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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K/A
SECOND AMENDMENT TO 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 December 8, 1997, Registrant had outstanding 8,379,813 shares of its
Common Stock.
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EXPLANATION OF SECOND 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 amended Part I, Items 7
and 8 of its Form 10-K on November 18, 1997. The Commission made additional
comments on the Form 10-K/A. Based on these comments, the Company is hereby
amending Part I, Item 8. All amended items are stated as of December 31, 1996.
2
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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
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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 $16.1 million. During
1995, the Company obtained capital contributions from certain of its directors
and others and restructured its Credit Agreement with the bank; however, the
Company continues to have limited cash resources available and has substantial
obligations that are due in the future. Under the terms of the Credit
Agreement, the bank may accelerate the maturity of the debt in the event of
violation of any covenant of the Credit Agreement or if a material adverse
event is deemed by the bank to have occurred. If the Company is unable to
remain in compliance with the terms of the Credit Agreement or obtain waivers
in the event of a default and the bank accelerates maturity of the Credit
Agreement, the Company does not have adequate financial resources to extinguish
the loan and the Company's operations may be negatively impacted. As discussed
in Note 13 to the consolidated financial statements, the Company is involved in
various significant permitting efforts, claims, lawsuits and other
administrative matters which are uncertain at this time. The foregoing matters
raise substantial doubt about the Company's ability to continue as a going
concern. Management's plans in regard to these matters are also described in
Note 1. The accompanying consolidated financial statements do not include any
adjustments relating to the recoverability and classification of asset carrying
amounts or the amounts and classification of liabilities that might be
necessary should the Company be unable to continue as a going concern, or
adjustments, if any, that may be necessary as a result of the outcome of the
matters discussed above.
ARTHUR ANDERSEN LLP
Houston, Texas
April 11, 1996
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
AMERICAN ECOLOGY CORPORATION
CONSOLIDATED BALANCE SHEETS
($ 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.
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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) 1,386 --
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.
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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.
7
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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 -- -- -- (78) -- --
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 -- -- -- -- -- (11,407)
Preferred stock issuances -- 3,000 -- -- -- --
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 -- -- -- -- 241 --
------- --------- ------ -------- --------- ---------
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.
8
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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.
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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 prior
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. The Company expects to incur and
capitalize expenses of approximately $120,000 per month, including interest,
until construction begins on the facility. 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
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<PAGE> 11
December 31, 1996 the Company has contributed and deferred approximately
$7,146,000 (7% of total assets), of 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
11
<PAGE> 12
approval, time delays, local opposition and potential stricter governmental
regulation. Substantial losses which 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.
12
<PAGE> 13
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
13
<PAGE> 14
1995, proceeds of $214,000 received on sales of securities available-for-sale
during 1995 resulted in realized losses 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.
14
<PAGE> 15
<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,
permits and estimated site closure cost 7,451 --
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)
</TABLE>
15
<PAGE> 16
<TABLE>
<S> <C> <C>
Net loss before income taxes $(11,491) $(8,488)
</TABLE>
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.
16
<PAGE> 17
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 RI/FS. The estimated term of the closure
plan combined with the required thirty years post-closure monitoring is forty
years. As of December 31, 1996, the Company had accrued $10,173,000 for
estimated plan costs. This estimate is based on the current plan and the
estimate may vary materially based on the provisions of the approved plan.
Prior to 1995 the Company discounted the estimated amount at 2 1/2% to
determine the amount accrued. In 1995, the Company re-evaluated the accrual,
including the amount and timing of the costs over the anticipated 40 year
period and ceased discounting the chemical disposal facility costs.
Additionally, the Company is maintaining until 1998 a closed LLRW disposal
facility adjacent to the closed chemical waste disposal facility pursuant to a
May 25, 1988 Agreed Order with the State of Illinois. 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)
---------
Amount accrued, net of discount $ 485
=========
</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
------- -------
36,705 29,137
</TABLE>
17
<PAGE> 18
<TABLE>
<S> <C> <C>
Less: Current maturities (503) (780)
------- -------
Long term debt $36,202 $28,357
======= =======
</TABLE>
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.
18
<PAGE> 19
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 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, the Board
of Directors duly authorized and adopted, by all necessary action on the part
of the Company, a Certificate of Designation, Preferences and Rights creating
300,000 shares of Series E Redeemable Convertible 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, 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.
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 December 31, 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. A 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. Since the Series E Preferred Stock is redeemable only at the
option of the Company, it is included in the Balance Sheet under the general
heading of shareholders' equity and not as temporary capital.
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.
19
<PAGE> 20
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.
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>
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 --
</TABLE>
20
<PAGE> 21
<TABLE>
<S> <C> <C> <C>
Tax refund 5.7 -- --
Other, net 1.4 1.1 (1.6)
-------- ------- -------
Total effective tax (benefit) rate (12.0)% (10.0)% 31.7%
======== ======= =======
</TABLE>
21
<PAGE> 22
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, $1,079,000 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 31, 1996, $740,000 of the
refunds 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
22
<PAGE> 23
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 three 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-
</TABLE>
23
<PAGE> 24
<TABLE>
<S> <C> <C> <C>
$ 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>
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
24
<PAGE> 25
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.
25
<PAGE> 26
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 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'
26
<PAGE> 27
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.
27
<PAGE> 28
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: December 17, 1997 By: /s/ Jack K. Lemley
------------------
Jack K. Lemley
Chief Executive Officer
Date: December 17, 1997 By: /s/ R. S. Thorn
---------------
R. S. Thorn
Vice President of Administration
Chief Accounting Officer
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