offerings, stock placements and services
provided, the Company has issued various stock purchase warrants. All such
warrants were issued at prices which approximated or exceeded fair market
value of the Companys common stock at the date of grant and are exercisable
at dates varying from immediately to nine years. The Company issued a
consultant a five-year warrant to purchase 50,000 shares of the Companys
common stock during the year ended December 31, 2003 and recognized $21,364
of expense related to the warrant. At December 31, 2003, the weighted
average exercise price per warrants outstanding was $1.50, expiring through
December 2008.  Summarized information for stock purchase warrants is as follows: Number ofWarrants
    
    Price per shareWarrants outstanding at December 31, 2000
    
    
    1,267,495
    
    
    $
    2.50-$12.50Issued
    
    
    600,000
    
    
    $
    1.50Expired
    
    
    (737,406
    )
    
    $
    3.50-$12.50Warrants outstanding at December 31, 2001
    
    
    1,130,089
    
    
    $
    1.50-$4.80Exercised
    
    
    (25,000
    )
    
    $
    1.50Expired
    
    
    (48,256
    )
    
    $
    3.50Warrants outstanding at December 31, 2002
    
    
    1,056,833
    
    
    $
    1.50-$4.80Issued
    
    
    550,000
    
    
    $
    1.41Expired
    
    
    (456,153
    )
    
    $
    3.51Warrants outstanding at December 31, 2003
    
    
    1,150,680
    
    
    $
    0.50-$3.50
 Common Stock  During the year ended December 31, 2001, the Company issued 866,901 shares,
with 266,901 being the result of debt conversions and 600,000 as the result
of a private placement of units, each unit consisted of one share of common
stock and one common stock purchase warrant exercisable at $1.50 per share.  During the year ended December 31, 2002, the Company issued 226,000 shares
in connection with the resignations of two officers of the Company and
25,000 shares as the result of warrant exercises. The Company repurchased
194,800 shares as a result of a stock buyback program.  During the year ended December 31, 2003, the Company repurchased 260,000
shares as a result of a stock buyback program. NOTE 18  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, 2003, 2002 and 2001.  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 F-20




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##### Table of Contents



provisions of negotiated labor contracts. The contributions were $332,237,
$325,788 and $376,922 for the years ended December 31, 2003, 2002 and 2001,
respectively. NOTE 19  SIGNIFICANT CUSTOMERS  Sales for the year ended December 31, 2003 to Curtom-Metalclad were
approximately $5,113,000, primarily representing work performed at Southern
California Edison Company (SCE) and LA Power Joint Venture under the
strategic alliance program with Curtom-Metalclad. The Company had trade
accounts receivable of $346,000 from Curtom-Metalclad, primarily related to
SCE and LA Power Joint Venture, as of December 31, 2003. Additionally, the
Company had sales of $1,275,000 to Shell Oil Products US during the year
ended December 31, 2003. Accounts receivable from Shell Oil Products US was
$80,000 as of December 31, 2003.  Sales for the year ended December 31, 2002 to Curtom-Metalclad were
approximately $6,384,000, primarily representing work performed at Southern
California Edison Company (SCE) plants under the strategic alliance
program with Curtom-Metalclad. The Company had trade accounts receivable of
$521,000 from Curtom-Metalclad, primarily related to SCE, as of December 31,
2002. Additionally, the Company had sales of $1,967,000 and $1,571,000 to
Kiewit Industrial Company, and Equilon Enterprises LLC, respectively, during
the year ended December 31, 2002. Accounts receivable from these two
customers were $486,000 and $76,000, respectively, as of December 31, 2002.  Sales for the year ended December 31, 2001 to Curtom-Metalclad were
approximately $7,132,000, primarily representing work performed at SCE
plants. The Company had trade accounts receivable of $621,000 from
Curtom-Metalclad as of December 31, 2001. Additionally, the Company had
sales of $1,910,000 and $1,540,000 to Equilon Enterprises LLC and AES
Corporation, respectively, during 2001. Accounts receivable from these two
customers were $63,000 and $412,000, respectively, as of December 31, 2001. NOTE 20  COMMITMENTS AND CONTINGENCIES  Collective Bargaining Agreements  Approximately 90% of the Companys employees are covered under collective
Bargaining Agreements. One agreement, the Maintenance Agreement with
Local No. 5 of the International Association of Heat and Frost Insulators
and Asbestos Workers expired in December 2003. The Maintenance Agreement
is currently under negotiation. The Basic Agreement with Local No. 5 of
the International Association of Heat and Frost Insulators and Asbestos
Workers expires in August 2004. An agreement with the Laborers Local 300
was signed in January 2004 and expires in December 2006.  Leases  The Company previously leased its facilities under non-cancelable operating
lease agreements which expired at various dates through 2002. In May 2002,
the Company purchased the facilities in Anaheim, California, housing the
industrial insulation services operations. 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.  Total rent expense under operating leases was $83,821, $145,418 and $262,746
for the years ended December 31, 2003, 2002, and 2001, respectively. There
are no future minimum non-cancelable lease commitments.  Litigation  Prior to 1975, the Company was engaged in the sale and installation of
asbestos related insulation materials, and has been the subject of 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. F-21




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##### Table of Contents



The number of asbestos related claims which have been initiated naming the
Company (primarily our subsidiary, Metalclad Insulation Corporation) as a
defendant had increased from 254 in 1999, 527 in 2000 to 685 in 2001. The
number of claims initiated slightly decreased to 583 in 2002, and further
decreased to 337 in 2003. As of December 31, 2003, there were approximately
1,212 asbestos cases pending, of which approximately 390 have been settled
but not yet closed for lack of final documentation or payment. At December
31, 2000, 2001 and 2002, there were, respectively, approximately 860, 1,450
and 1,635 cases pending. It had been previously improperly reported in the
Companys Forms 10K for the period ended December 31, 2002, filed with the
Securities and Exchange Commission, that there were approximately 660 cases
pending at December 31, 2002, and 700 cases pending at the end of 2001.
Although, the number of claims made in 2002 and 2003 reflected a downward
trend from 2001, and the number of cases pending on December 31, 2003,
dropped from those pending on December 31, 2002, it cannot be assumed that
this trend will continue. The sympathies of juries, the aggressiveness of
the plaintiffs bar, and the declining defendant base as a result of
business failures, has also led to a trend of larger payments and
settlements per claim.  In the past the Company believed that it had adequate insurance to cover
these claims; however, the terms of such insurance policies are complex and
the coverage for many types of claims is limited. If the current trend of
the claim occurrence and amounts is not significantly reversed, it will
likely have a material adverse effect on the Companys financial condition
and business in the future. Because of the Companys insurance coverage, it
does not anticipate any adverse effect on its financial condition to develop
for at least the next four to five years. Beyond that, however, the effect
of those claims is uncertain.  In 2003 the United States Congress considered legislation to create a
privately funded, publicly administered fund to provide the necessary
resources for an asbestos injury claims resolution program. The latest
draft of the legislation called for the fund to be funded 50% by asbestos
defendant companies, of which the Company is one, and 50% by insurance
companies. The impact, if any, this potential legislation will have on us
cannot be determined at this time.  In October 1999, the Company completed the sale of its operating businesses
and its development project located in Aguascalientes, Mexico. The sale
specifically excluded those Mexican assets involved in the Companys NAFTA
claim. Under the terms of the sale the Company received an initial cash
payment of $125,000 and recorded a receivable for $779,000. 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. The Company has suffered damages and
continues to accrue damages and a monetary award is sought as the remedy.
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 consent from the Company. 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
the Companys complaint. The Company is prepared to now file the
arbitration claim for the aforementioned damages. No assurances can be
given on the outcome. The Company has fully reserved its $779,000 note
receivable, which was recorded at the date of sale, but will continue to
pursue its claims.  In a related action, a default was entered against the Company 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 the Company, and was set aside in
the quarter ended June 30, 2003. Most of the evidentiary hearings on the
merits of the former employees claim have taken place and we are preparing
for final arguments. The Company believes this claim is without merit and
intends to vigorously defend against the claim.  On February 5, 2003, a Notice of Involuntary Lien was filed against the
Company with the County Recorder for Orange County California in the amount
of $104,046. This lien relates to a judgment against the Company for
attorney fees in the Companys NAFTA settlement. The total amount of the
claim including interest and collection costs is $111,406. Subsequent to
the lien being filed, $27,050 was paid to the lien holder from a trust fund
established by the Company and a third party to pay for any judgments and
defense costs related to this lawsuit. The Company agreed to pay the
remaining $84,356 of the claim in three installments. At December 31, 2003,
the Company paid the judgment in full. F-22




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##### Table of Contents



The Company has been indemnified by the third party against any judgments
and costs related to this lawsuit in excess of the trust fund and has
contacted the third party seeking indemnification. The third party has
refused to honor its indemnification obligation and the Company has
therefore initiated legal proceedings against the third party. The third
party has filed a cross-complaint against the Company seeking $100,000 due
to undue influence, duress, fraud, unconscionability and conspiracy related
to the original indemnification agreement. The Company believes the
cross-complaint is without merit. Due to the uncertainty regarding
indemnification, during the year ended December 31, 2003 the Company
recorded $84,356 of expense related to the remaining balance of the claim.
The Companys policy is to record any legal costs associated with a loss
contingency when incurred.  Stock Repurchase Program  In July 2002, the Board of Directors authorized a stock repurchase program
under which the Company is authorized to repurchase up to 1,000,000 common
shares of the Companys common stock. During the year ended December 31,
2003, the Company repurchased 260,000 shares for $158,606 and during the
year ended December 31, 2002, the Company repurchased 194,800 shares for
$222,159.  Letters of Credit  On October 1, 2002, Community Bank issued a $2,100,000 standby letter of
credit on behalf of the Company for the benefit of a customer of the
Companys insulation subsidiary. The letter of credit is fully secured by
the Companys certificate of deposit at Community Bank. The letter of
credit was in lieu of a performance and payment bond required by the
contract with the customer and was released on March 25, 2003.  In August 2003, Arrowhead Consulting Group (Arrowhead) agreed to
arrangements with the Company which resulted in the issuance of completion
bonds benefiting a joint venture of Metalclad Insulation Corporation for two
projects. The issuer of the bonds required credit enhancement and accepted
letters of credit issued by M&I Bank through the efforts of Arrowhead. As
compensation for Arrowhead having its bank issue its letters of credit, the
Company agreed to pay a fee and issue a three-year warrant to purchase
100,000 shares of the Companys common stock, at $1.50 per share, to
Arrowhead, valued using the Black-Scholes pricing model at $98,592. In
addition, the Company provided collateral in the form of an assignment of
shares of NextNet Wireless, Inc. preferred stock owned by the Company and
Wayne Mills, the Companys CEO, provided Arrowhead with his personal
guaranty. At December 31, 2003 the bonds remain outstanding.  Other Matters  The Company had under contract uncompleted work at bid prices totaling
approximately $5,559,000 and $5,848,000 at December 31, 2003 and 2002,
respectively.  Employment Agreement  The Company has an employment agreement with one of its officers, which
expires at-will. The agreement requires minimum annual compensation of
$200,000, plus an annual incentive bonus as defined in the agreement and six
months severance, in the event of sale or merger of the Company or if
terminated without cause.  The Company also has an employment agreement with another one of its
officers, which expires in April 2006. The agreement requires minimum
annual compensation of $165,000, plus an annual bonus as defined in the
agreement and three months severance, in the event of sale or merger of the
Company or if terminated without cause. NOTE 21  SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION AND NON-CASH INVESTING ACTIVITIES  Supplemental Disclosures of Cash Flow Information  Cash paid for interest was $165,509, $113,021 and $279,131 for the years
ended December 31, 2003, 2002, and 2001, respectively. F-23




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##### Table of Contents



Disclosure of Non-cash Investing and Financing ActivityNon-cash items related to a note receivable and interest receivable converted
into investment in unconsolidated affiliates was $1,756,889 for the year
ended December 31, 2003.Non-cash items related to a piece of equipment financed through a capital
lease obligation in the amount of $40,410, including interest of $4,055,
occurred during the year ended December 31, 2003.As part of the purchase of Chiral Quest, Inc., formerly Surg II, Inc., the
Company had goodwill of $384,679 and minority interests of $264,749 during
the year ended December 31, 2002.During the year ended December 31, 2001, the Company converted approximately
$324,000 of convertible subordinated debentures, principal and interest into
266,900 shares of common stock. NOTE 22 - RELATED PARTY TRANSACTIONS  During fiscal 1995 the Company loaned $740,000 to two officers of the
Company, Mr. Neveau and Mr. Kesler. In February 1996, the officers each
repaid $150,000 to the Company. In March 1996, the notes were amended to
modify the loan principal and to adjust the interest rates, effective March
1, 1996, to a variable rate based upon the Companys quarterly investment
rate. In December 2001, Mr. Neveaus note was written off and in February
2002, Mr. Keslers note was amended to be forgiven over time, in
consideration for consulting services.In November, 2000, the Board of Directors approved advances against legal
costs on behalf of Mr. Kesler, the Companys former CEO, in his pursuit of
certain personal legal matters related to his position in the Company. As of
December 31, 2000, Mr. Kesler owed the Company $57,000 related to these
advances, which may be recoverable from pending litigation. In December,
2001, the Company assumed these legal fees and all rights of recovery against
the defendants.A former officer and director of the Company, who resigned in February 2002,
is a partner in a law firm which has received payments for legal fees of $0,
$42,888 and $196,637 for the years ended December 31, 2003, 2002 and 2001,
respectively.On December 10, 2001 the Company issued a $1,250,000, 6%, non-recourse
secured note to Blake Capital Partners, LLC (Blake), an entity controlled
100% by Wayne Mills. On February 14, 2002 Mr. Mills became President and
Chief Executive Officer and a member of the Companys Board of Directors.
The note was collateralized by 500,000 shares of the Companys common stock
and any dividends received on the 500,000 shares of the Companys common
stock (the Collateral), owned by Blake and Mr. Mills. The principal and
interest was due June 10, 2002. Blake had the right to extend the maturity
date of this note for a period of 90 days, and on June 10, 2002 exercised
that right. During the 90-day extension period and beyond, simple interest
was payable at 12% per annum. The note was not repaid on the extended due
date of September 8, 2002. As of December 31, 2002, the market value of the
common stock held as Collateral was $863,000, $387,000 less than the face
amount of the note. The Company recorded a $387,000 allowance to record the
face amount of the note at the value of the underlying Collateral on December
31, 2002. The carrying value continued to fluctuate as the market value of
the Collateral changed.Effective November 1, 2003, the promissory note (the Note) referred to
above and the Security and Pledge Agreement (the Security Agreement)
relating to the securities pledged as collateral for such loan were amended.
The Note was previously due on September 8, 2002. At that time, $1,250,000
of principal and approximately
$75,000 of interest were due under the Note. The Note (except for the
interest) was without recourse to Blake, but was secured under the terms of
the Security Agreement by 500,000 shares of the Companys common stock, and
250,000 shares of the common stock of Chiral Quest, Inc. (OTCBB:CQST), owned
by Blake and Mr. Mills. The common stock of Chiral Quest, Inc. was spun out
to the Companys shareholders of record as of October 11, 2002, as a
one-for-two stock dividend. Under the Security Agreement, the Companys
only recourse was to cancel the Companys common stock held as collateral at
$2.50 per share. In addition, Blake had the right to require the Company to
cancel the shares of the Companys common stock held as collateral, and
apply the value of the F-24




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##### Table of Contents



Companys common stock at $2.50 per share. Since the
Security Agreement did not anticipate the situation where the Company spun
off a subsidiary as a dividend, it was not clear under the Security
Agreement as to how shares of Chiral Quest, Inc. were to be treated. The
closing per share purchase prices of the Companys and Chiral Quest, Inc.,
common stock on October 31, 2003, were $1.22 and $1.95, respectively,
placing an aggregate market value on shares of the Company and Chiral Quest,
Inc. held as collateral on that date at $610,000 and $487,500, respectively.The Board of Directors of the Company negotiated an amendment to the
Security Agreement (the Amended and Restated Security Agreement) which it
believed to be beneficial to the Company. The Note as amended (the New
Note) is in the principal amount of $1,496,370, and now provides for an
October 31, 2007 due date, with interest at 2% over the prime rate
established by Wells Fargo Bank, NA in Minneapolis, Minnesota, adjusted on
March 1 and September 1 of each year (6% at December 31, 2003), instead of
the 12% rate established in the Note. Interest only is payable commencing
March 1, 2004, and at the end of each six-month period thereafter. The New
Note is with full recourse to Blake and the Amended and Restated Security
Agreement does not require the Company, or permit Blake or Mr. Mills, to
cancel the shares of the Companys common stock, and require the Company 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
has personally guaranteed the repayment of the New Note. At December 31,
2003, the note receivable balance, including interest, was $1,511,375. At
December 31, 2002, the note receivable balance, including interest and an
allowance for officer receivable, was $984,438.A director and an officer of the Company are employed by a corporation which
has received payments for rent, health insurance and consulting services of
approximately $187,601 and $174,209 for the years ended December 31, 2003
and 2002, respectively.According to the terms of his employment agreement, the Company paid its
Chief Executive Officer $109,110 in consideration of his personal guarantee
of the debt obligations with Far East Bank and to Arrowhead. (See Notes 12,
14 and 20)In November 2002, the Company entered an agreement whereby it lent $1.75
million to Zamba Corporation (Zamba) in the form of a collateralized
convertible note. The note matured on March 31, 2003, and was converted in
to 415,340 shares of NextNet Wireless, Inc. Series A Preferred Stock owned
by Zamba. Each share of NextNet Series A Preferred Stock is convertible
into three shares of NextNet common stock. Mr. Wayne Mills, the CEO of the
Company, owned approximately 6.3% of the outstanding common stock of Zamba
on the date of the agreement and owned approximately 1.4% of NextNet
Wireless, Inc. on December 31, 2003. (see Note 7) F-25




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##### Table of Contents



NOTE 23  SELECTED QUARTERLY DATA (Unaudited)  The following summarized unaudited quarterly financial data has been
prepared using the consolidated financial statements of Entrx Corporation: First
    
    Second
    
    Third
    
    FourthQuarter
    
    Quarter
    
    Quarter
    
    Quarter2003:Total revenue
    
    $
    3,902,269
    
    
    $
    3,082,575
    
    
    $
    3,121,424
    
    
    $
    2,626,654Gross margin (loss)
    
    
    (67,729
    )
    
    
    442,131
    
    
    
    521,679
    
    
    
    524,356Loss from continuing operations
    
    
    (1,118,410
    )
    
    
    (151,864
    )
    
    
    (232,581
    )
    
    
    (1,503,638
    )Net loss
    
    
    (1,118,410
    )
    
    
    (151,864
    )
    
    
    (232,581
    )
    
    
    (1,503,638
    )Net loss per
common share - basic
    
    $
    (0.15
    )
    
    $
    (0.02
    )
    
    $
    (0.03
    )
    
    $
    (0.21
    )Net loss per
common share - diluted
    
    $
    (0.15
    )
    
    $
    (0.02
    )
    
    $
    (0.03
    )
    
    $
    (0.21
    )2002:Total revenue
    
    $
    3,182,209
    
    
    $
    4,270,827
    
    
    $
    3,514,557
    
    
    $
    4,052,978Gross margin
    
    
    333,167
    
    
    
    534,317
    
    
    
    476,944
    
    
    
    517,661Income (loss) from continuing
operations
    
    
    (3,992,649
    )
    
    
    (566,637
    )
    
    
    (1,054,995
    )
    
    
    327,907Net income (loss)
    
    
    (3,992,649
    )
    
    
    (566,637
    )
    
    
    (1,054,995
    )
    
    
    327,907Net income (loss) per common share
- basic
    
    $
    (0.53
    )
    
    $
    (0.07
    )
    
    $
    (0.14
    )
    
    $
    0.05Net income (loss) per common share
- diluted
    
    $
    (0.53
    )
    
    $
    (0.07
    )
    
    $
    (0.14
    )
    
    $
    0.05
 NOTE 24  SUBSEQUENT EVENT  In March 2003, the Company converted a note receivable from Zamba
Corporation into 415,340 shares of NextNet Wireless, Inc. Series A Preferred
Stock owned by Zamba. NextNet is a privately held provider of
non-line-of-sight plug-and-play broadband wireless access systems. Each
preferred share is convertible into three shares of common stock. On February
23, 2004, however, the Company was notified of a proposed merger between
NextNet and a recently formed privately owned company (the Acquirer), to
which we gave our consent. The Acquirer has experience in the
wireless communication industry.Under the terms of the merger, the Company will receive warrants
to purchase 290,738 shares of the class A common stock of the Acquirer in exchange for the 415,340
shares of Series A Preferred Stock that it owns of NextNet. The warrants
the Company will receive from the Acquirer have an exercise price of
$4.00 per share, are immediately exercisable and have a term which
terminates after the earlier of six years or upon the occurrence of certain
events which gives the holders of the warrant liquidity with respect to the
underlying common stock. The Company has been informed that the merger was completed on March 16, 2004.
Based upon the foregoing, the Company determined that there had been an
other-than-temporary decline in the fair value of its investment below the
cost and recorded an impairment charge of $1,000,000 for the year ended
December 31, 2003. The Company valued the warrants received using the
Black-Scholes pricing model using 113% as the volatility, 1.24% as the risk
free interest rate, an expected life of six years and no expected dividends.
The Company has not obtained, and will not obtain, an independent appraisal
of the value of the warrants. F-26




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##### Table of Contents



Report of Independent Auditors on Supplementary Information To Shareholders, Audit Committee and Board of Directors
Entrx Corporation
Minneapolis, Minnesota Our report on our audits of the basic consolidated financial statements of
Entrx Corporation for the years ended December 31, 2003 and 2002 appears on
page F-1. The audits were made for the purpose of forming an opinion on the
basic consolidated financial statements taken as a whole. The supplementary
information on page F-28 is represented for purposes of additional analysis and
is not a required part of the basic consolidated financial statements. Such
information has been subjected to the auditing procedures applied in the audits
of the basic consolidated financial statements and, in our opinion, is fairly
stated in all material respects in relation to the basic consolidated financial
statements taken as a whole. /s/ VIRCHOW, KRAUSE & COMPANY, LLP
 Minneapolis, Minnesota
January 30, 2004 F-27




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##### Table of Contents



SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AdditionsBalance at
    
    Charged to
    
    Charged
    
    
    
    
    
    Balance atBeginning of
    
    Costs and
    
    to Other
    
    
    
    
    
    End ofDescription
    
    Period
    
    Expenses
    
    Accounts
    
    Deductions
    
    PeriodYear ended December 31, 2003Deducted from asset accounts:Allowance for doubtful accounts
    
    $
    61,500
    
    
    $
    41,459
    
    
    $
    
    
    
    $
    37,959
    
    
    $
    65,000Allowance on notes receivable
    
    $
    1,166,402
    
    
    $
    
    
    
    $
    
    
    
    $
    (387,000
    )
    
    $
    779,402Year ended December 31, 2002Deducted from asset accounts:Allowance for doubtful accounts
    
    $
    57,500
    
    
    $
    4,000
    
    
    $
    
    
    
    $
    
    
    
    $
    61,500Allowance on notes receivable
    
    $
    779,402
    
    
    $
    387,000
    
    
    $
    
    
    
    $
    
    
    
    $
    1,166,402Year ended December 31, 2001Deducted from asset accounts:Allowance for doubtful accounts
    
    $
    50,000
    
    
    $
    7,500
    
    
    $
    
    
    
    $
    
    
    
    $
    57,500Allowance on notes receivable
    
    $
    
    
    
    $
    779,402
    
    
    $
    
    
    
    $
    
    
    
    $
    779,402
 F-28