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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(x) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 1998
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from____________________to____________________
Commission File Number 0-11688
AMERICAN ECOLOGY CORPORATION
----------------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 95-3889638
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
805 W. Idaho
Suite #200
Boise, Idaho 83702-8916
------------ ----------
(Address of principal executive offices) (Zip Code)
(208) 331-8400
--------------
(Registrants telephone number, including area code)
Indicate by a check mark whether Registrant (1) has filed all reports required
to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days.
YES [X] NO [ ]
At May 12, 1998 Registrant had outstanding 13,498,429
shares of its Common Stock.
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AMERICAN ECOLOGY CORPORATION
QUARTERLY REPORT FORM 10-Q FOR THE
THREE MONTHS ENDED MARCH 31, 1998
TABLE OF CONTENTS
PART 1. FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Item 1. Consolidated Financial Statements PAGE
<S> <C> <C>
Financial Statements 3
(Unaudited)
Consolidated Statements of Operations 4
(Unaudited)
Consolidated Statements of Cash Flows 5
(Unaudited)
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition of Operations 10
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 14
Item 2. Changes in Securities 15
Item 3. Defaults upon Senior Securities 15
Item 4. Submission of Matters to a Vote of Security Holders 15
Item 5. Other Information 15
Item 6. Exhibits and Reports on Form 8-K 15
Signature 16
</TABLE>
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PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
AMERICAN ECOLOGY CORPORATION
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
($ IN 000'S EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
---- ----
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 157 $ 366
Receivables, net of allowance for doubtful
accounts of $1,502 and $1,440, respectively 7,720 7,929
Income taxes receivable 740 740
Prepayments and other 443 877
-------- --------
Total current assets 9,060 9,912
Cash and investment securities, pledged 13,693 14,287
Property and equipment, net 12,586 13,004
Deferred site development costs 60,203 58,890
Intangible assets relating to acquired businesses, net 432 438
Other assets 2,031 1,900
-------- --------
Total Assets $ 98,005 $ 98,431
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LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities:
Revolving credit loan $ -- $ --
Current portion of long term debt 111 111
Accounts payable 8,173 8,997
Accrued liabilities 14,193 14,801
Deferred site maintenance, current portion 1,524 2,842
Income taxes payable 365 91
-------- --------
Total current liabilities 25,867 26,842
Long term debt, excluding current portion 40,511 39,872
Deferred site maintenance, excluding current portion 18,241 18,337
Commitments and contingencies
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 shares issued and outstanding -- 3,000
Common stock, $.01 par value, 25,000,000 authorized, 13,498,429
and 8,462,533 shares issued and outstanding, respectively 134 85
Additional paid-in capital 52,591 47,701
Retained earnings (deficit) (37,839) (37,407)
-------- --------
Total shareholders' equity 14,887 13,380
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Total Liabilities and Shareholders' Equity $ 98,005 $ 98,431
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
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AMERICAN ECOLOGY CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
($ in 000's except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1998 1997
---- ----
<S> <C> <C>
Revenues $ 9,644 $ 9,629
Operating Costs 6,079 6,329
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Gross profit (loss) 3,565 3,035
Selling, general and administrative expenses 4,042 4,292
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Loss from operations (477) (992)
Investment (income) (325) 42
(Gain) on sale of assets (35) --
Other (income) (184) (83)
Loss before income taxes 67 (951)
Income tax benefit 145 (43)
------- -------
Net income (loss) (78) (908)
Preferred income stock dividends 105 186
------- -------
Net income (loss) available to common
shareholders (183) (1,094)
======= =======
Basic earnings per share $ (.01) $ (.14)
======= =======
Diluted earnings per share $ (.01) $ (.14)
======= =======
Dividends paid per common share -- --
</TABLE>
See notes to consolidated financial statements.
4
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AMERICAN ECOLOGY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
($ in 000's)
<TABLE>
<CAPTION>
Three Months Ended March 31,
1998 1997
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (78) $ (908)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 783 919
Gain on sale of assets -- --
Changes in assets and liabilities:
Receivables 209 2,328
Investment securities classified as trading 547 737
Other assets 193 367
Accounts payable and accrued liabilities (3,758) (2,515)
Income taxes payable 274 (33)
Deferred site maintenance (97) (282)
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Total adjustments 147 1,521
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Net cash provided by (used in) operating activities 69 613
------- -------
Cash flows from investing activities:
Capital expenditures (247) (180)
Site development costs, including capitalized interest (1,313) (551)
Proceeds from sales of property and equipment -- --
Proceeds from the sale of investment securities -- 434
Transfers from cash and investment securities, pledged -- (169)
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Net cash used in investing activities (1,560) (466)
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Cash flows from financing activities:
Proceeds from issuances of indebtedness 6,346 5,800
Proceeds from rights offering 1,996
Repayments of indebtedness (5,064) (5,693)
Payment of cash dividends -- --
------- -------
Net cash provided by (used in) financing activities 1,282 (107)
------- -------
Increase (decrease) in cash and cash equivalents (209) 254
Cash and cash equivalents at beginning of period 366 185
------- -------
Cash and cash equivalents at end of period $ 157 $ 439
======= =======
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest, net of amounts capitalized $ -- $ --
Income taxes 2 --
</TABLE>
See notes to consolidated financial statements.
5
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AMERICAN ECOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATION.
The accompanying unaudited financial statements have been prepared by the
Company pursuant to the rules and regulations of the Securities and Exchange
Commission. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations. In the opinion of management, all adjustments and disclosures
necessary to a fair presentation of these financial statements have been
included. These financial statements should be read in conjunction with the
financial statements and notes thereto included in the Company's 1997 Annual
Report on Form 10-K for the year ended December 31, 1997, as filed with the
Securities and Exchange Commission.
Certain reclassifications have been made in prior period financial statements to
conform to the current period presentation.
NOTE 2. TERM LOAN AND LONG-TERM DEBT.
Long term debt at March 31, 1998 and December 31, 1997 consisted of the
following (in thousands):
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
---- ----
<S> <C> <C>
Secured bank credit facility $ 39,922 $ 39,257
Capital lease obligations and other 700 726
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$ 40,622 $ 39,983
Less: Current maturities (111) (111)
-------- --------
Long-term debt $ 40,511 $ 39,872
</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>
1998 $ 111
1999 5,119
2000 34,991
2001 401
--------
Total $ 40,622
</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. The agreement
to lend the
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Company up to a maximum of $38,000,000 does not constitute new debt, but is a
restructuring of existing debt plus some additional availability solely for the
capitalization of accrued interest and certain fees.
At March 31, 1998 the outstanding balance of the Company's total debt was
$39,979,000. Since October 31, 1996, total interest accrued at 7 percent in the
amount of $3,675,000 has been capitalized into the Term Loan. Additionally,
interest accrued at an incremental rate of 3 percent on the entire amount of the
debt outstanding since October 31, 1996 amounted to $1,575,000 at March 31,
1998.
In exchange for extending the terms, the bank received warrants, exercisable
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.
At March 31, 1998 the Company had issued letters of credit with an outstanding
face value of $4,297,000, including $1,798,000 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.
Based on the final financial results at March 31, 1998 the Company was in
compliance with all of its bank covenants. For the months of January and
February 1998, the Company was in default of certain of its bank covenants, as
described in the Third Amended and Restated Credit Agreement, for the periods
ended January and February 1998. These defaults were as follows:
Section 7.01(c) Borrowing Base Certificate & A/R and A/P Summary Schedules:
Submit Borrowing Base Certificates and a summary report of all Receivables and
Payables within 15 business days of the end of each month.
Section 8.08 Minimum EBITDA: Maintain Consolidated EBITDA on the last day of
each calendar quarter in 1998 to be $1,000,000 or more, and on the last day of
each month in 1998 to be $250,000 or more.
The following occurred at:
January 31, 1998 $ 65,000 in default of monthly bank covenant
February 28, 1998 $ 299,000 in default of monthly bank covenant
Section 8.09 Minimum Net Worth: Maintain a minimum net worth of $11,380,000 in
1997 and $13,380,000 in 1998.
The following occurred at:
January 31, 1998 $ 69,000 in default of monthly bank covenant
The Company received a waiver from its bank for all of the defaults in covenant
provisions, through March 25, 1998. The Company continues to be unsure about its
future financial position and cannot assert that it will not be in default of
certain covenant provisions again in the future.
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NOTE 3. DEFERRED SITE DEVELOPMENT COSTS.
The Company has been selected to locate, develop and operate the low-level
radioactive waste ("LLRW") facilities for the Southwestern Compact ("Ward Valley
facility") and the Central Interstate Compact ("Butte facility").
The license application for the Southwestern Compact was approved by the
California Department of Health Services ("DHS") in September 1993. All costs
related to the development of the Ward Valley facility have been paid and
capitalized by the Company. As of March 31, 1998, the Company had deferred
$52,631,000 (54% of total assets) of pre-operational facility development costs
of which $10,910,000 was capitalized interest. These deferred costs relating to
the development of the Ward Valley facility are expected to be recovered during
the facility's first 30 years of operating from future waste disposal revenues
based upon disposal fees approved by the DHS in accordance with existing state
rate-base regulations. The disposal fee approval process is expected to include
an independent prudency review of all the pre-operational costs incurred by the
Company prior to their inclusion in the rate-base. The Company expects all of
the costs which it has deferred for this facility, plus additional unrecognized
project interest costs to be included as a component of the rate-base; however,
there can be no assurance that all of the costs will be approved by the DHS.
Allowable costs incurred by the Company for the development of the Butte
facility are reimbursed under a contract with the Central Interstate LLRW
Compact Commission ("CIC") and are recognized as revenues. Substantially all
funding to develop the Butte facility is being provided by the major generators
of waste in the CIC. As of March 31, 1998 the Company has contributed and
deferred approximately $7,572,000 (8% of total assets), of which $1,481,000 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. Amendment three of the contract provided $31,100,000 in additional
funding and, at the time that amendment was executed, was expected to be
sufficient to fund the project up to a licensing decision. That amendment gave
the CIC the right to terminate the contract with ten days notice in the event a
licensing decision was not reached. In late October 1997 the state issued their
draft evaluation of the application and amendment four of the contract was
executed which provided additional funding on a monthly basis. The Company is
negotiating with the CIC for longer term funding. 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 (SFAS) 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
during the three month period ended March 31, 1998 and 1997 was $875,944 and
$902,000, respectively.
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NOTE 4. EARNINGS PER SHARE.
Net Income (Loss) Per Share. In February 1997, the Financial Accounting
Standards Board issued SFAS No. 128 "Earnings Per Share," which supercedes APB
Opinion 15. This statement, with new standards is effective for annual periods
ending after December 15, 1997. The Company is required to restate all periods
presented. The adoption of SFAS No. 128 by the Company did not have a material
effect on earnings per share.
SFAS 128 changes the manner in which earnings per share (EPS) amounts are
calculated and presented. SFAS 128 greatly simplifies the computations and
conforms the determination and presentation of EPS data with the standards of
many other countries and with international accounting standards. Under the new
rules, two EPS amounts are required: (1) basic EPS; and (2) diluted EPS.
Basic EPS is simply the per share allocation of income available to common
stockholders based only on the weighted average number of common shares actually
outstanding during the period. Diluted EPS represents the per share allocation
of income attributable to common stockholders based on the weighted average
number of common shares actually outstanding plus all dilutive potential common
shares outstanding during the period.
The calculation of net loss per common share for the three months ended March
31, 1998 and 1997, respectively, is as follows:
<TABLE>
<CAPTION>
(000'S EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED
MARCH 31,
---------
1998 1997
---- ----
<S> <C> <C>
Net loss $ (78) $ (908)
======== ========
Weighted average shares outstanding:
Common shares outstanding at end of period 10,596 8,015
-------- --------
Shares used in computing earnings (loss) per share 10,596 8,015
======== ========
Basic EPS $ (.01) $ (.14)
======== ========
Diluted EPS $ (.01) $ (.14)
======== ========
</TABLE>
NOTE 5. 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 in Part II, Item 1., 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 in Part II,
Item 1., 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 administrative proceeding cannot be predicted with
certainty, management is unable to conclude that the ultimate
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outcome, if unfavorable, of the litigation and other matters described herein,
will not have a material adverse effect on the operations or financial condition
of the Company.
NOTE 6. PREFERRED STOCK
In November 1996, the Company issued 300,000 shares of Series E Redeemable
Convertible Preferred Stock ("Series E") in a private offering to four of its
directors for $3,000,000 in cash. The Series E bore an 11.25% annual dividend,
paid quarterly in shares of the Company's common stock. The Series E was issued
to fulfill a requirement of the Third Amended and Restated Credit Agreement with
Chase Bank of Texas ("Bank Agreement") to raise $3 million of new equity by
year-end 1996. There were no voting rights or powers attached to this 11.25%
Series E Preferred Stock.
On December 30, 1997 the Company registered with the Securities and Exchange
Commission, a shareholder rights offering to each of its shareholders as of
December 8, 1997 affording each shareholder the right to purchase one share of
the Company's common stock for $1.00 for each share they owned on December 8,
1997. The shareholder rights offering fulfilled a requirement of the Bank
Agreement that the Company use its "best efforts" to raise an additional $2
million of new equity in 1997. The shareholder rights offering concluded on
February 10, 1998.
The Company sold 3,912,936 shares of its common stock in the rights offering;
2,912,936 for cash at $1.00 each and 1,000,000 by tender of 100,000 shares of
Series E in lieu of cash payment in accordance with the terms of the Series E.
Of the remaining 200,000 shares of Series E, 91,294 were redeemed at $10.00 each
and 108,706 were converted into 1,087,060 shares of common stock of the Company.
The partial redemption and mandatory conversion of the remaining Series E at the
conclusion of the rights offering was a term of the Series E Designation
Certificate. As a result of the rights offering and Series E conversion, the
Company now has approximately 13,498,429 shares of common stock outstanding at
March 31, 1998.
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 $1,039,000 and $934,000 at March 31, 1998 and December
31, 1997, 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 one
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 minimus.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
The following discussion contains trend information and other forward looking
statements that involve a number of risks and uncertainties. The Company's
actual results could differ materially from the Company's historical results of
operations and those discussed in the forward looking comments. Factors that
could cause actual results to differ materially are included, but are not
limited to, those identified in Notes 2, 3 and 5 to the Consolidated Financial
Statements herein, Part II, Item 1. Legal Proceedings, and the discussion below.
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CAPITAL RESOURCES AND LIQUIDITY
In the last three years the Company has incurred losses from operations, and has
had continuing difficulty in generating enough cash to meet the obligations of
doing business. In 1995, and then again in 1996, the Board of Directors provided
a capital infusion, in exchange for preferred stock of American Ecology
Corporation. In February 1998, the Company completed a Rights Offering which
generated over $2 million of new working capital. These capital contributions
have totaled $10 million, and still the ongoing losses have resulted in working
capital deficits. The working capital deficits were $16,807,000 and $16,930,000
at March 31, 1998 and 1997.
The Company cannot be certain about its ability to improve short-term operating
results. The Company's financial statements as of March 31, 1998, contain no
adjustments to the asset carrying amounts but, certain reserves have been made
for litigation issues. Management's actions and plans to address these issues
are as follows:
CREDIT AGREEMENT
A Third Amended and Restated Credit Agreement was executed on December 31, 1996,
but dated effective October 31, 1996 between the Company and its bank lender,
Chase Bank of Texas. This Credit Agreement extends the maturity of the credit
agreement to December 31, 2000, and modifies certain other terms. A description
of the Credit Agreement as so amended is set forth in Note 2 to the Consolidated
Financial Statements. As of March 31, 1998, the Company had available borrowings
of $189,000 under its Credit Agreement.
STRATEGIC PLAN
The Company has adopted a strategic plan focusing on its low-level radioactive
waste services. Its hazardous and non-hazardous waste disposal and processing
operations are reported as Chemical Services. The Company is continuing to
improve as reorganized under those respective service divisions. The
reorganization started in 1996 and continues but, was started to facilitate
potential strategic alliances with other companies that may provide additional
sources of capital and open greater opportunities. The Chemical Services has not
been as profitable as LLRW services. Management continues to monitor and study
the performance of both Chemical and LLRW services along with industry standards
and market fluctuations. These studies will provide useful information for
management to determine how to organize each service division in the future. In
general, the studies indicate a decline of waste volumes nationwide, and
management is preparing to meet the ever changing industry.
MEASURES TO REDUCE COSTS
Management continues to implement its aggressive plan which started in 1995. The
Company has sized up its position to the surrounding market, where customer
potentials have been measured, where managing the Company can be improved and as
a result, unprofitable divisions have been either eliminated or reorganized to
be efficient and effective. The reorganized divisions have been dissected and
analyzed to measure break-even points, maximum revenues from customers, and
optimum operating levels to maximize profitability. These variables of operation
for the Company have been adjusted and measured to fit the changing times of the
environmental industry. The waste generators are generating less waste now due
to both Federal and State constricting the areas in the regulations where
generators were relaxed about disposal practices. These environmental
proceedings and regulations have forced all of the environmental companies to
evaluate their part in the industry. The outcome in many areas is difficult to
forecast, but the management of the Company and the strategic plans include the
flexibility to adapt to these industry changes.
The Chemical Services division has not been profitable in over two years. This
performance is being monitored very closely, and the changes to compensate for
these lost earnings are being implemented strategically, so not to upset the
monthly revenues. AET Transport, has focused on servicing transportation for
both hazardous and non-hazardous customers in the Gulf Coast market. This market
has been on the decline and it has been difficult for the Company to be
successful from the Houston, Texas area. The Company has relocated most of AET
operations to the Robstown, Texas area to work in conjunction with Texas
Ecologists landfill. This effort resulted in layoffs of personnel and a
reduction in direct costs to the transportation business.
At the Winona facility, the Company continues to close the facility under both
State and federal regulations. The Company has been cleaning the site and the
equipment to maximize the proceeds from the sale of these assets. These proceeds
from the sale are being used to fund the efforts of further closure and
post-closure. This effort helps
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offset the negative cash flow at this Winona site. There can be no assurance
that the sale of the assets will result in a favorable outcome, and there may
still be a need for the Company to supply additional funding for the Winona site
through the closure and post-closure periods.
The Company continues to evaluate the viability of certain other operations, and
their current potential to perform at an acceptable level of profitability.
In the plan, a new budget was made for 1998. Capital expenditures were limited
in 1997 and for 1998 to the development of the Ward Valley Project, certain
regulatory obligations, and required operational repairs.
The Company believes its plan will improve both cost structure and operating
results. However, considering the Company's recent losses and insufficient cash
flow from operations, there can be no assurance that this plan will resolve the
Company's liquidity problem in a timely fashion.
FUTURE CONSIDERATIONS
The Company believes that the future operating results of its existing LLRW
businesses will improve, although no assurances can be given that such
improvements will occur. The Company will continue with the Chemical Services
but the losses being suffered may require immediate attention during the next
few months of 1998.
The Company is currently in negotiations, for the disposition of legacy waste
with the State of Tennessee Department of Environment and Conservation division
of Radiological Health. Legacy waste, for purposes herein, is that waste that
was on site when the Company acquired Quadrex and waste since generated by the
Company and not disposed of. The objective of negotiating with the State of
Tennessee DEC is to come to a reasonable term for both parties to remove this
waste. The Company has processed most of the waste but does not have the cash
flow to pay for disposal costs. The Company signed a contract in February, 1997
with another disposal company that is licensed to accept this waste. The terms
of this agreement include paying an additional amount of approximately $800,000
to dispose of legacy waste before May 1998. The terms are such that the Company
is responsible for the payment even if it does not dispose of $800,000 of waste.
The terms of this agreement have now been extended until November 1998. This
arrangement will provide for a considerable cost savings to dispose of the
legacy waste. In September 1997, the Company made a complete count and
reevaluation of the inventory liability at the Oak Ridge, Tennessee Recycle
Center. The count was thorough and included all aspects of the costs included to
process and remove the waste from the facility. The largest hurdle is for the
Company to have enough cash available to pay for the disposal. The Company has
provided for a recorded liability in the amount of $5,567,000 for the waste
processing and burial of waste now on site at the Recycle Center. The Company
continues to seek alternative methods of disposal that may be less costly and
still within federal and state regulations. Should the Company be unsuccessful
in these attempts, it is believed that there is an adequate accrual reserved.
RESULTS OF OPERATIONS - THREE MONTHS ENDED MARCH 31, 1998 AND 1997
The Company reported a net loss of $78,000 for the three months ended March 31,
1998 compared to a net loss of $908,000 for the three months ended March 31,
1997. This is a marked improvement over the prior year first quarter, since
revenues increased only $15,000 from the first quarter of 1997 to the same
period of 1998.
REVENUES
Revenues for the first quarter of 1998 increased $15,000, which is less than 1%,
compared to the first quarter of 1997.
Low-level radioactive waste ("LLRW") revenues declined $169,000, about 3% in the
first quarter of 1998 compared to the same quarter of 1997. LLRW remediation
project revenues increased at Richland and Nebraska, but declined $878,000 at
the Oak Ridge Recycle Center. Revenues for the Richland, Washington, facility
were $2,327,000 compared to $1,797,000 for the first quarter a year ago.
Chemical Division waste revenues increased $345,000 for the three months ended
March 31, 1998, compared to the same three months ended in 1997. Disposal
revenues generated by the Company's chemical waste landfill
12
<PAGE> 13
operation in Beatty, Nevada, increased by approximately $587,000 due principally
to the rate reduction on fees by the State of Nevada but, the costs incurred for
closing the Winona, Texas facility without any revenue remain a burden.
OPERATING COSTS
Total operating costs decreased $515,000 or 8% for the first quarter of 1998 as
compared to the first quarter of 1997 for a variety of reasons. Operating costs
increased almost 44% at Beatty, Nevada but, declined at AET transport,
Surecycle, Winona, and Oak Ridge. Operating costs as a percentage of revenue
were 63% for the three months ended March 31, 1998 compared to 69% for the same
quarter of 1997. The many efforts exercised by both Chemical and LLRW divisions
should allow for continued improvement in the next quarter. The Company as a
whole has demonstrated a positive trend in operating results even when revenues
had declined in prior periods by recapturing a portion of the market share lost
and monitoring all costs closely. In addition to regaining market share, the
Company continues making every effort to analyze each aspect of the two
operating divisions and determine how they can maximize operating performance.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
For the quarter ended March 31, 1998 selling, general and administrative
expenses ("SG&A") increased only $15,000 as compared to the quarter ended March
31, 1997.
During the same period, corporate overhead decreased by approximately $304,000
due to reductions in corporate personnel, a decrease in amortization of deferred
debt issuance costs and other cost saving measures taken by the Company over the
last 12 months as described under the caption Capital Resources and Liquidity.
INVESTMENT INCOME
Investment income is comprised principally of interest income earned on various
investments in securities held-to-maturity, dividend income, and capital gains
and losses earned on the Company's stock portfolio classified as trading
securities. As of March 31, 1998 the Company reported an unrealized gain of
$47,000 on investments. The realized gains or losses on securities
available-for-sale are included as a component of investment income when
realized.
INCOME TAXES
The Company's effective income tax (benefit) rates for the three months ended
March 31, 1998 was 46% and (5)% for the same period one year ago. The effective
benefit rate of (5)% in 1997 does not reflect any recognition of future tax
benefits on timing differences or net operating loss carryforwards. The Company
still has available certain net operating loss carryforwards that can be applied
in future periods of profitability.
13
<PAGE> 14
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
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 and regulations to which its
operations are subject, or, are the result of different interpretations of the
applicable requirements.
In addition to previously reported litigation, 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 established reserves for certain of the matters previously
reported and for certain anticipated legal fees, based on management's estimates
of the outcome. During the course of legal proceedings, estimates with respect
to the matters may change. While the outcome of any particular action or
administrative proceeding cannot be predicted with certainty, management is
unable to conclude that the ultimate outcome, if unfavorable, of the litigation
and other matters previously reported, will not have a material adverse effect
on the operations or financial condition of the Company.
Except for the matter discussed below, there were no material developments with
respect to previously reported legal proceedings.
PEOPLE OF THE STATE OF ILLINOIS EX REL. JAMES E. RYAN, ATTORNEY GENERAL AND
THOMAS W. ORTCIGER, DIRECTOR OF THE ILLINOIS DEPARTMENT OF NUCLEAR SAFETY V.
AMERICAN ECOLOGY CORPORATION AND US ECOLOGY, INC., CASE NO. 97MR30. On November
3, 1997, the State of Illinois sued the Company and US Ecology in the Circuit
Court of Bureau County, Illinois for failing to provide $2,000,000 in letters of
credit as a financial assurance bond in regard to the Company's closed
Sheffield, Illinois LLRW facility and to prevent the Company from transferring
the site to the state as scheduled in May 1998. In 1988 the Company settled the
long-standing litigation with the State of Illinois regarding this facility. In
accordance with the settlement agreement, the Company has maintained the
facility and paid to Illinois nearly $2,500,000 million to be used for long term
care of the facility after such responsibility is transferred to the state in
May 1998. The settlement agreement also obligates the Company to provide a
letter of credit in a decreasing amount, which is presently $123,000 to secure
certain closure costs if the Company fails to meet certain financial tests
relating to working capital, debt-equity ratio and net worth. The state claims
that the Company has failed to meet some or all of these tests and that this
letter of credit thus is required. The state has also claimed that a second
letter of credit in the amount of $1,900,000 is also required because the
financial covenants have not been met and that the provision of both letters of
credit is a precondition to the state's acceptance of the site.
The Company has provided the decreasing letter of credit. The Company has
asserted that the $1,900,000 letter of credit is only required when both (a) one
or more of the environmental triggering events listed in the settlement
agreement have occurred, and (b) the financial tests are not met. The state does
not allege that any of these environmental triggering events has occurred, and
the Company believes that the likelihood of such an event ever occurring is
remote. Although the state has taken a contrary position, the Company believes
that the settlement agreement clearly excludes the posting of the letters of
credit as a condition of transfer of the facility and that the Company has
performed all the conditions required for transfer.
The issues presented by this case were argued to the Court on cross motions for
summary judgment. The Court ruled on April 9, 1998 that the Company breached the
terms of the Settlement Agreement by not posting the $1,900,000 letter of credit
and therefore the state is not required to assume ongoing maintenance
responsibilities. The Court also ruled that the Company can amend its
counterclaims to seek use of the funds it has paid the state for the purpose of
defraying ongoing maintenance costs. Finally, the Court urged the parties to
reach a settlement in the matter and the Company has made a proposal to the
state.
14
<PAGE> 15
ITEM 2. CHANGES IN SECURITIES.
The Third Amended and Restated Credit Agreement provides that the Company
shall not make or declare any dividends or other distribution on any class of
stock, except a dividend payable solely in shares stock, warrants, rights, or
options to acquire shares.
As previously reported on Form 8-K November 26, 1996, the Company issued
300,000 shares of Series "E" Redeemable Convertible Preferred Stock ("Series E")
to two of its directors in exchange for $3,000,000.00 in cash. Subsequently, one
director sold a total of 35,000 Series E shares to two other directors at the
original stated value of $10.00 per share. The Series E provides for a
mandatory dividend of 11.25% annually, payable quarterly in common stock of the
Company. Dividends paid with respect to the Series E for the first quarter of
1998 were 35,901 shares at a value of $1.056 per share. The dividend was paid
through and including February 10, 1998, the date on which the Company's
shareholder rights offering concluded.
At the conclusion of the shareholder rights offering, Series E preferred
stock not exchanged therein as do payment of subscription to the right to
purchase common stock, or redeemed from excess proceeds, was a mandatory
conversion to common stock of the Company. Accordingly, 108,706 shares of
Series E preferred stock was converted into 1,087,059 shares of the Company's
common stock. Please refer to footnote 6 of the financial statements herein for
a discussion of the shareholder rights offering.
In each instance, the Company is relying on Section 4(2) of the Securities
Act and Rule 506 thereunder to qualify for exemption from registration of the
common stock issued.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None
ITEM 5. OTHER INFORMATION.
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
a. Exhibits
27 Financial Data Schedule
b. Reports on Form 8-K
None
15
<PAGE> 16
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: May 14, 1998 By: /s/ Jack K. Lemley
------------------
Jack K. Lemley
Chief Executive Officer
Date: May 14, 1998 By: /s/ R. S. Thorn
---------------
R. S. Thorn
Vice President of Administration
Chief Accounting Officer
16
<PAGE> 17
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
27 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1997
<PERIOD-END> MAR-31-1998 MAR-31-1997
<CASH> 157 439
<SECURITIES> 0 331
<RECEIVABLES> 7,720 8,025
<ALLOWANCES> 1,502 1,224
<INVENTORY> 0 0
<CURRENT-ASSETS> 9,060 10,147
<PP&E> 12,586 13,622
<DEPRECIATION> 783 919
<TOTAL-ASSETS> 98,005 95,780
<CURRENT-LIABILITIES> 25,867 26,703
<BONDS> 0 0
134 80
0 0
<COMMON> 1 3,001
<OTHER-SE> 14,752 12,309
<TOTAL-LIABILITY-AND-EQUITY> 98,005 95,780
<SALES> 9,644 9,629
<TOTAL-REVENUES> 9,644 9,629
<CGS> 6,079 6,329
<TOTAL-COSTS> 4,042 4,292
<OTHER-EXPENSES> (399) 3,035
<LOSS-PROVISION> 78 908
<INTEREST-EXPENSE> 0 0
<INCOME-PRETAX> 67 (951)
<INCOME-TAX> 145 (43)
<INCOME-CONTINUING> 0 0
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (183) (1,094)
<EPS-PRIMARY> (.01) (.14)
<EPS-DILUTED> (.01) (.14)
</TABLE>
