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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K/A
ANNUAL REPORT UNDER SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR FISCAL YEAR ENDED DECEMBER 31, 1996 COMMISSION FILE NUMBER 0-11688
AMERICAN ECOLOGY CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 95-3889638
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
805 W. IDAHO, SUITE #200, BOISE, IDAHO 83702-8916
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (208) 331-8400
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, $.01 par value per Share
(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. [ ]
At November 14, 1997, Registrant had outstanding 8,379,813 shares of
its Common Stock.
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EXPLANATION OF AMENDMENT
The Registrant, American Ecology Corporation (the "Company"), filed a
Registration Statement on Form S-3 on September 9, 1997 with the Securities and
Exchange Commission. In the course of reviewing such Registration Statement, the
Commission made comments on the Form 10-K as filed with the Commission on March
25, 1997. Based on these comments, the Company is hereby amending Part I,
Items 7 and 8 of its Form 10-K. All amended items are stated as of December
31, 1996.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
CAPITAL RESOURCES AND LIQUIDITY
The Company has incurred recurring losses from operations, had a working
capital deficit of $16,693,000 and $16,115,000 as of December 31, 1996 and
December 31, 1995, and continues into a second year experiencing difficulty
paying its on-going obligations as they become due. While the Company cannot be
certain about its ability to improve short-term operating results, the Company
is confident that the reduction in operating expenses other than interest which
it anticipates from the actions discussed below plus its new bank loan terms
providing for accrual of interest during 1997 and 1998 will enable the Company
to meet its obligations as they become due for the balance of 1997. The new bank
loan terms described below and in note 7 to the Consolidated Financial
Statements reduce the Company's cash requirements in 1997 by approximately $5.0
million. The Company's financial statements as of December 31, 1996, contain
adjustments to the asset carrying amounts for the Winona facility for asset
liquidation and the accounting for the impairment of the Winona facility.
Management's actions and plans to address these issues are as follows:
Credit Agreement
A Third Amended and Restated Credit Agreement was executed on December 31,
1996, but dated effective October 31, 1996 between the Company and its bank
lender, Texas Commerce Bank. This Credit Agreement extends the maturity of the
credit agreement to December 31, 2000, and modifies certain other terms. A
description of the Credit Agreement as so amended is set forth in Note 7 to the
Consolidated Financial Statements. As of December 31, 1996, the Company had
borrowed all amounts available under its Credit Agreement except for $6.9
million in interest to be accrued in 1997 and 1998 and added to the loan
balance.
Equity Investments
Effective October 31, 1996 the Company completed a definitive agreement for
$3,000,000 in Series E, Redeemable Convertible Preferred Stock. Two of the
Company's directors and shareholders agreed to purchase the 300,000 non-voting
preferred shares with a stated value and liquidation preference of $10.00 per
share, with a right to receive dividends in common shares of the Company at
11.25% per annum. This was an equity condition prescribed by the Third Amended
and Restated Credit Agreement. In order to meet the second equity condition and
give all common shareholders an ability to participate in increased equity, the
Company will use its best efforts to register a Rights Offering on or before
June 1, 1997. A description of the preferred stock and Rights Offering is set
forth in Note 8 to the Consolidated Financial Statements.
National Stock Market Exchange
On March 24, 1997 the Company announced it has appealed a ruling by the
NASDAQ Stock Market, Inc., the exchange on which the Company's common stock is
traded, that the Company needed prior approval of its shareholders before
issuing its Series E Preferred Stock to directors of the Company in November
1996.
The Series E Preferred Stock was issued to the directors as a central part
of the debt restructuring agreement reached with the Company's lender, Texas
Commerce Bank, also in 1996.
The NASDAQ ruling provided that the Company's stock would be de-listed from
the NASDAQ National Market effective March 21, 1997. Under NASDAQ rules, the
Company's appeal will stay, or prevent, de-listing from the National Market
until the appeal is heard and decided.
The Company believes that the NASDAQ ruling was erroneous and has appealed
to a committee of the NASDAQ Board of Governors in accordance with NASDAQ rules
and has requested an oral hearing in the matter.
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Additionally, as previously planned, the Company intends to submit the
Series E issuance to a vote of its shareholders at its May 22, 1997 annual
shareholders meeting to be held in Boise, Idaho.
Strategic Plan
The Company has adopted a strategic plan focusing on its low-level
radioactive waste disposal and processing operations and its hazardous waste
disposal and processing operations as separate operations. The Company is
continuing to improve as reorganized under those respective operating divisions.
The reorganization was to facilitate potential strategic alliances with other
companies that may provide additional sources of capital and open greater
opportunities.
Senior Management Changes
The Company has continued to make substantial senior management changes.
These include installation of a new Chief Operating Officer for US Ecology, a
new General Counsel, and new managers to head both Chemical and the LLRW and
hazardous waste operations.
Measures to Reduce Costs
Management has been implementing a very aggressive plan since 1995, where
the Company has sized up its position to the surrounding market, where customer
potentials have been measured, where managing the Company can be improved and as
a result, unprofitable divisions have been either eliminated or reorganized to
be efficient and effective. The reorganized divisions have been dissected and
analyzed to measure break-even points, maximum revenues from customers, and
optimum operating levels to maximize profitability. These variables of operation
for the Company have been adjusted and measured to fit the changing times of the
environmental industry. As discussed in Item 1. Business, the waste generators
are generating less waste now due to both Federal and State constricting the
areas in the regulations where generators were relaxed about disposal practices.
These environmental proceedings and regulations have forced all of the
environmental companies to evaluate their part in the industry. The outcome in
many areas is difficult to forecast, but the management of the Company and the
strategic plans include the flexibility to adapt to these industry changes.
The plan has required personnel reductions, and some individuals have also
been reassigned to other projects. The most significant cost reducing measure
recently taken was the closure of the Winona facility. There is a significant
impact to both the income for 1996 as well as a reduction to equity for the
accounting of this site closure. The plan provides for the writedown of
property, plant, and equipment for $4.4 million, a writedown of permits for $2.4
million and closure of the site by proper application of both Federal and State
environmental regulations determined to be $1.5 million. The total cost for
closing the Winona facility is estimated to be $7.4 million. It is estimated
that the future cost savings by closing this site will be about $3.5 million per
year. Since the acquisition of this site, December 31, 1994, this facility has
incurred operating losses of $11.4 million and $8.5 million for the years ended
December 31, 1996 and December 31, 1995.
In carrying out the disposal of the Winona facility, the Company will
complete all of its legal obligations for the site closure and post closure. The
Company will make every effort to clean the site and the equipment to maximize
the proceeds from the sale of these assets. There can be no assurance that the
sale of the assets will result in a favorable outcome, and there may still be a
need for the Company to supply additional funding for the Winona site through
the closure and post-closure periods.
The Company continues to evaluate the viability of certain other operations,
and their current potential to perform at an acceptable level of profitability.
In the plan, capital expenditures were limited in 1996 to the development of
the Ward Valley Project, certain regulatory obligations, and required
operational repairs. Again, in 1997, capital expenditures will be limited in the
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same way, with the addition of the new cell constructed at TECO in Robstown,
Texas for non-hazardous industrial waste.
The Company believes its plan will improve both cost structure and operating
results. However, considering the Company's recent losses and insufficient cash
flow from operations, there can be no assurance that this plan will resolve the
Company's liquidity problem in a timely fashion. The Company intends to raise
additional capital through a Rights Offering to its shareholders on or before
June 1, 1997. There can be no assurance, however, that any such rights offering
will provide sufficient capital to support operations. In any event, the Company
may experience increasing cash flow problems that could cause the Company to
materially reduce the current level of its operating activities.
For the year ended December 31, 1996, the Company raised $3,000,000 in cash
from the sale of Series E Redeemable Convertible Preferred Stock, generated cash
from operations of $5,170,000, spent $1,677,000 for capital expenditures
excluding site development costs, invested $2,107,000 in site development costs
for the Ward Valley facility and incurred capitalized interest of $3,558,000
related to the Ward Valley and Butte facilities.
Future Considerations
As a result of the changes to its management and operations in 1996, and the
implementation of the business plan, the Company believes that the future
operating results of its existing businesses will improve, although no
assurances can be given that such improvements will occur.
The Company has completed negotiations for the insurance claims relating to
the July 1994 fire at the Recycle Center in Oak Ridge, Tennessee. In May 1996,
the Company received $1,811,000 as the final portion of the claim, which is
being used to replace property and equipment damaged in the fire.
In April 1996, the Company received a letter from the State of Tennessee
Department of Environment and Conservation division of Radiological Health. This
letter specified that they had accepted the Company's plan to dispose of the
legacy waste on site at the Oak Ridge, Tennessee facility by December 31, 1997.
The Company signed a contract February 24, 1997 with another disposal company
that is licensed to accept this waste. This arrangement will provide for a
considerable cost savings to dispose of the legacy waste, however, it is still
estimated that this cost will be $6.2 million.
In addition, the Company expects to receive federal income tax refunds of
approximately $740,000 during the third quarter of 1997.
A Rights Offering will be made on or before June 1, 1997. This offering will
offer each shareholder the opportunity to buy an additional share of stock for
each one owned at one dollar. This will make available, by full subscription,
the possibility to raise an additional $8,000,000 of capital.
The Company is exploring as many avenues as possible to increase its market
share. It was just awarded a contract with the Midwest Compact in Ohio which has
potential to grow to an attractive size.
The Company offered an unsolicited proposal in the second quarter of 1995 to
the Department of Energy ("DOE") to dispose of large volumes of LLRW from the
DOE's Hanford site into the Company's Richland, Washington facility which is
located on the Hanford Reservation. Although the Company believed and still
believes the economics of its proposal should be very attractive to the DOE, the
DOE rejected the Company's proposal. The Company will continue to pursue this
opportunity.
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RESULTS OF OPERATIONS - 1996 VS. 1995
The Company reported a net loss of $11,407,000 for the year ended December
31, 1996 compared to net loss of $48,903,000 for 1995. The 1996 results included
pre-tax charges totaling $7,563,000 for unusual events and non-recurring
adjustments of which $7,451,000 related to the Winona facility. During 1996 the
Company began clean-up work at the Winona facility and expended approximately
$750,000 for this effort. Exclusive of material unusual events and non-recurring
accounting adjustments in both periods, the Company had a pre-tax loss of
$3,329,000 in 1995 compared to a pre-tax loss of $4,042,000 in 1996.
Approximately $14,015,000 of the adjusted loss from operations for 1996, as
compared to $35,959,000 for 1995, is attributable to the operating results of
the Recycle Center and Winona facility that were acquired in September and
December 1994, respectively. These losses have been offset by the profitability
of the other site facilities. The Winona facility incurred major losses since
the acquisition, therefore, management recorded an impairment loss in accordance
with FASB 121. The Company will follow both Federal and State environmental
regulations for the closure of the Winona facility.
The following table sets forth items in the Statements of Operations for the
three years ended December 31, 1996, as a percentage of revenue:
<TABLE>
<CAPTION>
Percentage of Revenues for the
Year Ended December 31,
-----------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Revenues 100.0% 100.0% 100.0%
Operating costs 92.2 104.8 75.4
-------- -------- --------
Gross profit (loss) 7.8 (4.8) 24.6
Selling, general and administrative expenses 23.4 24.2 17.2
Impairment losses on long-lived assets 14.9 48.7 --
-------- -------- --------
Income (loss) from operations (30.5) (77.6) 7.4
Other (income) expense, net 4.6 2.4 (0.4)
Interest expense 0.0 0.0 0.0
-------- -------- --------
Income (loss) before income taxes (25.9) (80.0) 7.8
Income tax expense (benefit) (3.0) (8.0) 2.5
-------- -------- --------
Preferred stock dividends 0.9 0.1 --
-------- -------- --------
Net income (loss) to common shareholders (23.8)% (72.1)% 5.3%
======== ======== ========
</TABLE>
Revenues
Revenues for 1996 were $49,972,000, a 26% decrease from 1995 revenues of
$67,895,000.
In 1996, there were two operating divisions; chemical and LLRW. The chemical
division revenues were $23,734,000 in 1996 compared to $41,272,000 in 1995. A
major reason for this decrease is a result of Winona facility revenues
decreasing 47% compared to 1995, and Winona being in a state of suspended
operations from August 1996. Even though there was a loss in revenue, the result
is a savings by not incurring the high operation costs that have always
prevented operating with a profit at the Winona site. The Winona site was
purchased from Gibraltar Chemical on December 31, 1994 and has never had a
profitable month. The Beatty, Nevada site is the other major factor in the
decrease in revenues, which tumbled by 57% from 1995 as a result of the high
Nevada State disposal and burial fees. Management has negotiated a lower fee
schedule for 1997, and every attempt is being made to win back customers who
found lower priced disposal in California and Arizona.
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The LLRW division revenues were $26,238,000 in 1996, compared to $26,623,000
for 1995. Revenues of the LLRW division should increase when the Butte, Nebraska
facility is licensed. The Company's current contract with the CIC specifies
certain project milestones to be achieved in order for generator funding of
development to proceed. The first milestones, which were under control of the
Company, were completed by July 1995. The remaining four milestones are actions
by the State of Nebraska. The Company anticipates that notice of the state's
intent to issue a license decision will occur in the fall of 1997. The remaining
three milestones are issuance of a draft license decision, a final license
decision and completion or termination of the project, whichever occurs first.
The Company anticipates that a final license decision will be made by the end of
1999. After a construction period of approximately 18 months, the facility would
begin accepting waste and generating revenue. This is currently estimated to
occur in 2001. The CIC currently reimburses the Company for its expenses in
regard to the project monthly. Revenues from the CIC were $5.7 million, $8.1
million, and $9.8 million in 1996, 1995, and 1994, respectively. Revenues for
1996 from the CIC decreased because the Company ceased including in revenues
reimbursements of State of Nebraska costs that were billed to the Company and
reimbursed to it by CIC. Starting in 1996, the Company viewed itself as merely a
pass through conduit for these revenues and costs.
LLRW disposal revenues decreased 8% in 1994 due principally to the
implementation of the Federal Low-Level Radioactive Waste Policy Amendments Act
of 1985 (the "Low-Level Act") on January 1, 1993. The Low-Level Act together
with state regulatory initiatives resulted in the inactivity of the Beatty,
Nevada LLRW facility and the regulatory restrictions placed on the Richland,
Washington facility and caused unusually large volumes of waste receipts at the
end of 1992 which were not buried and recognized as revenues until the first
quarter of 1993. Exclusive of the carryover effect of volumes received in 1992,
1994 disposal revenues increased by approximately 37% compared to 1993 due to
penetration of the NARM (naturally occurring or accelerator produced radioactive
materials) waste disposal market. When the Company entered into this market in
1992, there was no cost effective competitor for NARM business. In 1994
Envirocare began accepting NARM for disposal at costs less than the Company's
due to lower disposal fees and shipping and packaging costs. In 1994, the
Company entered the LLRW on-site remediation business generating approximately
$1,900,000 of revenues by providing technical and remedial services for several
projects in various regions of the country. Additionally, the acquisition of the
Recycle Center in September 1994, contributed approximately $2,800,000 in
treatment, processing, and recycling revenues.
While the revenues have declined in both 1996 and 1995, the Company has been
following closely its plan to clean up the non-profitable businesses and focus
on new strategic alliances with other companies that will increase both revenues
and profitability in the future. The last two years have resulted in decreases
in revenue, but every effort is now being focused on winning new customers, and
regaining the confidence of current and previous customers.
Operating Costs
Operating costs in fiscal 1996 decreased $25,053,000, or 35%, as compared to
1995, including a decrease of $2.8 million in nonrecurring adjustments listed in
the table on the following page. A large portion of the decrease related to the
decrease in revenues at the Winona facility, which was closed in 1996, and at
the Beatty facility. The operating costs of these two facilities decreased by
$13.5 million. However, even though overall revenues decreased 26% from 1996 to
1995, there is a larger drop in the actual operating expenses of 35% for the
same period. Aside from the large decreases in operating costs for the Beatty
and Winona facilities, there was marked improvement from the site managers
making conscious decisions for the Company. These decisions were considering how
they could best manage their site location and be accountable for the activities
there., which had previously been the responsibility of the corporate office. In
addition corporate headquarter expenses allocated to the operating divisions
were decreased by $1.5 million in 1996 from 1995.
Both variable and fixed operating costs were reduced in 1996 from 1995. The
fixed costs in 1996 were $4,543,000, a decrease of $1,409,000 from 1995 at
$5,952,000. Variable costs decreased dramatically also. In 1996, variable costs
were $20,701,000 compared to $34,656,000 in 1995. Variable costs were trimmed in
every area possible. The managers of each site analyzed and corrected items such
as idle vehicle and equipment rental, use of disposal supplies, lab equipment
and supplies, parts, consulting, and subcontracted costs including
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transportation. As a percentage of revenues, operating costs were 92%, 105%, and
75% for 1996, 1995, and 1994, respectively.
The following table sets forth unusual events and non-recurring accounting
adjustments which affected operating costs for 1996, 1995, and 1994,
respectively.
<TABLE>
<CAPTION>
Increase (Decrease) in Operating Costs
(in thousands)
--------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Deferred site maintenance accrual adjustments due to changes
in current cost estimates $ -- $ -- $ (3,202)
Settlements of environmental insurance claims on closed -- -- (505)
sites
Deferred site maintenance accrual reversal, settlement with
the Commonwealth of Kentucky, and estimated PRP settlements
all regarding remedial liability and indemnity
for the closed Maxey Flats site -- -- (518)
Writedowns of certain permitting costs and airspace cost 135 76 413
Deferred site maintenance accrual adjustment due to change
in the discount rate used to compute present value -- 1,396 --
Writedowns of design fees/facility costs due to abandonments -- 320 --
Cell development cost amortization adjustment due to
changes in cell utilization -- 204 --
Settlement of variances from collective bargaining agreement -
Recycle Center -- 447 --
Remedial investigation costs - Beatty, Nevada site -- 491 --
------------ --------- ----------
Total unusual events and non-recurring adjustments
included in operating costs $ 135 $ 2,934 $ (3,812)
============ ========= ==========
</TABLE>
Exclusive of these unusual events and non-recurring adjustments, operating
costs for 1996, 1995, and 1994 would have been $46,211,000, $68,195,000, and
$57,993,000, or 92%, 81% and 84% of revenues, respectively. In 1995, exclusive
of these unusual events and non-recurring adjustments, the operating costs as a
percentage of revenues for the Recycle Center and the Winona facility were 126%
and 124%, respectively, and all other locations combined were 89%.
Selling, General and Administrative Expenses
Selling, general and administrative expenses ("SG&A") for 1996 were
$11,682,000 compared to $16,411,000 for 1995. Included in SG&A for the 1996
period are charges for several unusual events and non-recurring accounting
adjustments which increased SG&A by $372,000. In 1995 the $16,411,000 of SG&A
included $2,942,000 of unusual and non-recurring expenses. Of these nonrecurring
expenses, $1,163,000 was severance pay for the management personal replaced in
the 1995 change in management, $1,241,000 related to the net loss on the Houston
office space lease due to movement of the Company's headquarters from Houston to
Boise, and $621,000 was the write-off of deferred costs and a claim for
retirement plan restitution which the Company's new management could not verify
the validity of. These items were offset by an $83,000 valuation adjustment in
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securities held by the Company's insurance subsidiary. On a site by site study
many of the SG&A costs remained too high for the decrease of revenues. In 1996,
the Beatty facility revenues were only 43% of 1995 revenues, while SG&A costs
remained at 66% of 1995 SG&A costs. The other sites' percentage of SG&A is not
as high as the Beatty facility, but they are all too high in proportion to the
decrease of revenues. Exclusive of these charges, SG&A was $11,682,000 in 1996
compared to $13,469,000 in 1995, a decrease of $1,787,000 from 1995. The
corporate SG&A was reduced considerably from $13,710,000 in 1995 to $7,712,000
in 1996. Both years include SG&A legal costs. However, the legal fees were
reduced considerably in 1996. Included in SG&A costs for 1996 are $1,559,000 of
corporate legal costs. Excluding the $2,942,000 in nonrecurring SG&A costs in
1995 discussed above, the SG&A costs increased in 1995 from 1994 by $1,787,000
due to an $861,000 increase in legal fees and a $420,000 increase in insurance
premiums, which were only partially offset by a decrease in other items.
Investment Income
Net investment income is comprised of interest income earned on various debt
securities, certificates of deposit and other interest bearing deposits, and
dividend income and capital gains and losses earned on the Company's preferred
stock portfolio. This portfolio is principally the Company's captive insurance
investments reinsuring the present value of certain long-term closure and
post-closure liabilities. The amount of investment income in 1996 decreased
$200,000 from 1995 due principally to a lower weighted average of outstanding
investments in 1996 as compared to 1995, and in December 1996, the Company
terminated the trustee of the Company's captive insurance investment portfolio,
and appointed a new trustee, Merrill Lynch Trust Company of America. This change
of trustees was an immediate cost of approximately $80,000 but will provide
savings in fees of about $220,000 per year in the future. Interest Expense
Interest Expense
Interest expense is the total interest expense incurred by the Company on
outstanding indebtedness less capitalized amounts. In 1996, 1995, and 1994, the
Company incurred $3,558,000, $3,281,000, and $968,000, respectively, in interest
cost, all of which was capitalized for the development of the Company's LLRW
facilities in California in accordance with Statement of Financial Accounting
Standards No. 34, Capitalization of Interest Cost. Substantially all of the
interest cost incurred for 1996, 1995, and 1994 related to borrowings under the
Company's Credit Agreement with its bank lender.
Income Taxes
The Company's effective income tax (benefit) rates were (12)%, (10)%, and
32%, for the fiscal years 1996, 1995, and 1994, respectively. The effective
benefit rate of (12)% in 1996 does not reflect any recognition of future tax
benefits on timing differences or net operating loss carryforwards.
Financial Assurance and Site Maintenance
The Company operates its hazardous waste disposal sites under RCRA of 1976
("RCRA") permits. The LLRW sites are operated under licenses from state and, in
some cases, federal agencies. When these facilities reach capacity, or lease or
license termination dates, as the case may be, they must be closed and
maintained for a period of time prescribed by law or by license. In the case of
the RCRA-permitted hazardous sites, federal regulation requires that operators
demonstrate the financial capability to close sites on an immediate, unscheduled
(worst-case) basis. The estimated costs of such a closure are set forth in the
operator's RCRA closure/post-closure plan.
To secure closure/post-closure obligations of its hazardous waste disposal
sites under federal and state regulations, the Company has provided letters of
credit, certificates of insurance, and corporate guarantees as financial
assurance. Cash and investment securities totaling $16,394,000 and $13,770,000
at December 31, 1996 and 1995, respectively, have been pledged as collateral for
the Company's closure/post-closure obligations, performance of a Remedial
Investigation and Feasibility Study ("RI/FS") and performance of corrective
action at the closed Sheffield, Illinois chemical waste facility, compliance
with the TNRCC requirements related to a deepwell at the Company's Robstown,
Texas hazardous disposal site, closure costs for the Beatty, Nevada LLRW
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site, closure costs for the Recycle Center, closure costs for the Winona
facility, test borings at the proposed LLRW sites in Nebraska and California,
settlement with generators of waste at the Richland, Washington facility and
performance bonds.
The RI/FS for the Sheffield facility was completed and approved by the EPA
in 1990. The Company is in the remedial phase of the Sheffield program as set
forth in the EPA's corrective measures implementation plan. During 1996, the
Company spent approximately $138,000 on remediation at the closed Sheffield
hazardous disposal site.
The nature of the hazardous material handled by the Company and its
subsidiaries could give rise to substantial damages if spills, accidents or
migration of hazardous material occurs. The occurrence of such events could have
a material adverse effect upon the Company's liquidity and operating results.
Corporate Development Considerations
See "Business - Low-Level Radioactive Waste Services - Disposal Services
Proposed Ward Valley, California Facility" and "Proposed Butte, Nebraska
Facility" for a description of the Company's facilities, and the impact of such
facilities and other future considerations on the Company's consolidated
financial condition and results of operations.
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INDEPENDENT AUDITORS' REPORT
To the Shareholders and Board of Directors
American Ecology Corporation
We have audited the accompanying consolidated balance sheet of American Ecology
Corporation and subsidiaries as of December 31, 1996, and the related
consolidated statements of operations, shareholders' equity, and cash flows for
the year then ended. 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 audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our 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 American Ecology Corporation
and subsidiaries as of December 31, 1996, and the results of their operations
and their cash flows for the year then ended in conformity with generally
accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 1 to the
consolidated financial statements, the Company has suffered recurring losses
from operations and writedowns of assets and had a working capital deficiency of
$16.7 million as of December 31, 1996. During 1996, the Company obtained capital
contributions from certain directors and restructured its Credit Agreement with
the Bank; however, the Company continues to have limited cash resources
available and has substantial obligations that are due in the future. Under the
terms of the Credit Agreement, the bank may accelerate the maturity of the debt
in the event of violation of any covenant or of any occurrence of a default of
the Credit Agreement. If the Company is unable to remain in compliance with the
terms of the Credit Agreement or obtain waivers in the event of a default and
the bank accelerates maturity of the Credit Agreement, the Company does not have
adequate financial resources to extinguish the loan and the Company's operations
may be negatively impacted. The Company is involved in various significant
permitting efforts, claims, lawsuits and other administrative matters which are
uncertain at this time. The foregoing matters raise substantial doubt about the
Company's ability to continue as a going concern. Management's plans regarding
those matters also are described in Note 1. The accompanying consolidated
financial statements do not include any adjustments relating to the
recoverability and classification of asset carrying amounts or the amounts and
classification of liabilities that might be necessary should the Company be
unable to continue as a going concern, or adjustments, if any, that may be
necessary as a result of the outcome of the matters discussed above.
Balukoff, Lindstrom & Co., P.A.
Boise, Idaho
March 17, 1997
11
<PAGE> 12
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To American Ecology Corporation:
We have audited the accompanying consolidated balance sheet of American
Ecology Corporation (a Delaware Corporation) and subsidiaries as of December 31,
1995, and the related consolidated statements of operations, shareholders'
equity and cash flows for each of the two years in the period ended December 31,
1995. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of American Ecology Corporation
and subsidiaries as of December 31, 1995, and the results of their operations
and their cash flows for the two years in the period ended December 31, 1995, in
conformity with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed in Note
1 to the consolidated financial statements, the Company has incurred significant
losses from operations and writedowns of assets. At December 31, 1995, the
Company had a working capital deficiency of $16.1 million. During 1995, the
Company obtained capital contributions from certain of its directors and others
and restructured its Credit Agreement with the bank; however, the Company
continues to have limited cash resources available and has substantial
obligations that are due in the future. Under the terms of the Credit Agreement,
the bank may accelerate the maturity of the debt in the event of violation of
any covenant of the Credit Agreement or if a material adverse event is deemed by
the bank to have occurred. If the Company is unable to remain in compliance with
the terms of the Credit Agreement or obtain waivers in the event of a default
and the bank accelerates maturity of the Credit Agreement, the Company does not
have adequate financial resources to extinguish the loan and the Company's
operations may be negatively impacted. As discussed in Note 13 to the
consolidated financial statements, the Company is involved in various
significant permitting efforts, claims, lawsuits and other administrative
matters which are uncertain at this time. The foregoing matters raise
substantial doubt about the Company's ability to continue as a going concern.
Management's plans in regard to these matters are also described in Note 1. The
accompanying consolidated financial statements do not include any adjustments
relating to the recoverability and classification of asset carrying amounts or
the amounts and classification of liabilities that might be necessary should the
Company be unable to continue as a going concern, or adjustments, if any, that
may be necessary as a result of the outcome of the matters discussed above.
ARTHUR ANDERSEN LLP
Houston, Texas
April 11, 1996
12
<PAGE> 13
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
AMERICAN ECOLOGY CORPORATION
CONSOLIDATED BALANCE SHEETS
($ IN 000'S EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
As of December 31,
------------------
1996 1995
---- ----
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 185 $ 229
Investment securities 410 523
Receivables, net of allowance for doubtful
accounts of $1,155 and $1,322, respectively 10,396 16,938
Income taxes receivable 740 5,339
Insurance claim receivable -- 2,538
Prepayments and other 949 1,675
-------------- --------------
Total current assets 12,680 27,242
Cash and investment securities, pledged 16,394 13,770
Property and equipment, net 14,255 21,764
Deferred site development costs 53,030 47,364
Intangible assets relating to acquired businesses, net 462 486
Other assets 2,206 3,499
-------------- --------------
Total Assets $ 99,027 $ 114,125
============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Revolving credit loan $ -- $ 6,416
Current portion of long term debt 503 780
Accounts payable 10,470 13,376
Accrued liabilities 16,876 21,022
Deferred site maintenance, current portion 1,524 1,763
-------------- --------------
Total current liabilities 29,373 43,357
Long term debt, excluding current portion 36,202 28,357
Deferred site maintenance, excluding current portion 19,848 20,387
Commitments and contingencies (Note 13) Shareholders' equity:
Convertible preferred stock, $.01 par value,
1,000,000 shares authorized, none issued -- --
Series D cumulative convertible preferred stock, $.01 par value,
105,264 authorized, 105,264 shares issued and outstanding 1 1
Series E redeemable convertible preferred stock, $10.00 par value,
300,000 authorized, 300,000 and 0 shares issued and outstanding 3,000 --
Common stock, $.01 par value, 20,000,000 authorized, 8,010,017
and 7,825,628 shares issued and outstanding, respectively 80 78
Additional paid-in capital 46,971 46,762
Unrealized gain (loss) on securities available-for-sale (477) (718)
Retained earnings (deficit) (35,971) (24,099)
-------------- --------------
Total shareholders' equity 13,604 22,024
-------------- --------------
Total Liabilities and Shareholders' Equity $ 99,027 $ 114,125
============== ==============
</TABLE>
The accompanying notes are an integral part of these financial statements.
13
<PAGE> 14
AMERICAN ECOLOGY CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
($ IN 000'S EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Revenues $ 49,972 $ 67,895 $ 71,891
Operating costs 46,076 71,129 54,181
-------------- -------------- --------------
Gross profit (loss) 3,896 (3,234) 17,710
Selling, general and administrative expenses 11,682 16,411 12,362
Impairment loss on long-lived assets 7,451 33,048 --
-------------- -------------- --------------
Income (loss) from operations (15,237) (52,693) 5,348
Investment income (932) (582) (287)
(Gain) or loss on sale of assets (55) 1,836 --
Other expense (1,326) 821 --
Interest expense -- -- --
-------------- ------------- --------------
Income (loss) before income taxes (12,924) (54,318) 5,635
Income tax expense (benefit) (1,517) (5,415) 1,785
-------------- -------------- --------------
Net income or (loss) (11,407) (48,903) 3,850
Preferred stock dividends 465 88 --
-------------- ------------- --------------
Net income (loss) available to common shareholders $ (11,872) $ (48,991) $ 3,850
============== ============= ==============
Net income (loss) per share, primary $ (1.50) $ (6.26) $ .49
============== ============= ==============
Dividends paid per common share $ -- $ .025 $ .10
============== ============= ==============
</TABLE>
The accompanying notes are an integral part of these financial statements.
14
<PAGE> 15
AMERICAN ECOLOGY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
($ 000'S)
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (11,407) $ (48,903) $ 3,850
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Impairment loss on long-lived assets 7,451 33,048 --
Depletion, depreciation and amortization 5,383 7,319 6,279
Deferred income taxes -- 816 3,044
(Gain) loss on sale of assets (58) 1,386 (65)
Debt restructure fees 265 -- --
Realized loss on sales of securities available-for-sale -- 101 --
Changes in assets and liabilities, excluding effects of acquisitions:
Receivables 6,542 12,655 (4,534)
Income taxes receivable 4,599 (5,339) --
Proceeds from insurance claim 2,538 -- --
Investment securities classified as trading (582) (354) 472
Other assets (850) (1,016) (411)
Deferred site maintenance (778) (40) (7,041)
Other liabilities (7,933) 2,923 (3,394)
---------- ------------ ------------
Total adjustments 16,577 51,499 (5,650)
---------- ------------ ------------
Net cash provided by (used in) operating activities 5,170 2,596 (1,800)
---------- ------------ ------------
Cash flows from investing activities:
Capital expenditures, excluding site development costs (1,677) (2,320) (3,714)
Site development costs, including capitalized interest (3,982) (6,125) (4,321)
Payments for businesses acquired -- -- (27,871)
Proceeds from sales of assets 31 1,080 299
Net proceeds from sales of investment securities (1,993) 214 --
Transfers to (from) cash and investment securities, pledged 384 (241) 885
---------- ------------ ------------
Net cash used in investing activities (7,237) (7,392) (34,722)
---------- ------------ ------------
Cash flows from financing activities:
Proceeds from issuances and indebtedness 29,008 26,640 56,555
Payments of indebtedness (29,985) (26,430) (23,739)
Proceeds from common stock issued -- 98 301
Proceeds from preferred stock issued, net 3,000 4,759 --
Liquidation of shareholders' rights -- (78) --
Payment of cash dividends -- (195) (780)
---------- ------------ ------------
Net cash provided by (used in) financing activities 2,023 4,794 32,337
---------- ------------ ------------
Decrease in cash and cash equivalents (44) (2) (4,185)
Cash and cash equivalents at beginning of year 229 231 4,416
---------- ------------ ------------
Cash and cash equivalents at end of year $ 185 $ 229 $ 231
========== ============ ============
$ 123
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest, net of amounts capitalized $ -- $ -- $ --
Income taxes $ -- $ -- $ 123
</TABLE>
The accompanying notes are an integral part of these financial statements.
15
<PAGE> 16
AMERICAN ECOLOGY CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
($ IN 000'S)
<TABLE>
<CAPTION>
8.375% 11.25%
SERIES D SERIES E UNREALIZED
CUMULATIVE REDEEMABLE GAIN (LOSS)
CONVERTIBLE CONVERTIBLE ADDITIONAL SECURITIES RETAINED
PREFERRED PREFERRED COMMON PAID-IN AVAILABLE- EARNINGS
STOCK STOCK STOCK CAPITAL FOR-SALE (DEFICIT)
----- ----- ----- ------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1993 $ -- $ -- $ 78 $ 41,469 $ -- $ 22,017
Net income -- -- -- -- -- 3,850
Common stock issuances -- -- -- 301 -- --
Income tax benefit of stock
options exercised -- -- -- 67 -- --
Dividends - common stock -- -- -- -- -- (780)
Unrealized gain on securities
available-for-sale -- -- -- -- 43 --
-------- -------- ------- -------- -------- --------
Balance, December 31, 1994 $ -- $ -- $ 78 $ 41,837 $ 43 $ 25,087
Net loss -- -- -- -- -- (48,903)
Preferred stock issuances 1 -- -- 4,898 -- --
Common stock issuances -- -- -- 98 -- --
Income tax benefit of
stock options exercised -- -- 7 -- -- --
Liquidation of shareholders'
rights -- -- -- -- -- --
Dividends - common stock -- -- -- -- -- (195)
Dividends - preferred stock -- -- -- -- -- (88)
Unrealized loss on securities
available-for-sale -- -- -- -- (761) --
-------- -------- -------- -------- -------- --------
Balance, December 31, 1995 $ 1 $ -- $ 78 $ 46,762 $ (718) $(24,099)
Net loss
Preferred stock issuances -- 3,000 -- -- -- (11,407)
Common stock issuances -- -- 2 209 -- --
Income tax benefit of
stock options exercised -- -- -- -- -- --
Liquidation of shareholders'
rights -- -- -- -- -- --
Dividends - common stock -- -- -- -- -- --
Dividends - preferred stock -- -- -- -- -- (465)
Unrealized gain (loss) on
securities available-for-sale -- -- -- -- --
-------- -------- -------- -------- -------- --------
Balance, December 31, 1996 $ 1 $ 3,000 $ 80 $ 46,971 $ (477) $(35,971)
======== ======== ======== ======== ======== ========
</TABLE>
Note: Convertible Preferred Stock is not shown above because no shares have
been issued.
The accompanying notes are an integral part of these financial statements.
16
<PAGE> 17
AMERICAN ECOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Business
American Ecology Corporation (a Delaware Corporation) and its subsidiaries
("the Company") provide processing, packaging, transportation, remediation and
disposal services for generators of hazardous waste and low-level radioactive
waste. The Company services the needs of hazardous waste generators nationally,
but larger market shares in the Gulf and West Coast regions of the country at
its hazardous waste landfill disposal sites in Robstown, Texas and Beatty,
Nevada and until August 1996, a commercial deepwell disposal facility in Winona,
Texas. The Company services the needs of low-level radioactive waste (LLRW)
generators in the Northwest region and Rocky Mountain Compact at its rate
regulated LLRW facility located near Richland, Washington and provides LLRW
processing and recycling services to LLRW waste generators in the Mid-West and
East Coast regions of the country at its Oak Ridge, Tennessee facility.
Business Conditions. The Company has incurred significant losses from
operations during the last two years, 1996 and 1995, had a working capital
deficit of $16.7 million as of December 31, 1996. Furthermore, as a result of
the above conditions and other circumstances discussed in Note 4, the Company
recorded a $7.4 million impairment loss on long-lived assets of the Winona
facility during 1996. The estimated unaudited results for the first quarter of
1997 is a net loss of approximately $1.8 million.
Although the Company obtained capital contributions of approximately $3.0
million from certain of its directors and others, restructured its bank Credit
Agreement extending its maturity to December 2000, and received certain new
waivers for financial and other covenants in the Credit Agreement, from the
bank, for 1996 the Company continues to have very limited cash resources
available and is currently experiencing difficulty paying its on-going
obligations as they become due. As discussed in Note 7, available borrowings
under the Credit Agreement were approximately $6.9 million as of December 31,
1996. Under the terms of the Credit Agreement, the bank may accelerate the
maturity of the debt in the event of violation of any financial covenant of the
Credit Agreement or if a material adverse event is deemed by the bank to have
occurred. If the Company is unable to remain in compliance with the terms of the
Credit Agreement or obtain waivers in the event of a default and the bank
accelerates maturity of the Credit Agreement, the Company does not have adequate
financial resources to extinguish the loan and the Company's operations may be
negatively impacted.
Management has taken aggressive steps to improve the Company's financial
status. Last year the Company implemented a business plan and a long-term
strategy to substantially reduce operating expenses and enhance revenues from
low-level radioactive waste disposal and processing. Actions taken to date
include reductions in personnel, decentralization of responsibilities, and
analysis of operations to improve operating efficiency and reduce operating
costs within each operating division. Furthermore, the Company has limited
future capital expenditures. The Company anticipates raising additional
financing through either a stock rights offering on or before June 1, 1997 or
sale of assets. There can be no assurance, however, that any such financing
arrangement or asset sales will be consummated. In the event the Company does
not meet its business plan objectives or the Company is unable to obtain
alternative financing, there can be no assurance that the Company will be able
to meet its obligations as they become due or obtain further forbearance from
the bank.
As discussed in Note 13 to the consolidated financial statements, the
Company is involved in various significant permitting efforts, claims, lawsuits
and other administrative matters which are uncertain at this time.
The accompanying consolidated financial statements do not include any
adjustments relating to the recoverability and classification of asset carrying
amounts or the amounts and classification of liabilities that might be necessary
should the Company be unable to continue as a going concern, or adjustments, if
any, that may be necessary as a result of the outcome of the matters discussed
above.
17
<PAGE> 18
Principles of Consolidation. The accompanying financial statements present
the consolidated accounts of American Ecology Corporation and its subsidiaries.
All significant intercompany accounts and transactions have been eliminated.
Revenue Recognition. Generally, revenues are recognized as services are
performed and as waste materials are buried or processed.
Cash Equivalents. Cash equivalents consist of short-term, highly liquid
investments with original maturities of three months or less, which are readily
convertible into cash.
Investments in Debt and Equity Securities. The Company adopted Statement of
Financial Accounting Standards No. 115 (SFAS 115), "Accounting for Certain
Investments in Debt and Equity Securities", effective January 1, 1994. Debt and
equity securities that the Company has the intent and ability to hold to
maturity are classified as "securities held-to-maturity" and reported at
amortized cost. Debt and equity securities that are held for current resale are
classified as "trading securities" and reported at fair value with unrealized
holding gains and losses included in earnings. Debt and equity securities not
classified as either "securities held-to-maturity" or "trading securities" are
classified as "securities available-for-sale" and reported at estimated fair
value with net unrealized holding gains and losses reported as a component of
shareholders' equity. The adoption of SFAS 115 did not have a material effect on
the Company's financial position or results of operations. The Company uses the
specific identification method to determine the cost basis used in computing
realized gains or losses.
Property and Equipment. Property and equipment are recorded at cost and
depreciated on straight-line and declining balance methods over estimated useful
lives. Land is comprised of land owned at the processing and disposal sites.
Land owned at disposal sites is depleted over the estimated useful life of the
disposal site on a straight-line basis. Cell development costs represent waste
disposal site preparation costs which are capitalized and charged to operating
costs as disposal space is utilized. Cell development costs include direct costs
related to site preparation, including legal, engineering, construction, and the
direct cost of company personnel dedicated for these purposes. The estimated
useful lives of buildings and improvements is fifteen to thirty-one years. The
estimated useful lives of vehicles, decontamination, processing and other
equipment is three to ten years. See Note 3 for major categories of property and
equipment. Expenditures for major renewals and betterments are capitalized and
expenditures for maintenance and repairs are charged to expense as incurred.
During 1996, 1995, and 1994, maintenance and repairs expense was $982,000,
$1,224,000, and $750,000, respectively.
Deferred Site Development Costs. The Company has been selected to locate,
develop and operate the low-level radioactive waste ("LLRW") facilities for the
Southwestern Compact ("Ward Valley facility") and the Central Interstate
Compact ("Butte facility").
The license application for the Southwestern Compact was approved by the
California Department of Health Services ("DHS") in September 1993. All costs
related to the development of the Ward Valley facility have been paid and
capitalized by the Company. As of December 31, 1996, the Company had deferred
$45,884,000 (46% of total assets) of pre-operational facility development costs
of which $6,753,000 was capitalized interest. These deferred costs relating to
the development of the Ward Valley facility are expected to be recovered during
the facility's first 30 years of operating from future waste disposal revenues
based upon disposal fees approved by the DHS in accordance with existing state
rate-base regulations. The disposal fee approval process is expected to include
an independent prudency review of all the pre-operational costs incurred by the
Company prior to their inclusion in the rate-base. The Company expects all of
the costs which it has deferred for this facility, plus additional unrecognized
project interest costs to be included as a component of the rate-base; however,
there can be no assurance that all of the costs will be approved by the DHS.
Allowable costs incurred by the Company for the development of the Butte
facility are reimbursed under a contract with the Central Interstate LLRW
Compact Commission ("CIC") and are recognized as revenues. Such revenues totaled
$5,711,000, $8,100,000, and $9,800,000 in 1996, 1995, and 1994, respectively.
Substantially all funding to develop the Butte facility is being provided by the
major generators of waste in the CIC. As of December 31, 1996 the Company has
contributed and deferred approximately $7,146,000 (7% of total assets), of
18
<PAGE> 19
which $1,054,000 was capitalized interest, toward the development of the Butte
facility and no additional capital investment is expected to be required from
the Company prior to the granting of the license. The Company expects all costs
which it has deferred for this facility, plus additional unrecognized project
interest costs, to be included as a component of the rate-base. The agreed
contract interest cost reimbursement as part of the rate-base may yield an
additional $15 million in revenue, however, there can be no assurance that all
of these amounts will be approved. In addition, the CIC has the option to
terminate the contract, upon ten (10) days written notice, in the event it has
expended the additional $31.1 million provided under the last contract
amendment, and the State of Nebraska's licensing decision has not been made, and
the major generators in the compact region have either ceased funding the
project or thereafter notified the CIC, pursuant to amendment No. 5 of its
contract with the CIC, that the major generators intend to cease funding of the
project. As of December 31, 1996, approximately $25.2 million had been expended
under the last contract amendment. If the CIC elects to terminate the contract,
then the Company has no further claim or right to reimbursement of its
contributions or accrued interest unless the CIC and the Company agree to go
forward with the facility, in which event the Company retains its rights to
recover its contribution together with any accrued interest.
The construction and operation of the Ward Valley and Butte facilities are
currently being delayed by various political and environmental opposition toward
the development of the sites and by various legal proceedings as further
discussed under "Business - Low-Level Radioactive Waste Services - Disposal
Services - Proposed Ward Valley, California Facility" and "-Proposed Butte,
Nebraska Facility". At this time, it is not possible to assess the length of
these delays or when, or if, the Butte facility license will be granted, and
when, or if, the land for the Ward Valley facility will be obtained. Although
the timing and outcome of the proceedings referred to above are not presently
determinable, the Company continues to actively urge the conveyance of the land
from the federal government to the State of California so that construction may
begin, and to actively pursue licensing of the Butte facility. The Company
believes that the Butte facility license will be granted, operations of both
facilities will commence and that the deferred site development costs for both
facilities will be realized. In the event the Butte facility license is not
granted, operations of either facility do not commence or the Company is unable
to recoup its investments through legal recourse, the Company would suffer
losses that would have a material adverse effect on its financial position and
results of operations.
In 1994, the Company began to capitalize interest in accordance with
Statement of Financial Accounting Standards No. 34, Capitalization of Interest
Cost, on the site development projects while facilities being developed are
undergoing activities to ready them for their intended use. Interest capitalized
was $3,558,000 in 1996, $3,281,000 in 1995 and $968,000 in 1994.
Intangible Assets. Intangible assets relating to acquired businesses consist
primarily of the cost of purchased businesses in excess of fair value of net
assets acquired ("goodwill"). Intangible assets are being amortized on the
straight-line method over periods not exceeding 40 years with the majority being
amortized over 25 years. The accumulated amortization of intangible assets
amounted to $288,000, $314,000 and $962,000 at December 31, 1996, 1995, and
1994, respectively. Amortization of intangible assets was $24,000, $742,000, and
$520,000, in 1996, 1995, and 1994, respectively. On an ongoing basis, the
Company measures realizability of intangible assets. In the event that facts and
circumstances indicate intangible or other assets may be impaired, an evaluation
of recoverability would be performed. If an evaluation was required, the
estimated future undiscounted cash flows associated with the assets would be
compared to the asset's carrying amount to determine if a write-down to market
value or discounted cash flow value was necessary.
Permitting Costs. Permitting costs, which are primarily comprised of outside
engineering and legal expenses, are capitalized and amortized over the life of
the applicable permits. At December 31, 1996 and 1995, there were $1,360,000 and
$2,057,000, respectively, of such unamortized costs included in other assets in
the accompanying consolidated balance sheets.
The Company operates its various sites under the regulations of, and permits
issued by various state and federal agencies. Several of the Company's existing
sites are currently seeking permit renewals and/or expansion permits. There is
no assurance of the outcome of any permitting efforts. The permitting process is
subject to regulatory approval, time delays, local opposition and potential
stricter governmental regulation. Substantial losses which
19
<PAGE> 20
would have a material adverse effect on the Company's consolidated financial
position, could be incurred by the company in the near term in the event a
permit is not granted, if facility construction programs are delayed or changed,
or if projects are otherwise abandoned. The Company reviews the status of
permitting projects on a periodic basis to assess realizability of related asset
values. As of December 31, 1996, management believes that assets which could
currently be affected by permitting efforts are recoverable at their recorded
values.
Deferred Site Maintenance. Deferred site maintenance includes the accruals
associated with obligations for closure and post-closure of the Company's
operating and closed disposal sites and for corrective actions and remediation.
The portion of these obligations expected to be spent within the following
twelve month period is classified as deferred site maintenance, current portion
in the accompanying consolidated balance sheets. The Company generally provides
accruals for the estimated costs of closures and post-closure monitoring and
maintenance as permitted airspace of such sites is consumed. Liabilities are
recorded when environmental assessments and/or remedial efforts are probable,
and the costs can be reasonably estimated. The Company performs routine periodic
reviews of closed operating sites and revises accruals for estimated
post-closure, remediation or other costs related to these locations as deemed
necessary. The Company's recorded liabilities are based on best estimates of
current costs and are updated periodically to include the effects of existing
technology, presently enacted laws and regulations, inflation and other economic
factors. The Company estimates its future cost requirements for closure and
post-closure monitoring and maintenance for operating chemical disposal sites
based on RCRA and the respective site permits. RCRA requires that companies
provide financial assurance for the closure and post-closure care and
maintenance of their chemical sites for at least thirty years following closure.
Where both the amount of a particular environmental liability and the timing of
the payments are reliably determinable, the cost is discounted to present value
at a discount rate of 2.5%, net of inflation. See the discussion of Operating
Costs included in Management's Discussion and Analysis of Financial Condition
and Results of Operations for information concerning certain adjustments
recorded in 1996, 1995, and 1994.
Net Income (Loss) Per Share. The calculation of net income (loss) per
common and common equivalent share is in accordance with the treasury stock
method for 1996, 1995, and 1994.
<TABLE>
<CAPTION>
(000's except per share amounts)
Year Ended December 31,
-----------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Net income (loss) $ (11,407) $ (48,903) $ 3,850
Adjustments to net income (loss):
Preferred stock dividends 465 88 --
---------- ----------- ---------
Adjusted net income (loss) available to
common shareholders $ (11,872) $ (48,991) $ 3,850
Weighted average shares outstanding-
Common shares outstanding at year end 8,010 7,826 7,819
Effect of using weighted average common and
common equivalent shares outstanding (114) (4) (6)
Effect of shares issuable under stock option
plans based on the treasury stock method -- -- 38
---------- ----------- ---------
Shares used in computing earnings (loss)
per share 7,896 7,822 7,851
---------- ----------- ---------
Net income (loss) per common and common
equivalent share, primary $ (1.50) $ (6.26) $ .49
========== =========== =========
</TABLE>
There was no difference between the primary and fully diluted earnings per
share calculations in 1996, 1995, and 1994.
20
<PAGE> 21
New Accounting Principles. In October 1995, Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" was
issued. This statement establishes a fair value based method of accounting for
stock-based compensation plans. The Company currently accounts for its
stock-based compensation plans under Accounting Principles Board (APB) Opinion
No. 25, "Accounting for Stock Issued to Employees". (See Note 11).
Effective December 31, 1994, the Company adopted Statement of Financial
Accounting Standards No. 107, "Disclosures about Fair Value of Financial
Instruments". This statement requires disclosure of fair market value
information for financial instruments. The book values of investment securities,
excluding investments in common and preferred stocks, receivables, accounts
payable and financial instruments included in other assets and accrued
liabilities approximate their fair values principally because of the short-term
nature of these instruments. Investments in common and preferred stocks are
stated at fair market values. The quoted market price was used to determine the
fair market value of the investment in common stock and estimated market values
were used to determine the fair market value of the investments in preferred
stocks. The carrying value of long-term debt approximates fair value
principally because of the variable interest rate terms set forth in the bank
credit facility agreement. See Note 2.
Use of Estimates. The preparation of financial statements in conformity
with generally accepted accounting principles requires the company 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 affect the reported amounts of revenues and
expenses during the reporting period. The significant estimates used by the
company in the accompanying consolidated financial statements primarily relate
recoverability of deferred site development costs, waste processing and burial,
deferred site maintenance, and commitments and contingencies as discussed in
Notes 5, 6 and 13, respectively. Actual results could materially differ from
the Company's estimates.
Major Customers. Revenues resulting from the cost reimbursement contract
with the Central Interstate Low-Level Radioactive Waste Commission were
approximately $5,711,000 in 1996, or 11% of the Company's consolidated revenues.
No other single customer accounted for 10% of the Company's consolidated
revenues for 1996.
Reclassification. Only minor reclassifications have been made to prior
year financial statements to conform to the fiscal 1996 presentation.
NOTE 2. CASH AND INVESTMENT SECURITIES
Cash and investment securities at December 31, 1996 and 1995, were as
follows (in thousands):
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Cash and cash equivalents $ 788 $ 1,246
Trading securities 7,576 6,993
Securities held-to-maturity 7,383 5,760
Securities available-for-sale 1,242 523
-------- --------
$ 16,989 $ 14,522
======== ========
</TABLE>
Investments in trading securities consist principally of preferred stocks,
which are held by a captive insurance company wholly-owned by the Company. The
change in net unrealized holding gains on trading securities was $115,000 in
1996 and $114,000 in 1995 each of which has been included in earnings.
Investments in securities available-for-sale consist of common stock of
Perma-Fix, Inc. (see Note 12) which has an original cost value of $1,719,000,
fair value of $1,242,000 and a gross unrealized holding loss of $477,000 at
December 31, 1996. The change in net unrealized holding loss on securities
available-for-sale was $477,000 which has been included as a separate component
of shareholders' equity during the period. In 1996, investment securities were
purchased and held, there was no gain or loss realized, interest earned on
holding these investment securities was $222,000. In 1995, proceeds of $214,000
received on sales of securities available-for-sale during 1995 resulted in
realized losses
21
<PAGE> 22
of $101,000. Investments in securities held-to-maturity mature over various
dates during 1996 and are reported at their amortized cost basis, which
approximates fair value at December 31, 1995. Investments in securities
held-to-maturity at December 31, 1996 and 1995, consisted of the following (in
thousands) all of which mature in 1997:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
U.S. Government securities $ 7,156 $ 5,547
Certificates of deposit 69 138
Money market accounts and other 158 75
---------- ---------
$ 7,383 $ 5,760
========== =========
</TABLE>
Certain cash accounts and substantially all investments in securities
held-to-maturity and trading securities totaling $16,394,000, and $13,770,000 at
December 31, 1996 and 1995, respectively, have been classified as non-current
assets as cash and investment securities, pledged. The pledged cash and
investment securities represent collateral for the Company's
closure/post-closure obligations, performance of a Remedial Investigation and
Feasibility Study ("RI/FS") and performance of corrective action at the closed
Sheffield, Illinois facility, compliance with Texas Natural Resource
Conservation Commission ("TNRCC") requirements related to the Company's
non-commercial use deepwell at the company's Robstown, Texas, facility, closure
costs for the Beatty, Nevada LLRW site, test borings at the proposed LLRW
facilities in Nebraska and California, settlement with generators of waste at
the Richland, Washington facility, and various performance bonds. Also, a
portion of the pledged cash and investment securities at December 31, 1996 is
pledged as collateral for closure costs relating to the two facilities acquired
in 1994 (see Note 12). The amounts pledged by the Company generally equal the
present value of its estimated future closure and post-closure obligations.
NOTE 3. PROPERTY AND EQUIPMENT
Property and equipment at December 31, 1996 and 1995, was as follows (in
thousands):
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Land $ 1,819 $ 1,484
Cell development costs 10,540 10,452
Buildings and improvements 6,425 7,673
Decontamination and processing equipment 2,155 2,131
Vehicles and other equipment 17,944 22,112
-------- --------
38,883 43,852
Less: Accumulated depletion, depreciation and amortization (24,628) (22,088)
-------- --------
$ 14,255 $ 21,764
======== ========
</TABLE>
NOTE 4. ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS
In March 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of",
which is intended to establish more consistent accounting standards for
measuring the recoverability of long-lived assets. The Company adopted this
statement during 1995 in conjunction with recording a substantial writedown of
goodwill and certain property and equipment. There was an impairment of
long-lived assets in 1996 at the Winona, Texas facility and the Company
determined operations should be discontinued. The Winona facility has had
on-going losses and with periodic reviews the adjustments to correct the
short-comings have not proven profitable, therefore, the decision was made to
close this site location.
22
<PAGE> 23
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Writedown of the carrying amount of goodwill resulting from
the acquisition of the Recycle Center (Note 12) $ -- $ 22,165
Writedown of the carrying amount of goodwill resulting from
the acquisition of Waste Processor Industries, Inc. -- 5,744
Writedown of the plant assets carrying value, 7,451 --
permits and estimated site closure cost
Writedown of the carrying amount of goodwill resulting from
the acquisition of the Winona facility (Note 12) -- 3,458
Writedown of property and equipment at the Winona facility (Note 12) -- 1,681
----------- ----------
Total impairment losses $ 7,451 $ 33,048
=========== ==========
</TABLE>
The circumstances leading to the impairment losses include an accumulation
of costs significantly in excess of the amount of acquisition costs originally
expected for the Recycle Center and to a lesser degree, the Winona facility in
1995, but increased in 1996. Contributing factors include a current period
operating and cash flow loss, a recent history of operating losses, and the
Company's inability to achieve the operating results anticipated prior to the
respective acquisitions. Changes in the marketplace and competitive situations
in certain service lines, particularly at the Recycle Center and the Winona
facility, have contributed to the Company's inability to achieve anticipated
operating results.
The Winona facility was a 620 acre fuels blending and solvent recycling
facility with two hazardous waste deepwells and waste brokerage services. In
August of 1996, the Company made a decision to suspend further receipts of waste
at the Winona facility. This decision was made based on the adverse impact on
the business base of the Winona facility caused by inaccurate public statements
and other actions of persons opposed to the Facility. The litigation strategy
being pursued by persons opposed to the Facility includes numerous and
duplicative lawsuits filed in several jurisdictions. The Company believes that
the number of suits as well as the discovery and motion practices used in each
is designed to overwhelm the financial resources of AEESC, an American Ecology
wholly owned subsidiary. Based on the current regulatory and litigation morass
under which the Winona facility was forced to operate, management concluded that
it was not economically feasible for the Winona facility to continue. Also,
during the period of suspended waste receipts AEESC was in the process of
removing from inventory all waste materials which it believes would require the
continued operation of the facility's FTIR ambient air monitoring system as well
as the Thermal Oxidizer air emission control equipment. It is the facility's
intent to discontinue the use of this equipment as soon as regulatory permission
is received.
The Winona facility operation costs have been high and very difficult to
control. As a result of the operation costs exceeding revenues every month, the
Winona site has never been profitable. Management has made many efforts to
preserve the site as a possible profitable operation, using different business
techniques, yet none have succeeded. As a result of these efforts it has been
determined that the site should be closed under Federal and State regulations.
At March 17, 1997 management agreed to a plan for closing the site under RCRA
rules, and other substantive environmental regulations. The estimates for the
environmentally correct closure under those environmental laws has been
estimated at $1,500,000.
The results of operations for the Winona Facility since acquisition December
31, 1994:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Revenues
$ 6,834 $ 11,587
Net loss before impairment
(4,040) (3,349)
Net loss before income taxes
$(11,491) $ (8,488)
</TABLE>
23
<PAGE> 24
NOTE 5. ACCRUED LIABILITIES
Accrued liabilities at December 31, 1996 and 1995 were as follows (in
thousands):
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Waste processing and burial $ 6,240 $ 7,008
State disposal fees and taxes 2,359 1,994
Regulated rate settlements 1,643 2,123
Compensation costs 1,010 1,778
Deferred revenue 674 1,064
Other 4,950 7,055
---------- ----------
$ 16,876 $ 21,022
========== ==========
</TABLE>
The Company has recorded a liability of $6,240,000 for the waste
processing and burial of waste now on-site at the Recycle Center. The liability
is based on management estimates of anticipated waste treatment methods,
associated volume reductions and burial fees. The Company has signed agreements
for the disposal of this waste. This waste will be disposed of at two locationS
licensed for such disposal services. Should estimated volume reductions or
proposed disposal methods not be attainable, the costs for processing and
burial could increase materially in the near term.
NOTE 6. DEFERRED SITE MAINTENANCE
Deferred site maintenance accruals at December 31, 1996 and 1995 were as
follows (in thousands):
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Accrued costs associated with open facilities $ 10,714 $ 10,568
Accrued costs associated with closed facilities 10,658 11,582
---------- -----------
Sub-total 21,372 22,150
Less: current portion
(1,524) (1,763)
--------- ----------
Deferred site maintenance, excluding current portion $ 19,848 $ 20,387
========= ==========
</TABLE>
Accrued costs associated with open facilities principally relate to closure
and post-closure for the permitted and developed portion of the Robstown, Texas
facility, groundwater contamination remediation at the Robstown and Winona,
Texas facilities, and to capping of active cells at the chemical waste disposal
facilities in Robstown, Texas and Beatty, Nevada and the LLRW facility in
Richland, Washington. The Company is in process of re-permitting the Robstown
facility to include development of an additional portion of the site. The
Company's current estimate of the Robstown site's closure and post-closure costs
of $5,419,000 includes the closure and post closure costs for the portions of
the site now open and either filled or in use at this time. The estimated
additional cell capping costs to be expensed over the remaining developed cell
space at the Company's disposal facilities was approximately $2,500,000 at
December 31, 1996.
The Company is in the process of addressing corrective action plans at the
Robstown, Texas site. A 1978 analysis showed the presence of chemical
contamination in the shallow, non-potable aquifer underlying the site. The
Company operates a deep-injection well for the disposal of contaminated
groundwater and leachate generated at the facility. The Company has recorded an
accrual ($1,826,000 balance at December 31, 1996) for the estimated costs of the
groundwater remediation program based upon a compliance plan agreed to with the
state's regulatory authority in 1992. Based on the results obtained from the
compliance monitoring plan, the contamination levels in the surficial water
bearing zone are decreasing. The plume is still contained within the property
boundaries of the Robstown facility. The Company is proposing a modification
plan which will enhance environmental protection and substantially mitigate
future groundwater remediation costs. This plan is currently being analyzed by
the regulating agency.
24
<PAGE> 25
Even though the Winona facility is closed, it has on-site, underground
chemical contamination for which the facility developed a corrective action plan
that is still ongoing. Groundwater is recovered and disposed of in the
facility's deep-injection well. The current estimated cost of the remediation of
$815,000 is included in the Company's deferred site maintenance accruals at
December 31, 1996.
The State of Nevada and the State of Washington have collected money for the
costs of closure and post-closure care and maintenance of the respective Beatty,
Nevada and Richland, Washington sites. The Company currently submits waste
volume-based fees to state maintained funds. Such fees are periodically
negotiated with, or established by, the states and are based upon engineering
cost estimates provided by the Company and approved by the state.
Accrued costs associated with closed facilities relate to remediation,
closure and post-closure of the Sheffield, Illinois chemical facility and
maintenance of the Sheffield LLRW facility.
The Company is in the process of remediating the closed chemical waste
disposal facility in Sheffield, Illinois under a final corrective measures
implementation plan issued by the U.S. EPA in 1990 pursuant to the Remedial
Investigation and Feasibility Study completed by the Company. The Company has
submitted for approval a closure/post-closure plan for the site to the Illinois
EPA and to the U.S. EPA. The plan has not been approved by the agencies pending
further implementation of the The estimated costs of the remediation and closure
program, maintenance and post-closure monitoring of the LLRW facility with the
expected timing of future payments at December 31, 1996 were as follows (in
thousands):
<TABLE>
<S> <C>
1997 $ 435
1998 62
------
Total estimated costs 497
Discount amount at 2.5% (12)
------
$ 485
Amount accrued, net of discount ======
</TABLE>
The Company's estimates of future deferred site maintenance costs are
subject to change in the near term in the event amendments are made to current
laws and regulations governing the Company's operations or if more stringent
implementation thereof is required, or if additional information regarding
required remediation activities is obtained. Such changes could have a material
adverse effect on the Company's consolidated results of operations and financial
position in the near term and require substantial capital expenditures.
NOTE 7. REVOLVING CREDIT LOAN AND LONG TERM DEBT
Long term debt at December 31, 1996 and 1995 consisted of the following (in
thousands):
<TABLE>
<CAPTION>
1996 1995
------- -------
<S> <C> <C>
Secured bank credit facility $36,116 $28,079
Acquisition note payable -- 550
Capital lease obligations and other
------- -------
589 508
------- -------
Less: Current maturities 36,705 29,137
------- -------
(503) (780)
Long term debt ------- -------
$36,202 $28,357
======= =======
</TABLE>
25
<PAGE> 26
Aggregate maturities of long-term debt and the future minimum payments under
capital leases are as follows (in thousands):
<TABLE>
<CAPTION>
Year Ended
December 31,
------------
<S> <C>
1997 $ 503
1998 86
1999 5,000
2000 30,613
----------
Total $ 36,202
==========
</TABLE>
On October 31, 1996 the Company renegotiated its prior bank debt under the
terms of a Third Amended and Restated Credit Agreement ("Credit Agreement").
The new term loans, subject to satisfaction of certain conditions, extend
the maturity of the Company's existing bank debt to December 31, 2000 (the
maturity date). Interest on this debt will accrue at a rate of 7% through 1998.
Thereafter, interest is to be paid quarterly at the rate of 10% or prime,
whichever is greater. Principal repayments will commence on December 31, 1999
with $5,000,000 due on that date and quarterly payments of $250,000 thereafter.
The total debt balance remaining at the maturity date will be due and payable on
that date. The secured debt now consists solely of a Term Loan and a Revolving
Credit Loan. Subject to the terms and conditions of the Credit Agreement, the
Company's bank agrees to lend the Company an advancing term loan, in a series of
advances, up to a maximum of $38,000,000. The Revolving Credit loan portion of
this loan is represented by a single revolving promissory note in the original
principal sum of $5,000,000 (the "Revolving Credit Note"). No further advances
of any Revolving Credit Loans shall occur after the Maturity Date.
Under the terms of the Credit Agreement the Company increased long-term
debt by $1,684,000. Included in the total long-term debt balance is the debt
restructuring fees of $265,000.
As of December 31, 1996, the outstanding balances of the Term Loan and the
Revolving Credit loan were $32,004,576 and $3,931,180, respectively. The Company
also had incurred $180,071 in accrued interest and fees at that date.
In exchange for extending the terms, the bank received warrants,
excercisable only upon maturity or the occurrence of a monetary default, to
purchase up to 10% of the Company's then outstanding shares for $1.50 per share.
However, the Company can eliminate these warrants by the payment on maturity of
additional interest equal to the difference between the interest accrued through
1998 and interest for the same period at the rate of the greater of 10% or
prime. The bank eliminated its existing conversion feature on the Fee
Capitalization portion of the outstanding debt. In addition to the changes in
economic terms, the Company's financial covenants were restructured to match the
Company's current situation and financial plan. The bank has also agreed to
allow the Company to use capital freed up by its debt restructuring as a working
capital. The terms of the bank loan prohibit dividend payments on the Company's
common stock until the bank debt is fully retired.
As part of the new arrangements regarding the secured credit facility with
its bank, the Company obtained $3,000,000 in new equity from two of its
directors and shareholders, Rotchford Barker and Edward Heil, who in exchange
for this amount agreed to purchase 300,000 shares of new Class E Redeemable
Convertible Preferred Stock. The new Preferred Stock is nonvoting, has a stated
value and preference in liquidation of $10 per share, and has the right to
receive dividends, payable solely in common shares of the Company, at the rate
of 11.25% per annum.
As a condition to the extension of these terms, and in addition to the
$3,000,000 in equity already raised, the Company is required to use its best
efforts to raise an additional $2,000,000 in equity on or before June 30, 1997.
In order to meet this second equity condition and to give all common
shareholders the ability to participate in the Company's increased equity base,
the Company will use its best efforts to register on or before June 1, 1997 a
rights
26
<PAGE> 27
offering to holders of the Company's common stock. In the rights offering, which
will be made only by means of a prospectus, the Company would offer each common
shareholder, as of a record date expected to be on or about the second business
day before the registration statement for the rights offering is declared
effective by the Securities and Exchange Commission (SEC), the right to purchase
for $1 one share of newly issued common stock for each share of common stock
held on such record date. The rights would expire unless exercised within 30
days after the offer commences. As of December 31, 1996, the Company had
8,010,017 shares of common stock outstanding.
On February 7, 1996 the Company entered into an agreement (First Amendment
to Second Amended and Restated Credit Agreement) with its bank for the issuance
of a note, the Advance Note, in the amount of $4,000,000. This note, issued to
provide the Company working capital funds, was paid in full before its maturity,
June 30, 1996.
The acquisition note payable matured on December 31, 1995 and represented a
note payable to Mobley Environmental Services, Inc. ("Mobley"). This
non-interest bearing note was incurred as part of the Company's acquisition of
Gibraltar Chemical Resources, Inc. ("Gibraltar") on December 31, 1994. The note
has not been paid by the Company because of the offsetting costs that the
Company paid on behalf of Gibraltar combined with the Tolling Agreement removed
the Company's obligation for settlement of this note payable.
At December 31, 1996 the Company had issued letters of credit with an
outstanding face value of $4,675,848, including $1,872,000 issued under the bank
credit facility, of which the most significant relate to site operating permits
for the Company's sites. The issued letters of credit are secured by cash and
investment securities. The Company is required to pay fees ranging from 1/2 of
one percent to one percent on letters of credit drawn. The letters of credit
expire no more than one year after December 31, 1998.
NOTE 8. PREFERRED STOCK
Effective October 31, 1996, and executed on November 13, 1996, was the
Certificate of Designation, Preferences and Rights of Series E Redeemable
Convertible Preferred Stock. The Board of Directors duly authorized and adopted,
by all necessary action on the part of the Company, the resolution creating this
Series E of 300,000 shares of preferred stock. The Company sold all 300,000
shares of this 11.25% Series E Redeemable Convertible Preferred Stock, $10 par
value with a $10 per share liquidation preference, principally to two members of
the Board of Directors of the Company. The Company received cash proceeds of
$3,000,000 for the issuance of these 300,000 preferred shares.
By redemption, each share shall be redeemed by the Company on the first
business day following the issuance of Common Stock in a Rights Offering (which
Rights Offering the Company believes will occur on or before June 1, 1997), to
the extent that the purchase price of the Common Stock sold in the Rights
Offering plus the stated amount of the Series E Preferred outstanding on the
redemption date is in excess of $5,000,000. If less than all of the Series E
Preferred Stock outstanding is redeemed, the Series E Preferred Stock to be
redeemed shall be determined pursuant to the agreement for the initial purchase
of the Series E Preferred Stock. Any Rights Offering shall be an offer, to all
holders of record of the Company's Common Stock on or about the second business
day preceding the date the registration of the Rights Offering is declared
effective by the SEC, to purchase one share of Common Stock held on the record
date at a purchase price of $1 per share, payable within 30 days after the
Rights Offering.
By conversion, if there is a Rights Offering and less than 5,000,000 shares
of Common Stock are sold, one share of Series E Preferred Stock shall be
converted into 10 shares of fully paid and non-assessable Common Stock for each
10 shares or portion thereof of Common Stock less than 5,000,000 sold in the
Rights Offering. Such conversion shall occur on the first business day following
the expiration of the Rights Offering.
Each share of this 11.25% Series E Preferred Stock includes 10 warrants to
purchase Common Stock for an exercise price of $1.50 per share. There shall be
no voting rights or powers attached to this 11.25% Series E Preferred Stock.
27
<PAGE> 28
In September 1995, the Board of Directors of the Company authorized 105,264
shares of preferred stock designated as 8 3/8% Series D Cumulative Convertible
Preferred Stock ("8 3/8% Preferred Stock") and authorized the issuance of
105,264 of such shares and warrants to purchase 1,052,640 shares of the
Company's common stock. During September through December 1995, the Company sold
105,264 of 8 3/8% Preferred Stock with warrants in a private offering to a group
comprised principally of members of the company's directors ("the Investing
Group") and received cash proceeds of $4,759,000 which is net of offering
expenses of $101,000 and $140,000 in settlement of liabilities to two members of
the Investing Group. Each 8 3/8% Preferred Stock share is convertible at any
time at the option of the holder into 8.636 shares of the Company's common
stock, equivalent to a conversion price of $5.50 on the $47.50 total per share
offering price. Dividends on the 8 3/8% Preferred Stock are cumulative from the
date of issuance and payable quarterly commencing on October 15, 1995. Accrued
unpaid dividends totaled $514,000 and $88,000 at December 31, 1996 and 1995,
respectively. The 8 3/8% Preferred Stock shares are not redeemable and the
liquidation preference is $47.50 per share plus unpaid dividends. Each share of
the 8 3/8% Preferred Stock issued includes ten warrants to purchase shares of
the Company's common stock. Each warrant entitles the holder to purchase on
share of common stock for an exercise price of $4.75. The $4.75 warrants are
exercisable at any time and expire September 12, 1999. No value was assigned to
the warrants in the accompanying consolidated financial statements as the value
is deemed to be de minimis.
NOTE 9. INCOME TAXES
Effective January 1, 1993, the Company prospectively adopted Financial
Accounting Standards No. 109, Accounting for Income Taxes ("Statement 109").
The effect of the adoption was not material to the Company's financial position
or results of operations.
The components of the income tax provision (benefit) were as follows (in
thousands):
<TABLE>
<CAPTION>
Year Ended December 31,
1996 1995 1994
---- ---- ----
<S> <C><C> <C> <C> <C>
Current - Federal $ (1,552) $ (6,061) $ (1,184)
- State 35 (170) (75)
------------ ------------ ------------
(1,517) (6,231) (1,259)
------------ ------------ ------------
Deferred - Federal -- 816 3,044
------------ ------------ ------------
$ (1,517) $ (5,415) $ 1,785
============ ============ ============
</TABLE>
The following is a reconciliation between the effective income tax (benefit)
rate and the applicable statutory federal income tax (benefit) rate:
<TABLE>
<CAPTION>
Year Ended December 31,
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Income tax (benefit) - statutory rate (34.0)% (34.0)% 34.0%
State income taxes, net of federal tax benefit -- (.3) (.1)
Dividend income excluded from taxable income -- (.1) (2.2)
Non-deductible goodwill amortization -- 5.3 1.6
Valuation allowance for deferred tax assets 14.9 18.0 --
Tax refund 5.7 -- --
Other, net 1.4 1.1 (1.6)
------ ------ -----
Total effective tax (benefit) rate (12.0)% (10.0)% 31.7%
====== ====== =====
</TABLE>
28
<PAGE> 29
The tax effects of temporary differences between income for financial
reporting and taxes that gave rise to significant portions of the deferred tax
assets and liabilities and their changes during the year were as follows (in
thousands):
<TABLE>
<CAPTION>
January 1, Deferred December 31,
1996 Provision 1996
---- --------- ----
<S> <C> <C> <C>
Deferred tax assets:
Environmental compliance and
other site related costs,
principally due to accruals for
financial reporting purposes $ 8,212 $ 95 $ 8,307
Depreciation and amortization 6,396 1,969 8,365
Net operating loss carryforward 2,701 4,444 7,145
Other 2,101 (1,210) 891
------------- ------------ -------------
Total gross deferred tax assets 19,410 5,298 24,708
Less valuation allowance (14,709) (5,679) (20,388)
------------ ------------ -------------
Net deferred tax assets 4,701 (381) 4,320
------------ ------------ -------------
Deferred tax liabilities:
Site development costs (2,633) 591 (2,042)
Insurance claim (1,000) 1,000 --
Other (1,068) (1,210) (2,278)
------------ ------------ ------------
Total gross deferred tax liabilities (4,701) 381 (4,320)
------------ ------------ -------------
Net deferred tax assets $ 0 $ 0 $ 0
============ ============ =============
</TABLE>
The Company has established a valuation allowance for certain deferred tax
assets due to realization uncertainties inherent with the long-term nature of
deferred site maintenance costs, uncertainties regarding future operating
results and for limitations on utilization of acquired net operating loss
carryforwards for tax purposes. The realization of a significant portion of net
deferred tax assets is based in part on the company's estimates of the timing of
reversals of certain temporary differences and on the generation of taxable
income before such reversals. The net operating loss carryforward of
approximately $19,740,000 at December 31, 1996, begins to expire in the year
2006 and utilization of $2,745,000 of this carryforward is limited pursuant to
the net operating loss limitation rules of Internal Revenue Code Section 382.
This $2,745,000 expires $793,000 in 2006, $1,029,000 in 2007 and $872,000 in
2008. The remaining unrestricted net operating loss carryforward expires
$4,680,000 in 2010 and $12,315,000 in 2011. The Company's federal income tax
returns are currently under examination due to net operating loss carrybacks in
amended returns filed in 1996. As of December 3, 1996, $740,000 the refund
claimed had not been received and were reflected as income taxes receivable.
NOTE 10. EMPLOYEE'S BENEFIT PLANS
Retirement Plan. The Company's defined contribution retirement plan (the
Plan) was amended effective December 31, 1995. The amendment changes provided
for employees not earning a benefit or having new eligibility to participate,
and no company contributions are being made. Prior to December 31, 1995, the
Plan covered all full-time employees of American Ecology and its subsidiaries
(the Company) hired in a job category which would result in 1,000 hours of
service during any consecutive 12-month period and who had attained the age of
21. The Company made basic contributions equal to 5% of compensation below the
prior year's FICA wage base plus a contribution equal to 10% of compensation
above the prior year's FICA wage base, and a past service contribution as
defines.
Effective November 20, 1996, the Company merged the Retirement Plan with the
401(k) Plan into a single plan to be known as the American Ecology Corporation
401(k) Savings Plan.
Effective February 10, 1997 the basic contributions as described above were
reinstated for the bargaining unit in Oak Ridge, TN, in accordance with the
agreement between Local No. 3-983 of the Oil, Chemical and Atomic
29
<PAGE> 30
Workers International Union and the Company's subsidiaries, Nuclear Materials
Management Center and Nuclear Equipment Service Center. The plan was
reconstructed as equal to the company's previous retirement plan.
401(k) Plan. The Company maintains a 401(k) plan for employees who
voluntarily contribute a portion of their compensation, thereby deferring income
for federal income tax purposes. Effective November 20, 1996 the 401(k) plan was
merged with the Retirement Plan to form a single plan called The American
Ecology Corporation 401(k) Savings Plan.
The 401(k) Savings Plan was amended and reinstated in its entirety. The Plan
covers substantially all of the Company's employees after one full year of
employment. Participants may contribute a minimum of 0% up to the IRS limits.
The Company's contribution matches 55% of participant contributions up to 6% of
deferred compensation or a maximum of 3.3% of an employees qualified earnings.
The Company's contribution was changed to cash instead of AEC stock, from
September 1996.
The Company's total contribution for both the retirement plan and 401(k)
plan was $829,000 and $946,000 for 1995 and 1994, respectively. The Company
contribution for the 401(k) plan was $268,907 for 1996. The Company has no
post-retirement or post-employment benefit plan.
NOTE 11. STOCK OPTION PLANS
The Company presently maintains these stock option plans affording employees
and outside directors of the Company the right to purchase shares of its common
stock. The exercise price, term and other conditions applicable to each option
granted under the Company's plans are generally determined by the Compensation
Committee of the Board of Directors at the time of the grant of each option and
may vary with each option granted. No option may be granted at a price less than
the fair market value of the shares when the option is granted, and no options
may have a term longer than ten years.
The Company accounts for these plans under APB Opinion No. 25, "Accounting
for Stock Issued to Employees". Under this opinion, the Company has recorded no
compensation cost for 1996, 1995, and 1994. Had compensation cost for the plans
been determined consistent with FASB Statement No. 123, "Accounting for
Stock-Based Compensation", the Company's 1996 and 1995 net loss would have been
increased by $49,118 and $683,375 respectively on a pro forma basis. Primary
loss per share would have increased $.05 and $.31 for 1996 and 1995,
respectively. Fully diluted loss per share would have been increased by $.02 per
share above the primary earnings per share amount for 1996. The effect on fully
diluted loss per share for 1995 would have been anti-dilutive. The FASB
Statement No. 123 method of accounting has not been applied to options granted
prior to January 1, 1995. The pro forma compensation cost may not be
representative of that to be expected in future years. The weighted average
remaining life of the options is seven years at December 31, 1996.
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Under option:
Options outstanding, beginning of year 1,186,600 691,950 611,450
Granted -- 706,000 125,000
Exercised -- (6,800) (35,000)
Canceled (644,000) (204,550) (9,500)
----------- ----------- -----------
Options outstanding, end of year 542,600 1,186,600 691,950
=========== =========== ===========
Price range per share of outstanding options $ 4.00- $ 4.00- $ 2.79-
$ 14.75 $ 14.75 $ 14.75
=========== =========== ===========
Price range per share of options exercised $ -- $ -- $ 8.00-
$ -- $ 2.79 $ 8.58
=========== ============= ===========
Price range per share of options canceled $ 4.62- $ 6.38- $ 10.13-
$ 14.25 $ 14.75 $ 11.00
=========== ============ ===========
Options exercisable at end of year 417,070 721,340 521,660
=========== ============ ==========
Options available for future grant at end of year 383,900 383,900 710,900
=========== ============ ==========
</TABLE>
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NOTE 12. ACQUISITIONS
On September 19, 1994, the Company acquired the assets of Quadrex Recycle
Center, ("Recycle Center"), a business segment of Quadrex Corporation
("Quadrex") that provides recycling, decontamination, volume reduction of
radioactive waste and related equipment rental services to government,
commercial and nuclear power industries. The purchase consideration was
comprised of payments by the Company for assumed liabilities and working capital
for the Recycle Center through the closing date, additional unpaid liabilities
assumed as of the closing date, and direct acquisition costs, all of which total
approximately $28,000,000. The purchase method of accounting was used for this
asset acquisition, therefore, the Recycle Center's results of operations are
consolidated with the Company's since September 19, 1994. The excess of
acquisition cost over fair value of net tangible assets of the Recycle center of
approximately $22,165,000 was written down during 1995 as discussed in Note 4.
The acquisition cost was reduced by the estimated fair value of 545,000 common
shares of Perma-Fix, Inc. ("Perma-Fix") which Quadrex transferred to the company
effective September 30, 1994.
On December 31, 1994, the Company acquired Gibraltar Chemical Resources,
Inc. ("the Winona facility"), a wholly-owned subsidiary of Mobley. The Winona
facility provides fuels blending, solvent recycling, and deepwell injection
services to the hazardous and industrial waste disposal markets with a fixed
base facility in Winona, Texas and collections and technical operations in El
Paso, Texas and Laredo, Texas. The total acquisition cost of $10,628,000
included cash, a $550,000 note payable to Mobley, assumed liabilities, and
direct acquisition costs. The excess of cost over fair market of net assets of
the Winona facility of approximately $3,458,000 was written down during 1995 as
discussed in Note 4. Since the acquisition, the Company has been faced with both
legal confrontations and operational difficulties. The operation costs have been
high and very difficult to control. As a result of the operation costs exceeding
revenues every month, the Winona site has never been profitable. Management has
made many efforts to preserve the site as a possible profitable operation, using
different business techniques, yet none have succeeded. As a result of these
efforts it has been determined that the site should be closed under Federal and
State regulations. The date of the closure was set at March 17, 1997 when
management agreed to a plan for closing the site under RCRA rules, and other
substantive environmental regulations. The estimates for the environmentally
correct closure under those environmental laws have been estimated at
$1,500,000.
NOTE 13. COMMITMENTS AND CONTINGENCIES
The Company's business inherently involves risks of unintended or
unpermitted discharge of materials into the environment. In the ordinary course
of conducting its business activities, the Company becomes involved in judicial
and administrative proceedings involving governmental authorities at the
federal, state and local levels. In the majority of the situations where
regulatory enforcement proceedings are commenced by governmental authorities,
the matters involved relate to alleged technical violations of licenses or
permits pursuant to which the Company operates, or, of laws or regulations to
which its operations are subject, or, are the result of different
interpretations of the applicable requirements.
In addition to the litigation described below, the Company and certain of
its subsidiaries are involved in other civil litigation and administrative
matters, including permit application proceedings in connection with the
established operation, closure and post-closure activities of certain sites.
Management has not established reserves for the matters discussed below,
other than for certain anticipated legal fees, based on management's estimates
of the outcome. During the course of legal proceedings, management's estimates
with respect to such matters may change. While the outcome of any particular
action or
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<PAGE> 32
administrative proceeding cannot be predicted with certainty, management is
unable to conclude that the ultimate outcome, if unfavorable, of the litigation
and other matters described below, will not have a material adverse effect on
the operations or financial condition of the Company.
Paul Stephenson, et al v. American Ecology Recycle Center, Inc., US District
Court, Eastern District, Tennessee, Civil Action No. 94-CV-650. The Company's
subsidiary, AERC, purchased the assets of Quadrex Environmental Company's
Recycle Center in Oak Ridge, Tennessee on September 19, 1994. In November 1994,
AERC was named as a defendant in what has become a class action lawsuit by
former employees of Quadrex who are claiming unpaid medical benefits and for
payment into an underfunded pension plan. The purchase agreement between AERC
and Quadrex excluded and provided for indemnification by Quadrex of such claims,
but Quadrex subsequently filed for protection under Chapter 11 of the Bankruptcy
Act and adopted a liquidating reorganization plan under which unsecured
creditors will likely receive no payment. In November 1996, approximately $1.2
million of insurance proceeds payable as a result of a fire at the Recycle
Center in July 1994 were paid into the Federal District Court to be held pending
the outcome of the litigation. The Plaintiffs' claims, as currently understood,
are substantially less than the amount held by the court. A determination of the
likelihood of an unfavorable outcome or an estimate of the amount or range of
potential loss, if the outcome is unfavorable, cannot be made at this time.
Management intends to continue to defend this matter.
US Ecology, Inc. v. Barbara Wagner, Benton County Assessor, Board of Tax
Appeals, State of Washington, Docket Nos. 92-63--92-65 and 95-43--95-45. In
1992, the Benton County (Washington) assessor issued property tax assessments on
improvements owned by the Company and located on the Company's leasehold at the
US Department of Energy's Hanford Reservation. The retroactive property tax
increases totaled $1.7 million for the years 1989, 1990 and 1991. Prior to 1989,
annual taxes had been about $5,400. The company sued Benton County, the Assessor
and Treasurer to enjoin them from collecting the increased taxes. An injunction
was granted by the Benton County Superior Court, but was reversed by the
Washington Court of Appeals which ruled that the Company had not exhausted
available administrative remedies. Accordingly, the Company prosecuted its
appeal to the Washington Board of Tax Appeals and a hearing was held in November
1995. The Company has recently been assessed an additional $1.9 million in taxes
for 1992, 1993 and 1994. On July 1, 1996, the Board of Tax Appeals issued an
Interim Decision that the Company's concession right to operate a low-level
radioactive waste disposal site at the Hanford Reservation is subject to
property tax, but that the hearing will be re-opened to allow the parties to
submit additional evidence regarding the fair market value of the concession
right. The Company believes that Washington law does not provide for taxation of
"concession rights" and that, in any event, since its permits and licenses may
not be freely transferred, the market value thereof is minimal. The Company
intends to continue to contest the matter.
Boston Edison Company v. US Ecology, Inc., U.S. District Court for
Massachusetts, Civil Action No. 95-12173. In October 1995, Boston Edison filed a
complaint against USE, a subsidiary of the Company, in the U.S. District Court
of Massachusetts alleging claims related to USE's alleged refusal to indemnify
Boston Edison for various costs arising out of the shipping and burial of waste
materials at the Maxey Flats Nuclear Disposal Site. USE had entered into a
series of contracts with Boston Edison to provide radioactive waste disposal
services at this site. Boston Edison alleges that USE breached the contracts
because USE failed to indemnify Boston Edison for its costs. Boston Edison also
alleges that USE committed an unfair and deceptive trade practice in the State
of Massachusetts because of its failure to indemnify Boston Edison as required
by these contracts. Finally, Boston Edison seeks a declaratory judgment that
would set forth the contractual rights and liabilities of the parties. Boston
Edison claims $600,000 in past and future costs for the alleged breach of the
contracts. It also seeks to treble damages under the Massachusetts Deceptive
Trade Practices Act. USE has successfully moved the case from Massachusetts to
federal court in Kentucky. The Company believes USE has contractual defenses to
the indemnity claims and intends to contest this matter. Additionally, USE has
counterclaimed against Boston Edison seeking contribution for its response costs
at Maxey Flats. It is not possible at this time to predict whether the outcome
of this matter will be favorable or unfavorable.
Ally Capital Corporation v. American Ecology Recycle Center, Inc., et al,
U.S. District Court, Southern District of Texas, Houston Division, Civil Action
No. H-96-3117. This complaint is for breach of an equipment lease resulting
from AERC's, the Company's subsidiary, failure to make monthly lease payments
on leased equipment.
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<PAGE> 33
The equipment is essential to the continued operations of the Oak Ridge
facility. By December 1996, the unpaid payments exceeded $255,000. The remaining
balance on the equipment lease, including the $255,000, is approximately
$618,000. Plaintiff has filed a motion for summary judgment seeking the entire
lease balance of $667,680, per diem interest, attorneys fees and possession of
the equipment. The parties are near settlement in the matter.
Houston Office 88, Inc. v. American Ecology Corporation v. Altra Energy
Technologies, L.L.C. , District Court of Harris County, Texas, Case No.
96-47050. Plaintiffs filed this case in September 1996 seeking more than $4.1
million in rent, interest, costs and attorneys fees, alleging breach of the
office lease agreement by the Company for vacating its former corporate
headquarters in Houston, Texas. The Company has filed a counterclaim against
Plaintiff based on its wrongful refusal to allow the Company's leasing agent to
show the premises to potential sublessees. Also, the Company has filed a
third-party claim against sublessee, Altra Energy Technologies, L.L.C., for
failure to consummate a sublease agreement between Altra and the Company. The
Company intends to vigorously contest the case, but will remain open to a
favorable settlement in advance of trial scheduled for December 8, 1997.
In the Matter of the Applications of American Ecology Environmental Services
Corp., Permit Nos. AQ-9429, HW-50368, WDW-186, and WDW-229 (SOAH Docket
###-##-####). This matter is a contested proceeding before the Texas State
Office of Administrative Hearings wherein AEESC, a wholly owned subsidiary of
the Company, is seeking to renew operation permits for its hazardous waste
treatment, storage, and disposal facility in Winona, Texas. A locally (Winona,
Texas) based organization known as "Mothers Organized to Stop Environmental
Sins" ("MOSES") has appeared in the matter seeking to have the permits revoked.
As a result of the activities of MOSES and certain individuals, AEESC has
determined it cannot continue operation of the facility.
Virgie Adams, et al v. American Ecology Environmental Services Corporation,
et al, Cause No. 236-165224-6, Tarrant County, Texas District Court. On August
30, 1996, Plaintiffs amended their August 6 complaint naming over 677 additional
plaintiffs and 87 defendants, including the Company, several of its subsidiaries
and customers of its Winona, Texas facility. The Plaintiffs are seeking damages,
punitive damages and pre- and post-judgment interest based on claims of
negligence, negligence as a matter of law, fraudulent concealment, assault and
battery, intentional infliction of emotional distress, res ipsa loquiter and
intentional tort. Plaintiffs allege the Company "...failed to handle, treat,
store, blend, inject, and otherwise dispose of extremely hazardous and highly
toxic substances in a manner...constitut(ing)...compliance with basic health,
safety and environmental standards." The case is in the early stages of
discovery. The Company believes it has conducted its operations in accordance
with applicable laws and regulations, that the lawsuit is without merit and
intends to vigorously defend the action. American Ecology
American Ecology Environmental Services Corp., et al v. Mildred Krueger, et
al, U. S. District Court for the Northern District of Texas, Dallas Division,
Civil Action No. 3-96-CV-2670-D. The Company and two of its subsidiaries, AEESC
and USE, filed suit in the U.S. District Court for the Northern District of
Texas against the Defendants seeking an award of actual and punitive damages
proven at trial and treble damages, costs and attorneys fees as allowed under
the federal racketeering statutes and for appropriate injunctive relief
including an order compelling Defendants to cease their improper activities,
retract their defamatory statements and to refrain from similar improper
activities. The Complaint alleges that the Defendants: violated the RICO
statute, defamed AEESC, USE and the Company through various publications and
statements; tortuously interfered with existing contractual rights and
prospective business relations of AEESC, USE and the Company; disparaged the
businesses of AEESC, USE and AEC; engaged in a civil conspiracy for improper
purposes to cause the closure of AEESC's Winona, Texas facility; and abused both
the administrative and judicial processes within Texas. The case is based on the
past and continuing activities of Phyllis Glazer and a non-profit corporation
(M.O.S.E.S.) organized by Glazer, her husband and mother, all of whom are
defendants. The action alleges that Defendants fraudulently sought to deprive
Plaintiffs of their property by spreading misleading and defamatory statements
about Plaintiffs and their business operations, and that the Defendants have
conspired among themselves to force the closure of the Winona facility for their
own pecuniary gain by engaging in a pattern of maliciously disseminating clearly
false and defamatory statements concerning the Plaintiffs' businesses and by
repeatedly abusing judicial proceedings solely for the purpose of damaging the
reputation and financial health of Plaintiffs. Defendants have answered the
complaint denying liability and counter-claiming for damages for abuse of
process in attempting to deny Plaintiffs'
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right of free speech. MOSES claims actual and punitive damages in excess of $1
million based on alleged reputational damage, reduced income (in the form of
reduced contributions) and costs of legal representation. Notwithstanding the
decision to close the Winona facility, the Company intends to vigorously
prosecute this case to its conclusion.
Phyllis Glazer and M.O.S.E.S. v. Gibraltar Chemical Resources, Inc., et al,
U.S. District Court Eastern District, Texas, Case No. 6:94-CV-708. This lawsuit,
which is a citizen suit brought under the federal Reserve Conservation and
Recovery Act and the Clean Air Act, alleges that the Winona facility violated
certain permits and regulations, and contributed to the handling, storage,
treatment, transportation and disposal of solid and hazardous waste in a manner
that presents an imminent and substantial endangerment to health and the
environment. The Plaintiffs have requested that the facility be shut down and
unspecified civil penalties imposed on the Company. The Company has been granted
a partial summary judgment, but the core claims remain subject to indemnity
provisions.
In April 1995, management learned that one of its subsidiaries had not
always complied with the tranit time limitations allowed for hazardous waste
being transferred from generators to final disposal sites. These requirements
are under the regulatory supervision of the TNRCC and the Company promptly
reported the situation to the TNRCC. As a result of an internal review of this
matter, the Company determined that there was a substantial number of instances
where the transit time limitations were exceeded over approximately eight months
from June 1994 through February 1995. As a direct result of this circumstance,
the Company has reorganized the operations of the subsidiary, including the
replacement of a number of personnel, and the adoption of stronger internal
systems for monitoring the movement of boxes and transportation vehicles. At
this time, the Company does not know whether the TNRCC will ultimately assess
any fines against the Company for exceeding transit time limitations. While the
Company believes the steps that it has taken are appropriate and responsible, it
is possible that the TNRCC may seek to impose a fine on the Company in
connection with the matter. The Company is not in a position to assess the
amount of such a fine. However, a fine of sufficient magnitude could have a
material adverse effect upon the consolidated financial position of the Company.
James D. Moncrief, et al v. Gibraltar Chemical Resources, Inc., et al,
District Court of Smith County, Texas, Civil Action No. 92-1942-C. Marian
Steich, et al v. Gibraltar Chemical Resources, Inc., et al, District Court of
Smith County, Texas, Civil Action No. 93-054309. Michael Williams, et al v.
Gibraltar Chemical Resources, Inc., et al, District Court of Smith County,
Texas, Civil Action No. 93-2304-C. Tangee E. Daniels, et al v. Atrium Doors and
Windows, Inc., et al, District Court of Dallas County, Texas, Civil Action No.
95-091459-L. Each of the above-identified cases, together with the Glazer and
Adams cases discussed above, involve AEESC, a subsidiary of the Company, Winona,
Texas facility. As discussed elsewhere herein, AEESC has decided to close that
facility permanently. Each of these cases seeks unspecified damages for various
causes of action, including trespass, nuisance, negligence, gross negligence,
and in some cases, fraudulent concealment and fraud. The Plaintiffs claim that
they suffered personal injuries and property devaluation as a result of alleged
releases of toxic or harmful chemical substances into the environment from the
facility. The Moncrief case was tried to a jury in October 1996. The jury
awarded damages in the amount of $18,000 on the Plaintiffs' nuisance claim only.
Plaintiffs have stated they intend to appeal the verdict and have requested a
new trial. All the other cases are in various stages of pre-trial discovery. In
the Moncrief, Steich, Williams and Daniels cases, AEESC is relying upon its
predecessor parent corporation's insurance coverage for defense and indemnity
purposes. With respect to each of the cases, the Company believes it has
conducted its operations in accordance with applicable laws and regulations,
that each of the lawsuits is without merit and intends to vigorously defend
each.
ENVIRONMENTAL MATTERS:
In the Matter of American Ecology Environmental Services Corporation, SOAH
Docket No. ###-##-####. In this matter, the Texas Natural Resources Conservation
Commission ("TNRCC"), alleges violations of certain provisions of the Winona
Facility's air and surface facilities hazardous waste permits and relevant
statutory provisions. The Complaint proposes an administrative penalty
assessment of $71,700. An answer has been filed with the TNRCC and settlement
discussions are ongoing. The Company will continue to contest this matter if
settlement discussions prove unfruitful.
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In re American Ecology Environmental Services Corporation, USEPA Region 6.
On March 7, 1997, Company representatives attended a meeting with the USEPA
regarding compliance by AEESC with notification requirements of the intention to
import waste from a foreign based waste generator. The meeting allowed the
Company an opportunity to explain its position regarding the matter and to
provide additional relevant information. The alleged violations involve
reporting requirements only, not release of pollutants from the facility. EPA
anticipates filing an enforcement action against the Company seeking a penalty
of approximately $67,500. The Company is currently investigating whether proper
information was reported to the EPA.
In the Matter of American Ecology Recycle Center, Inc., U.S. Environmental
Protection Agency, Region 4, Docket No. 96-13-R. Administrative Complaint issued
by the USEPA Region 4, Atlanta, alleges AERC, a subsidiary of the Company,
failed to make a hazardous waste determination as the generator of hazardous
waste, and stored the same for greater than 90 days without a permit. The
Complaint seeks civil penalties in the amount of $96,000, disposal of the
"wastes" at a permitted facility, and the immediate clean-up of the area in
which the materials have been stored. The materials were routinely used in the
AERC Chemline Cleaning Process Unit, which was destroyed by a July 1994 fire at
the Oakridge facility. AERC is in settlement discussions with the EPA to resolve
the matter without a hearing and has submitted a Resolution Plan to the EPA
requesting permission to allow processing of the Chemline Residues in the
Facility Waste Water Treatment Unit. The Treatment Unit is currently being
rebuilt from the fire, and is anticipated to be on-line in April 1997.
In re Ramp Industries, Inc. Site (Colorado), U.S. Environmental Protection
Agency, Denver, Region VIII. USE responded to a CERCLA 104(e) Information
Request in March 1996 sent by USEPA to numerous Potentially Responsible Parties.
Thus far, USE has not been named as a responsible party at the CERCLA site, and
there has not been any further action with respect to the site. Hazardous
substances may have been sent by USE to the site from the Company's former
operations warehouse in Pleasanton, California. No determination as to ultimate
liability can be made at this time and no formal action has been initiated
beyond the information requests.
United States Environmental Protection Agency v. US Ecology, Inc., RCRA No.
V-W-025-92. In 1992, the USEPA initiated an administrative enforcement action
against USE, a subsidiary of the Company, alleging that USE had failed to comply
with certain regulatory requirements to provide financial assurance for closure
and post-closure costs as well as liability insurance relating to its hazardous
waste management of its facility in Sheffield, Illinois. The EPA is seeking a
penalty of approximately $1 million and ordering compliance. USE ceased
operations at the facility in 1983, which has been undergoing closure and
corrective action pursuant to regulatory requirements and a RCRA Consent Order
since that time. Because the Sheffield facility had not been an interim status
facility under the RCRA regulations since November 1985, the Company responded
that the interim status regulatory requirements for financial assurance and
liability insurance do not apply and objected to the penalty as entirely
unwarranted. The administrative law judge ruled that the Sheffield facility is
subject to the RCRA regulatory requirements for financial assurance and
liability insurance. The Company has appealed that decision to the Environmental
Appeals Board and is negotiating a reduction of the penalty with the EPA and
alternatively seeking to apply the penalty to construction of a supplemental
environmental project elsewhere.
In the Matter of U.S. Department of Energy, US Ecology, Inc., RCRA Docket
No. WA7 89000 8967. EPA issued Hazardous and Solid Waste Amendments to a Final
RCRA Permit No. WA7 89000 8967, issued August 29, 1994 to the U.S. Department of
Energy for the Hanford Federal Reservation, which purports to impose obligations
on various parties, including, potentially, USE. USE has sought review of permit
condition III.B., identifying certain disposal units operated by USE as Solid
Waste Management Units subject to investigation and corrective action. USE also
sought review of all other conditions of the HSWA portion of the permit,
including definition "g" to the extent that it defines "facility" or "site" to
include leased lands, and including Attachments A-F, to the extent that they set
forth the requirements that would be applicable to the USE site. After
negotiations with the EPA, the appeal was dismissed at the joint request of USE
and the EPA, without prejudice to either party's right to reinstate the appeal
if settlement is not achieved. USE has submitted an Investigatory Plan to
Washington Department of Ecology for the investigation of hazardous
constituents. The Plan is pending. It is not possible at this time to predict
the outcome of this matter.
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NOTE 14. SHAREHOLDER RIGHTS PLAN
During December 1993, the Company adopted a Shareholder Rights Plan (the
"Plan"). Pursuant to the Plan each outstanding share of the Company's Common
Stock on December 17, 1993, received one Right as a dividend that becomes
exercisable upon certain triggering events. On March 29, 1995, the Company
terminated the Plan and authorized the redemption of all outstanding Rights
issued under the Plan. The redemption price was $.01 per Right, totaling $78,000
and was paid on April 15, 1995 to shareholders of record on April 10, 1995.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AMERICAN ECOLOGY CORPORATION
(Registrant)
Date: November 14, 1997 By: /s/ Jack K. Lemley
----------------------
Jack K. Lemley
Chief Executive Officer
Date: November 14, 1997 By: /s/ R. S. Thorn
-----------------------
R. S. Thorn
Vice President of
Administration
Chief Accounting Officer
37
