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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
ANNUAL REPORT UNDER SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR FISCAL YEAR ENDED DECEMBER 31, 1997 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 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 March 26, 1998, Registrant had outstanding 13,498,429 shares of its
Common Stock. The aggregate market value of the Registrant's voting stock held
by non-affiliates at this date was approximately $11,305,918 based on the
closing price of $1.875 per share as reported on the Nasdaq Stock Market, Inc.'s
National Market System. For purposes of the foregoing calculation, all directors
and officers of the Registrant have been deemed to be affiliates, but the
Registrant disclaims that any of such directors or officers is an affiliate.
Documents Incorporated by Reference
Portions of the Proxy Statement for 1998 Annual Meeting of Stockholders.
Part III
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PART I
ITEM 1. BUSINESS
American Ecology Corporation and its subsidiaries (hereinafter collectively
referred to as the "Company" unless the context indicates otherwise) provide
processing, packaging, transportation, remediation and disposal services for
generators of hazardous waste and low-level radioactive waste. Hazardous waste
consists primarily of industrial waste, including waste regulated under the
Resource Conservation and Recovery Act of 1976, as amended ("RCRA"), the
Comprehensive Environmental Response, Compensation and Liability Act of 1980
("CERCLA" or "Superfund"), and the Toxic Substance Control Act ("TSCA").
Low-level radioactive waste ("LLRW" or "low-level waste") consists of materials
contaminated with low-levels of radioactivity and is generated by nuclear power
facilities, industry, hospitals, universities, laboratories and other research
facilities. In 1997, 39% of the Company's revenues were derived from hazardous
waste services and 61% of the Company's revenues were derived from LLRW
services.
The Company generally performs its operations through its wholly owned
subsidiaries. The Company's material subsidiaries are: US Ecology, Inc., a
California corporation ("US Ecology"), Texas Ecologists, Inc., a Texas
corporation wholly owned by US Ecology ("Texas Ecologists"); American Ecology
Recycle Center, Inc., a Delaware corporation ("AERC"), American Ecology
Environmental Services Corporation, a Texas corporation ("AEESC"), and American
Liability and Excess Insurance Company, a Vermont corporation.
The Company and its predecessors have been in business for over 40 years.
The company was originally incorporated in California in October 1983. In May
1987, the Company was reincorporated as a Delaware corporation by merger into a
newly formed wholly owned subsidiary incorporated in Delaware for that purpose.
The following table indicates the site locations where Chemical and LLRW
principal services are performed.
<TABLE>
<S> <C> <C>
CHEMICAL SERVICES
FACILITY LOCATION SERVICES
- -------- -------- --------
US Ecology Beatty, Nevada Closed the First LLRW Landfill in the United States
Currently Operates a Chemical Hazardous Waste Landfill
Texas Ecologists Robstown, Texas Landfill for Hazardous and Class 1 Non Hazardous Waste
Surecycle(R) Robstown, Texas Brokerage Services for Hazardous and Non Hazardous Waste
AET Transportation Pasadena, Texas Provides Transportation Services for Hazardous and Non
Hazardous Waste
AEESC Winona, Texas Closed Facility - March 17, 1997
LLRW SERVICES
FACILITY LOCATION SERVICES
- -------- -------- --------
US Ecology Richland, Washington LLRW Hazardous Landfill
US Ecology, Mid- West Oak Ridge, Tennessee Brokerage Services for LLRW
Brokerage
AERC Oak Ridge, Tennessee Provides LLRW Processing, Packaging, Surveying, and
Large Motor Rebuilding
</TABLE>
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CHEMICAL AND HAZARDOUS WASTE SERVICES
The Company provides a variety of hazardous waste management services to
its customers including stabilization, solid waste disposal, transportation, and
brokerage. The Company's customers are generally in the chemical, petroleum,
pharmaceutical, manufacturing, electronics and transportation industries.
The hazardous waste management services provided by the Company are
generally performed pursuant to non-exclusive service agreements that obligate
the Company to accept hazardous waste from the customer. Fees are determined by
such factors as the chemical composition and volume or weight of the wastes
involved, the type of transportation or processing equipment used and distance
to the processing or disposal facility. The Company periodically reviews and
adjusts the fees charged for its services.
The Company competes with several very large U.S. companies. The largest,
Waste Management, Inc., has agreed to an acquisition by USA Waste, and the terms
are currently being reviewed by the Department of Justice. USA Waste provides
many services including residential, commercial, and roll-off industrial waste
collection and disposal. They consume the majority of the waste and hazardous
waste market in the United States with other competitors like Browning-Ferris
Industries, Inc. There are about five or six major waste and hazardous waste
companies which consume the greater majority of the market. American Ecology
Corporation is very small in relation to the competition and does not yet
provide residential waste services.
Hazardous Waste Disposal has undergone some very significant changes since
the implementation of the Resource Conservation and Recovery Act of 1976, as
amended ("RCRA"). New regulations have been promulgated that have imposed land
disposal restrictions forcing generators to minimize waste and encourage reuse
and recycling. As a consequence of this, national hazardous waste generation
rates have continued to decline both in the number of generators and the volume
of waste generated.
On a national level for the period 1994 through 1997, hazardous waste
generation is down approximately 30 percent, while the number of generators is
down 11 percent. The number of treatment, storage, and disposal companies has
declined a remarkable 49 percent marking a significant exit from and
consolidation in the market, and that trend seems to be continuing.
As a consequence of reduced volumes, competition, surplus disposal
capacity, and innovative technologies, both gross revenues and disposal price
yield have eroded significantly. On a consolidated basis for the Company's
Chemical Division, gross revenues have declined 66 percent from $49,908,000 to
$16,820,000 for the period 1994 to 1997. Nationally, disposal prices have
declined about 66 percent per ton for the same period. The Company's Beatty
disposal price has declined approximately 64 percent, and TECO disposal price
has declined approximately 38 percent.
In order to meet the challenges of the changing industry, the Company has
adjusted site operations to better manage direct costs and S,G&A.
These declines in waste volumes may be attributed to a number of factors,
key ones being noted below:
Site Locations - Transportation Costs. The locations of TECO and Beatty
present additional transportation costs and downward pressure on disposal
pricing. Depending on our customer's location, the transportation cost may
exceed the disposal cost on a unit basis. In order to retain market share and
secure business, the high transportation cost is subsidized by lowering the
disposal cost. Due to the high fixed costs relating to the disposal cell coupled
with the operating costs to manage the waste, the total transportation and
disposal cost has to be in concert with our competitors' pricing strategies.
The Beatty facility relies totally on vendor trucking and is unable to
compete with competition which has vertically integrated transportation and
disposal operations. Slow payment of vendor invoices due to limited cash
resources also limits the ability of the site to secure good transportation
pricing.
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Reclassification of Waste Streams. The hazardous waste disposal regulations
are constantly changing and as a consequence more authority is being vested with
the generator to correctly classify the waste stream. Additionally, large
generators have been able to influence the federal regulations and had their
wastes reclassified from hazardous waste to non-hazardous waste. The Company has
experienced this with large quantity generators and this has resulted in reduced
volumes and reduced revenues.
Waste Minimization. The waste generators have been actively pursuing
technologies and processes that produce minimal waste, and if there is waste, to
recycle it within the system. Due to this aggressive posture by the industry,
waste minimization is also impacting the quantity of waste that is available for
disposal, nationwide.
Loss of Customers. As a result of the decline in the financial performance
of the Company, coupled with the adverse publicity associated with the Winona
facility, some customers have elected not to use the Company's facilities. This
problem is more prevalent in Texas than in California.
State Fees and Regulations. State fees and taxes are a very important cost
to a customer when he is looking at multiple options for disposal. If exorbitant
state fees are prevailing such as they were in Nevada, the Company cannot be
competitive and consequently will lose business to competitors. While the Nevada
Environmental Commission recently approved, in the fourth quarter of 1997, an
average 43 percent overall reduction in state fees, it is too soon to predict
the effect it will have on business volume. Fortunately, the fees in Texas are
very similar to the fees in Louisiana and Oklahoma, therefore, they are not much
of a factor.
Company Market Share. Market share for the two company operated commercial
hazardous waste landfill disposal sites in the United States is varied in nature
on the basis of approved permits. For the Beatty facility the market share is
California for the hazardous and non-hazardous waste and national for PCB
related waste. Approximately 70 to 80 percent of the waste received at Beatty is
generated in California. The TECO hazardous and non-hazardous waste market is
generally in-state and mostly local to the Corpus Christi area. TECO receives
approximately 10 percent of the non-hazardous waste generated in Texas and about
4 percent of the hazardous waste generated in the state. The balance of the
non-hazardous waste is disposed at competitor operations or Municipal Solid
Waste landfills that have received special permission.
The bulk of the hazardous waste generated in the United States is waste
water liquids (greater than 95 percent of the total) and the landfill component
approaches only 1 percent of the total.
Hazardous and non-hazardous waste market trends are continually driven by
new regulations, changes in regulations, available disposal capacity, recycling
and reuse technology development, and disposal pricing. It is abundantly clear
that the volume of hazardous waste generated annually is declining, and the
available market is shrinking. This volume decline is resulting from a concerted
effort by the industry to minimize waste generation in general, and to encourage
the reuse of waste as by-product for other processes. Additionally, various
industry sectors have influenced a revision of regulations and consequently have
been able to reclassify waste streams.
Historically, one of the key hazardous waste generating sectors has been
the large remediation projects. A recent study published by the General
Accounting Office indicates that the trend to exhume and clean up sites is
generally on the decline if not completely over. The key test for remediation at
sites is now headed in the direction of risk based assessment standards and that
will eventually qualify a significant number of sites to remain in situ. This
transition in thinking has brought about a near collapse of the environmental
remediation business on a national level, and concurrently a decline in the
available waste volume for landfill disposal.
On a national level there is a surplus of disposal capacity. Sites that
traditionally were seeing business on a national level have experienced
significant declines. Geographic influences have affected regional areas in
nature, and now national exposure generates only limited business with the
exception of TSCA-PCB related waste for the two Company facilities.
Regulatory changes are also playing a key role as they relate to land
disposal restrictions. Virtually all of the organic waste streams are precluded
from land disposal and that has had a significant impact on the market. The
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wastes are now directed to incineration, fuel blending, solvent recovery, or
recycling operations. Concurrently, allowing industry to reclassify waste
streams is also contributing to a reduction in available waste volume. There is
a strong likelihood that due to the reclassification activity the volume of
non-hazardous waste is going to continue to increase over the next five years.
Surplus disposal capacity will continue to drive disposal pricing downward
and force the regional concept noted above. Due to high base costs to develop
the disposal capacity and the associated infrastructure, sites with lower front
end costs are likely to see an increase in business due to pricing.
National Trends. Hazardous waste generation trends have been on a decline
since 1991. Information compiled by the USEPA and published biennially as the
Hazardous Waste Report summarizes the following data on a national level.
YEAR NO. OF GENERATORS VOLUMES IN TONS % VOLUME CHANGE
1991 23,426 306,000,000 --
1993 24,362 258,000,000 16% down
1995 20,873 214,000,000 17% down
For the period 1991 to 1995, hazardous waste generation has declined
approximately 30 percent nationally. For the same period 1991 to 1995, the
number of generators producing hazardous waste declined approximately 11
percent. This would suggest that the concerted effort of the industry to reduce
waste is certainly having an impact on the volume generated nationally.
Meanwhile, all of these market and industry changes have negatively impacted the
Company's Chemical Division.
STABILIZATION AND DISPOSAL SERVICES
The Beatty and Robstown facilities may dispose of only solid wastes, but
both facilities also have the ability to treat and stabilize waste prior to
disposal and operate transfer and staging facilities for delivery of
containerized waste for off-site disposals. Stabilization involves the mixing of
sludges and certain wet wastes with cement, lime or other solidifying and
stabilizing agents to prevent leaching under any conditions. These facilities
are sited, designed, constructed, operated and monitored to provide long-term
containment of the waste in accordance with regulatory requirements. The Company
also maintains two closed landfills in Sheffield, Illinois. See "Closed
Facilities" for more detailed information about these facilities. The following
sections describe the Company's active hazardous waste disposal facilities.
Beatty, Nevada Facility. The Company's Beatty, Nevada chemical and
hazardous waste landfill site is located on 80 acres of land 11 miles southeast
of Beatty, Nevada in the Amargosa Desert, approximately 100 miles northwest of
Las Vegas and 8 miles northeast of Death Valley and the California border. The
Company leases the site from the State of Nevada pursuant to a 1977 lease which
provided for an initial 20-year term, with a 10-year option for renewal. The
hazardous waste site was opened in 1970 and operates under authority from the
Nevada Department of Conservation and Natural Resources and the Environmental
Protection Agency's ("EPA") Region IX. It is also subject to regulations of the
U.S. Department of Transportation ("DOT") relating to methods of handling,
packaging and transporting chemical waste. The Company recently renewed the
lease for 10 years. The waste site is operated under license from the State of
Nevada. The State of Nevada charges waste fees which are deposited in state
maintained trust funds for closure, perpetual care and maintenance. The Company
does not control these two state funds, but the Company understands from State
of Nevada correspondence that these funds contained approximately $2.4 million
and $12 million, respectively, as of December 31, 1997.
The Beatty, Nevada facility had previously operated a low-level radioactive
waste (LLRW) landfill from 1962. Closure of the former low level radioactive
waste disposal site allowed the Company to transfer custody of the occupied
portion to the State while transferring the unused portion of the site to the
hazardous waste facility, thereby extending the life of the facility. The
Company received a letter dated December 30, 1997 from the Nevada State Health
Division accepting the transfer of American Ecology's radioactive waste disposal
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license for the Beatty facility. Return of the land of a disposal site is the
final part of the closely regulated life cycle of such a facility. It is
returned to the government licensing agency to ensure long-term land use
control. The event marks the first time a commercial low-level waste disposal
company in the United States has successfully completed all the work required to
close such a facility and return it to the nuclear licensing agency for
long-term care and control.
The Chemical waste facility has approximately, 164,000 cubic yards of
remaining permitted in place capacity available in the cell it is currently
operating. In addition, the facility is permitted for construction of an
additional cell with a capacity of 2.1 million cubic yards when that becomes
necessary. Most of the facility's chemical waste comes from California. Since
1996, the facility has been operating at a competitive disadvantage in the
California market because the State of California reduced the fees it charges
for chemical waste disposal in the State. However, in January of this year, the
Nevada Environmental Commission agreed to reduce the fees it charges to dispose
of chemical wastes in Nevada, an average of forty one percent. Although most
Nevada fees are still somewhat higher than California's, the Company believes
Nevada's action should help the Company regain some of the California market.
In 1997, 1996, and 1995, 58,000, 71,000, and 131,000 cubic yards of
waste, respectively, were disposed of at the facility. Disposal operations at
the Beatty site involve stabilization of certain wastes to meet land disposal
criteria, and the burial of chemical waste in secure landfill cells which are
engineered, constructed, operated and monitored so as to provide for the
long-term containment of the waste. On April 4, 1997 US Ecology received its
Part B renewal permit which is effective until 2002.
The Beatty site is one of seven landfill sites in the United States which
are authorized by the EPA under TSCA to receive and dispose of certain types of
solid polychlorinated biphenyls ("PCBs"). This authority was issued jointly to
the Company and the State of Nevada by EPA Region IX. The disposal of PCBs
accounted for approximately, 30% and 31% of the Beatty site's total volumes in
1997 and 1996, respectively. In 1995, the Company was issued a five-year renewal
permit which allows the Company to continue to dispose of non-liquid PCBs at the
Beatty site. In 1990, the Company received written confirmation from the EPA
that the Beatty site was currently authorized to accept CERCLA clean-up waste
for disposal.
Robstown, Texas Facility. The Company owns 400 acres of land near Robstown,
Texas, located 15 miles west of Corpus Christi, and operates a hazardous waste
disposal site on 240 acres of the land. The site is operated under the
regulations of, and a permit issued by, the Texas Natural Resource Conservation
Commission ("TNRCC"). In addition to TNRCC regulation, the site is subject to
EPA and DOT regulation. In 1988, the Robstown site received its RCRA Part B
permit. A proposed permit renewal is expected to go to public hearing by
September 1998. Disposal operations at the Robstown site involve the burial of
hazardous waste in secure landfill cells which are engineered, constructed,
operated, and monitored so as to provide for the long-term containment of the
waste.
Groundwater at the Robstown site is monitored through the use of an
extensive well system. In 1978, an analysis of the non-potable aquifer
underlying the site showed the presence of chemical contamination. The Company
has no evidence that the contaminants have migrated beyond the permitted site
boundaries and continues to address corrective action plans in connection with
the permitting process. The Company is currently operating a non-commercial
deep-injection well at the facility for the disposal of contaminated groundwater
and leachate in order to comply with its groundwater cleanup program.
The facility serves a wide range of industries including refining,
petrochemical, agricultural and manufacturing. In operation since 1972, the
facility has disposed of more than 900,000 cubic yards of hazardous waste and
there are approximately 28,000 cubic yards of remaining capacity. In 1997, 1996,
and 1995, 11,000, 41,000, and 47,000 cubic yards of waste, respectively, were
disposed of at the facility.
Winona, Texas Facility. The Winona facility, now a closed 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
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opposed to the facility includes numerous and duplicative lawsuits filed in
several jurisdictions. The Company believes that the number of lawsuits 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.
On December 31, 1994 the Company purchased this facility from Gibraltar
Chemical. 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 was never profitable. Management made many
efforts to preserve the site as a possible profitable operation, using different
business techniques, none succeeded. As a result of these efforts it was
determined that the site 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. As part of its business closure activities,
company officials met with State regulators and negotiated an Agreed Order, with
a mutually acceptable schedule for environmental closure of the facility to
fully satisfy substantive environmental requirements. The Agreed Order requested
financial assurance be provided in the amount of $1,318,478 for the
environmentally correct closure under environmental laws. The Company has
complied with the financial assurance requirement, and currently has closure
activities underway.
TRANSPORTATION SERVICES
General. As a complement to its disposal operations, the Company also
offers hazardous waste transportation services to its customers. American
Ecology Transportation (AET) manages its operations from Robstown, Texas. AET
has transportation hubs located in Pasadena and Robstown, Texas. The primary
objective of AET is to provide value and transportation services to Texas
Ecologists and Surecycle(R) Customers. The Company's waste transportation
operations focus on the Gulf Coast market. The Company transports both hazardous
and non-hazardous solid and liquid wastes generally by truck or trailer from a
waste site to a disposal or treatment facility, such as a landfill or
incinerator. Hazardous waste is transported by the Company primarily in
specially-constructed vehicles designed to comply with applicable regulations
and specifications of the DOT. The Company's hazardous waste fleet includes 34
trucks or tractors, 289 roll-off containers and 65 trailers. Liquid waste is
frequently transported in bulk, but also may be transported in drums and totes.
Heavier sludges and bulk solids are transported in sealed roll-off boxes or bulk
trailers.
The Company also operates a scheduled, containerized hazardous waste
collection service in the Gulf Coast market called Surecycle(R), a division of
American Ecology Environmental Services Corporation (AEESC). Surecycle provides
small quantity generators with comprehensive waste management services that
includes waste analysis, technical advice, labeling, manifesting, collecting,
transporting, treating and disposing of hazardous and non-hazardous wastes. An
important feature of the Surecycle(R) program is the use of intermediate bulk
containers as a replacement for drums in many applications. Surecycle also
offers specialized 350 gallon waste packages or "totes". These totes allow waste
generators to accumulate up to six drums worth of material in the same floor
space required to store four drums. The totes are reusable, therefore the
customer also enjoys substantial savings in avoided drum purchase costs.
LOW-LEVEL RADIOACTIVE WASTE SERVICES
Low-level radioactive waste consists primarily of solid materials
containing radioactive contamination, generally decaying to safe levels within
several decades to approximately 500 years. The Company's LLRW business includes
the packaging, transportation, disposal, treatment, recycling and processing of
low-level waste. Low-level waste is generated by nuclear power facilities,
industry, hospitals, universities, laboratories and other research facilities.
This waste consists generally of material such as contaminated equipment,
discarded glassware, tools, gloves and protective clothing,
radio-pharmaceuticals and other hospital wastes, and laboratory waste materials.
This waste generally requires minimal shielding for the protection of the public
or employees from radiation. It is packaged in metal containers designed to
protect the public during transportation and provide additional long-term
containment of the waste once it is placed in the permanent disposal facility.
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The LLRW services market is generally composed of three segments; (i)
disposal, including both commercial and government markets, (ii) commercial
processing and volume reduction, and (iii) government services. The Company
operates in all three of these segments. The Company's LLRW disposal activities
involve the operation of a landfill site on government owned land near Richland,
Washington. The Recycle Center has LLRW commercial processing and volume
reduction services that include both fixed base processing facilities and
service capabilities as well as on site service capabilities managed as an
extension of the organization located at Oak Ridge, Tennessee. The government
services segment activities includes processing, volume reduction and disposal,
at US Department of Energy ("DOE") and US Department of Defense ("DOD")
locations. The Recycle Center is a well established commercial service provider
and intends to pursue these DOE and DOD markets.
THE COMPACT SYSTEM
The Low-Level Radioactive Waste Policy Act of 1980 and the Low-Level
Radioactive Policy Amendments of 1985 (collectively, the "Low-Level Act")
established the general framework for the management of commercial LLRW disposal
facilities. The Low-Level Act created incentives for states to form formal
regional alliances ("compacts") as ratified by the U.S. Congress, to
cooperatively provide for disposal of LLRW generated within their member states.
Typically one state in each compact is required to serve as the nost state for a
permitted disposal facility. Continuous disposal capacity is maintained through
the rotation of host state responsibilities among each compact's member states.
The Low-Level law provided that any compact approved by Congress could
prohibit disposal of wastes at its facility from states outside the compact
effective January 1, 1993. In anticipation of that happening, many customers
disposed of as much waste as possible in 1992 and the Company saw a marked
increase in waste disposal at its Richland facility that year. On January 1,
1993, the Northwest Compact which oversees the Richland facility restricted
waste disposal to its eight member states and to three states in the Rocky
Mountain Compact through an inter-compact contract. Consequently, waste disposal
volumes at Richland decreased significantly in 1993 and have remained fairly
constant ever since.
DISPOSAL SERVICES
The Company currently operates a licensed regional LLRW disposal facility
in Richland, Washington and is in the process of developing two additional
regional facilities for the Southwest and Midwest state's compacts. The Company
also maintains a closed LLRW landfill in Sheffield, Illinois. The following
section summarizes the Company's active and proposed LLRW disposal operations.
Richland, Washington Facility. The Company operates the Richland facility
as the only licensed LLRW disposal facility within the regional compact system.
The facility is located on 100 acres of the Department of Energy's Hanford
Reservation ("Hanford") approximately 35 miles north of Richland, Washington.
The State of Washington leases the land from the federal government and the
Company subleases the land from the State. The lease between the State and the
Federal government terminates in 2061. The Company's sublease with the State is
to be re-negotiated in 2005. Under the terms of the sublease the facility is to
be used for LLRW burial and related activities.
The facility commenced operations in 1965 and served as a national disposal
site for commercial LLRW through 1992. Under the provisions of the Low-Level
Waste Policy Act of 1980 and as amended in 1985, the State of Washington has
accepted responsibility for disposal of waste generated in the eight Northwest
Compact states and has entered into a contract agreement to provide disposal for
the three Rocky Mountain Compact states. Since 1992 the facility has been
limited to receiving LLRW from these eleven states and is barred from accepting
waste from any other state or compact region. LLRW disposal volume generated by
the Northwest and Rocky Mountain Compacts during the next four years is
estimated to be approximately 80,000 cubic feet annually. If the Low-Level
Policy Act is repealed or the State of Washington authorizes acceptance of waste
from other states or compacts, annual volume at the Richland facility could
substantially increase.
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Approximately 140 regional LLRW generators hold site use permits for access
to the Richland facility. Twelve of these generators cumulatively ship over 90
percent of waste disposed of annually. The majority of waste is received from
generators in Washington and Oregon. Two public utilities - one operating a
nuclear generating plant and one decommissioning a nuclear plant - within the
region, currently ship waste to the facility. These two utilities generated
29,000 cubic feet or over 30 percent of the LLRW waste disposed in 1997. After
2001 and termination of the decommissioning project, the remaining utility is
projected to annually ship less than 5,000 cubic feet of waste. The Richland
facility also received approximately 30 percent and 15 percent of its capacity
of over 91,000 cubic foot volume for 1997 from private industries and government
generators, respectively. The remaining volume was evenly split between
hospital/medical waste and university/research waste generators. The loss of any
large regional generator or a major increase in disposal charges could
significantly impact future operations at the Richland facility.
Disposal operations at the Richland facility are conducted under a
Radioactive Materials license issued by the Washington State Department of
Health. The license allows the Company to dispose of LLRW and special nuclear
materials. The Company submitted an application for renewal of its existing
license in January 1997. The license remains under timely renewal and when
reissued the license will be valid for a five year period.
The Washington Utilities and Transportation Commission (WUTC) has regulated
the disposal rates charges at the Richland facility since 1993. The disposal
rates are set by the WUTC at an amount sufficient to cover the costs of
operations and provide the Company with a reasonable profit margin. The Company
filed a rate case in 1995 with the WUTC to implement a rate design and revenue
requirement for the years 1996 through 2001. The WUTC approved a $5.6 million
annual revenue requirement and a rate design to collect this revenue through
site availability, volume, container, shipment and dose charges. The approved
revenue requirement is exclusive of taxes and fees. The State of Washington
charges fees for burial, site surveillance, local economic development, rate
regulation and site use from generators using the Richland facility. Revenues
are also collected from generators to fund a dedicated trust account for long
term care and maintenance of the Richland site after it closes. As of December
31, 1997 approximately $26 million was retained in this account. Another
dedicated trust account administered by the State Treasurer for use by the
Company or the state to close the Richland site retains over $25.8 million.
Competition. The Company operates the only commercial low-level waste
disposal site operating within the regional compact system in the United States.
The Company's Richland, Washington facility operates as the exclusive LLRW
disposal site for the Northwest and Rocky Mountain Compacts. The other United
States LLRW disposal facility near Barnwell, South Carolina is operated by
Chem-Nuclear, a subsidiary of WMX Technologies, Inc., and is no longer a part of
the Southwest Compact. WMX was recently acquired by USA Waste.
The Richland facility is also permitted to accept naturally occurring and
accelerator produced radioactive materials (NARM) waste and Exempt Quantity
waste from throughout the nation. During 1997, approximately 10,000 cubic feet
of NARM waste and 1,000 cubic feet of Exempt Quantity waste supplemented
revenues collected from the disposal of over 91,000 cubic feet of low-level
radioactive waste generated by Northwest and Rocky Mountain Compact states.
Under a settlement agreement signed in 1996, an annual cap of 100,000 cubic feet
was established on the NARM waste disposal. Although NARM and Exempt Quantity
waste disposal rates are not regulated by the WUTC, a portion of NARM revenue
can be applied to reduce the Company's annual LLRW revenue requirement.
In September, 1997 the State of Washington made a Determination of
Significance finding under the State Environmental Policy Act (SEPA) concerning
the Company's July 1996 submission of a Site Stabilization and Closure Plan, the
Company's February, 1997 radioactive materials license renewal application and
the promulgation of regulations by the Washington Department of Health to
establish a NARM volume cap. As a result of this finding, the State is drafting
an Environmental Impact Statement for the Richland facility. A final EIS is
expected to be issued by the end of 1998.
On November 13, 1997 the Washington Department of Ecology (WDOE) accepted a
Work Plan drafted by the Company for a comprehensive investigation of the
Richland site to assess the presence of hazardous waste constituents in the
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vadose zone beneath trenches and to confirm the performance of the disposal
trenches within the facility with respect to the protection of the groundwater
from small amounts of hazardous material associated with some LLRW. WDOE
contracted with the Company to conduct this investigation during 1998. Funding
of $786,986 from the dedicated Site Closure Account is provided for the
investigation.
Proposed Ward Valley, California Facility. California law and a
congressionally-ratified interstate compact among California, Arizona, South and
North Dakota (the "Southwestern Compact") require California to develop a
low-level radioactive waste ("LLRW") disposal facility in the State. The
Department of Health Services ("DHS" or "Department") was responsible for
identifying a private contractor for this task, and also is the agency
responsible for licensing the facility. DHS selected US Ecology as the "license
designee" for this project in December 1985. US Ecology is obligated to locate,
license and develop the project utilizing its own funds. Once established, the
Company will operate the facility and receive a return on its investment through
future disposal rates.
US Ecology identified 1,000 acres of federal land (the "Site") as the
preferred location for the project in 1988, and submitted a license application
for the facility in 1989. In April 1991, DHS and the federal Bureau of Land
Management ("BLM") published a Final Environmental Impact Report/Statement on
the proposed project and transfer of the Site to the State. In July 1991, DHS
conducted hearings on its proposed license for the facility. In December 1991,
DHS informed the Company that it had received all information necessary to
complete the requisite environmental and licensing analyses, and on September
16, 1993, the Department certified its Final Environmental Impact Report, issued
its Record of Decision on the project, issued a license to US Ecology to
construct and operate the facility (which can begin only after the Site is
transferred to the State) and executed a lease of the Site with US Ecology
(which also becomes effective once the land is conveyed to the State). In
October 1993, two lawsuits were filed in Los Angeles Superior Court challenging
the Department's decision on the project.
In October 1995, the California Court of Appeals upheld the Superior
Court's decision in favor of US Ecology and the Department on all issues.
Project opponents asked the California Supreme Court for review, but on January
18, 1996, the Supreme Court denied the petition. Accordingly, the license
decision and Environmental Impact Report have been completely and finally
upheld.
Concurrent with the licensing process and because under relevant state laws
and federal land management policies, the Site must be transferred to the State
before facility construction and disposal operations can commence, the
California State Lands Commission filed an application with the BLM in 1987 to
acquire the Site under the State's indemnity school land selection rights.
BLM analyzed the environmental consequences of the proposed conveyance
under the National Environmental Policy Act, and together with the Department
published a joint Final Environmental Impact Report/Statement ("EIR/S") in April
1991. The Final EIR/S concluded that the conveyance would have no significant
adverse environmental impact. The United States Fish and Wildlife Service also
analyzed the project's potential impact on the desert tortoise, a species which
is present at the Site and which is listed as a threatened species under the
federal Endangered Species Act. The Service concluded in a November 1990
Biologic Opinion that the project would not jeopardize the continued existence
of the desert tortoise, but recommended mitigation measures which the Department
incorporated into the facility's license.
In July 1991, the State Lands Commission decided to withdraw its indemnity
selection for the Site, apparently for political reasons. (Two of the three
State Lands Commissioners were engaged in a democratic primary election for the
U.S. Senate.) In July 1992, the Department applied to BLM for the Site's
purchase. In August 1992, BLM formally rejected the State Lands Commission's
prior indemnity selection application and published in the Federal Register a
proposal to withdraw the Site from the operation of most federal land laws to
preserve it for acquisition by the State. In September 1992, the State Lands
Commission submitted and revised indemnity selection application for the Site,
and BLM published a Notice of Realty Action for the proposed sale.
Although the proposed change of land acquisition methodologies would have
no environmental consequence, BLM decided for policy reasons to supplement the
Final EIR/S to describe this proposed change. In January 1993, however, then
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Secretary of Interior Manuel Lujan decided to sell the Site to the State before
the January 20, 1993 change of federal administrations. To accomplish this
result, Secretary Lujan foreshortened the EIR/S Supplementation process and
issued a Record of Decision for the sale, which also denied the State Lands
Commission's indemnity selection application. In other contemporaneous
decisions, Secretary Lujan denied various mining claims which had been filed
against the Site and other requests by project opponents to classify the Site as
unsuitable for waste disposal.
Transfer of the land was enjoined by a federal judge on January 8, 1993.
After the change of federal administrations, the new Secretary of Interior,
Bruce Babbitt, rescinded the prior Record of Decision and completed the Final
EIR/S Supplementation process. A final Supplemental EIR/S was issued in
September 1993, which again concluded that the project would have no significant
adverse environmental impact.
Howard Wilshire and two other U.S. Geological survey employees gratuitously
published a report questioning DHS conclusions regarding the project and
suggesting that the facility could contaminate the Colorado River 20 miles away
from the project. In December 1993, Secretary Babbitt asked the National Academy
of Sciences ("NAS") to conduct an independent review of the report's claims.
In 1995, the NAS concluded that the report did not raise any significant
concerns, but recommended that further site-specific data be gathered during
site construction, that several additional monitoring wells be constructed, and
that minor amendments be made to the project's desert tortoise relocation plans.
Subsequent to the NAS report, Secretary Babbitt concluded that further
hearings on the land transfer were unnecessary, the Department of Interior and
the State began to negotiate terms of the land transfer, but reached an impasse
on the issue of Interior's proposed continuing oversight of the project. In late
1995, the United States Congress passed a Budget Reconciliation Act, one rider
of which directed that the Site be transferred to the State by act of Congress.
President Clinton vetoed the bill. On February 15, 1996, the Deputy Secretary of
the Interior issued a press release stating that a further Supplement to the
EIR/S, "expected to be completed within one year," would be undertaken prior to
any land transfer. According the Interior, the purpose of the new Supplemental
EIR/S is to further examine the recommendations of the 1995 NAS panel, as well
as to consider the effect of the land transfer on nearby sacred Indian sites.
BLM conducted a scoping process on the proposed new supplemental EIS. After
that process was completed, DHS reviewed all of the comments and information
that had been submitted to BLM. In a November 18, 1996 letter to BLM, DHS
provided a detailed analysis of those submissions and concluded that no
significant new information or issues had been raised which warranted a further
supplement to the EIS. Accordingly, DHS urged Interior not to conduct the
proposed supplementation or any further on-site testing and instead deliver
title to the Ward Valley site immediately. Interior apparently rejected DHS'
analysis, and in December 1996 issued a request for proposals to perform the
Supplemental EIS and Interior is attempting to engage other contractors to
perform the additional on-site soils testing which the NAS majority had
recommended not be conducted until after the land transfer.
As a result of the continued inaction by the Department of Interior, the
California Department of Health Services brought suit against the Interior in
early 1997 seeking a writ of mandamus from the federal court ordering the
Secretary of Interior to convey the land to California. US Ecology has joined
this lawsuit and also filed a separate action for breach of contract against the
Department of Interior seeking damages in excess of $73.1 million. For a further
discussion of the two pending cases, please see Item 3, Other Material
Litigation.
Additional legal challenges and political delays could postpone the opening
of the facility for several years or more. The Company expects to incur costs of
approximately $120,000 per month, excluding interest, until construction begins.
These costs are not currently reimbursable from the Southwestern Compact or any
other party and are being capitalized as project costs. Assuming the land is
transferred and all challenges and appeals to the land transfer and the facility
license decision are favorably resolved, the Company expects that the
construction and start-up of the facility will take approximately eight to
twelve months. It is not possible to assess the ultimate length of the delay at
this time, nor can there by any assurance that the land will be transferred.
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If the Ward Valley site cannot be transferred, the Company has the right to
license, develop and operate an alternative site and to recover its costs for
both the Ward Valley site and the alternative site from the fees charged for
disposal at the alternative site. Under current federal and state law, the State
of California is required to provide a site somewhere and the Company has the
contractual right to license, develop and operate such site. Thus, the Company
should be able to recoup its costs plus interest thereon as provided in its
contract absent a change in federal or state law. Nevertheless, there can be no
assurance that the Company will ultimately recover its costs and interest
thereon. If the Company is unable to recover its costs, the Company will suffer
a loss that would have a material adverse effect on its financial condition.
Proposed Butte, Nebraska Facility. In June 1987, the Company was designated
to develop and operate a LLRW disposal facility ("Butte") by the Central
Interstate Low-Level Radioactive Waste Commission ("CIC"). In July of 1990, the
Company submitted an application to the Nebraska Departments of Environmental
Quality and Health ("NDEQ" and "NDOH") for the necessary license. The
application has been under review and the anticipated project completion date
has been postponed several times. In October 1997, the Departments issued their
draft evaluations of the application in the form of a Draft Safety Evaluation
Report (DSER) and a Draft Environmental Impact Analysis (DEIA) for a 90 day
public comment period. A public hearing on the documents was held during first
week of February 1998.
The DSER deemed the critical areas of site suitability, design,
construction, and performance to be acceptable. Some unacceptable areas were
identified, primarily in the areas of facility operations. The Company has fully
addressed these areas in the comments submitted to the state. The Departments
will review the public comments and are expected to issue a Final Safety
Evaluation Report and Environmental Impact Analysis with either a draft license
or a draft Intent-to-Deny a license. This is projected to occur during the
fourth quarter of 1998. Another public comment and hearing process will ensue. A
final licensing decision is projected in late 1999.
In August of 1996, the CIC voted to require the Department to issue the
DSER and DEIA in January 1997. The State of Nebraska filed a lawsuit against the
CIC in November 1996, challenging its authority to enforce a schedule. That suit
is progressing but has not yet been tried.
Project costs through 1997 totaled $87.8 million, substantially all of
which has been provided by the major low-level radioactive waste generators in
the CIC states (Nebraska, Kansas, Oklahoma, Arkansas, and Louisiana). The
Company expects to incur expenses of approximately $600,000 per month for the
remainder of the pre-licensing phase. All these expenses are reimbursed monthly
by the CIC. Once the two year construction period commences, expenditures are
expected to be approximately $50 million, excluding interest. Under the present
contract with CIC, this construction expense will be the Company's
responsibility. Because of delays in the completion of the license review,
pre-licensing funds that had been committed to the project were exhausted. The
Company is working with the CIC to renegotiate contract amendments to provide
further funding, through at least 1998.
In August 1994, the U.S. Army Corps of Engineers determined that a small
wetland, less than one acre, existed on the site. The Company disagreed with
this determination but decided to obtain a permit from the Corps to fill the
area and create a new wetland off-site. The permit was obtained and is, after
receiving an extension, valid through 1998. The work consists of moving less
than 400 cubic yards of soil, all within US Ecology's property. The State
advised the Company that such work would be considered to be unauthorized
pre-licensing construction and may be grounds for license denial. The Company
disputed the interpretation and has requested a declaratory judgment from the
Nebraska District Court.
LLRW PROCESSING AND RECYCLING SERVICES AT THE RECYCLE CENTER
The commercial processing and volume reduction segment of the LLRW services
market includes both fixed-based facilities and service capabilities performed
at the radioactive waste generator sites. The Company's processing and volume
reduction services are conducted under the auspices of its Recycle Center in Oak
Ridge, Tennessee.
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The Company acquired the Recycle Center from Quadrex Corp. in September
1994. The Recycle Center is equipped to process and recycle materials which are
contaminated with low levels of radioactivity. The Recycle Center provides
services primarily to nuclear power facilities, industrial nuclear generators
and the federal government. Historically, customers have included a substantial
number of public utilities. The Recycle Center's principal services include the
following:
NUCLEAR MATERIAL MANAGEMENT CENTER
The Nuclear Materials Management Center (NMMC) operation now has a market
edge in price and customer service. Current processing technologies linked with
burial in an all-inclusive pricing concept has proven to be a better option to
incineration.
LLRW Brokerage Services. The Company packages and transports small
quantities of LLRW from laboratories, hospitals, universities and other
commercial facilities to disposal facilities. The Company may contract with
low-level waste generators to pick up waste which is shipped to commercial LLRW
sites. The waste is either shipped by the Company in its own vehicles or is
shipped by common carriers under subcontract. The Company supplies many of these
customers with equipment and material for the packaging, labeling, and
transportation of the LLRW material. The packaging and transportation market is
highly competitive, and we have been steadily increasing our presence in the
market.
Metal Waste Decontamination. Radioactive contaminated metals exist
primarily in the form of large components such as pumps, valves, fuel racks, and
larger items such as condensers, heat exchangers and other large components. The
Recycle Center can decontaminate these metals through various techniques. New
investment in equipment provide for more aggressive decontamination processes
and higher throughput.
Dry Active Waste ("DAW") Processing. DAW processing services include volume
reduction and free release programs. This waste is primarily in the form of
plastics, clothing, and paper products. The Recycle Center uses its
super-compactor to reduce the volume of this waste before it is shipped for
disposal. The Recycle Center facility differentiates itself in this service by
compressing waste into bales prior to super-compaction. The combination of
baling and super-compacting accomplishes superior volume reduction. The Recycle
Center also sorts and segregates waste prior to super-compaction.
Green is Clean Program. In 1989, the Recycle Center initiated its free
release, or Green is Clean program. Under this program, generators place
potentially contaminated waste in yellow bags and potentially clean material in
green bags. The bags are then shipped to the Recycle Center for processing.
Waste certified as uncontaminated is disposed of in an industrial waste
landfill. Material that cannot be certified as clean is packaged for disposal at
a radioactive waste burial facility. This packaging process includes
super-compaction to facilitate significant volume reduction.
Remedial Services. The Field Services Division of the Recycle Center offers
a full range of turnkey services including site characterization, verification,
on-site volume reduction, license termination, decontamination and
decommissioning. The Recycle Center's staff has been involved in conducting
radiological decontamination projects for over 20 years. This highly experienced
staff has implemented multiple projects on time and within budget.
Scaffolding and Lead Management Services. During maintenance periods,
nuclear utilities require the use of scaffolding and lead blankets. The Recycle
Center maintains an inventory of approximately two million pounds of scaffolding
and 350,000 pounds of lead blankets. The scaffolding and lead blankets are
decontaminated, surveyed, refurbished, painted, and then rented to the customer.
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NUCLEAR EQUIPMENT SERVICE CENTER (NESC)
The Nuclear Equipment Service Center (NESC) provides refurbishment and
repair services for high value nuclear power plant electric motors and other
high value equipment. These services include decontamination, disassembly,
modifications, reassembly and testing to meet stringent client requirements for
safety and reliability. Additionally, the Company frequently provides field
services to nuclear power plants for removal, inspection, maintenance and
reinstallation of high value equipment.
Motors, valves, pumps and other components of nuclear power plants in the
United States require periodic maintenance which requires them to be
decontaminated before they can be refurbished. The Company can remove
contaminated winding insulation, decontaminate the motor stator and rotor, then
rebuild and test the motor with minimal outside service providers. The Company
believes that the NESC is the only major facility in the United States providing
a combination of all of these services.
Competition. The Company's competitors in the commercial LLRW processing
and recycling market include Scientific Ecology Group (recently purchased by GTS
Duratech), Chem-Nuclear Systems, Inc., Allied Technology Group, Inc., Frank Hake
and Associates, Inc., Alaron, Inc., and Manufacturing Sciences Company.
CLOSED FACILITIES
The Company's closed hazardous waste and LLRW disposal facilities are
described below.
Sheffield, Illinois Facility. The Company previously operated two hazardous
waste disposal sites at Sheffield, Illinois. The sites are located on property
owned by the Company on 45 acres adjacent to a closed state-owned LLRW site also
previously operated by the Company. One hazardous waste site was opened in 1974
and ceased accepting hazardous waste in 1983. A second closed hazardous waste
disposal site occupied less than five acres, and accepted hazardous waste
pursuant to Illinois authorization from 1968 through 1974. The two sites were
operated and are maintained under federal and state environmental regulations.
The Company also maintains a 20-acre LLRW disposal facility three miles
southwest of Sheffield, Illinois located on land owned by the State of Illinois.
The Company has closed the facility, which last received low-level waste in
1978, and is maintaining the site pursuant to a 1988 Agreed Order settling
long-standing litigation between the Company and the State of Illinois.
In 1984, the Company submitted for approval a closure and post-closure plan
for the hazardous waste disposal sites to the Illinois EPA and to the U.S. EPA.
The regulatory agencies have approved the Company's detailed program for
implementation and operation of comprehensive corrective action, but have not
approved the Company's closure and post-closure plan. The Company believes that
its closure and post-closure plan fully satisfies the health and safety needs of
the public and all regulatory requirements. The Company amended its closure plan
in 1996 to reflect up-to-date activities at the site. Review of the plan by the
Illinois EPA and the U.S. EPA is currently in progress.
In 1982, hazardous waste was detected in site-monitoring wells at one of
the two Sheffield facilities and as a result, the Illinois EPA requested that
the Company conduct an investigation of the site. The Company completed,
pursuant to a 1985 Consent Order, a Remedial Investigation and Feasibility Study
of the Sheffield facility. Pursuant to that order, a final Corrective Measures
Implementation Plan was issued by the U.S. EPA in October 1990 and the Company
is in the process of implementing this plan. The Company completed its source
isolation programs in 1994. The Company is currently renegotiating the terms of
the Corrective Measures Implementation Plan for groundwater monitoring and
extraction programs. A pilot air sparging system has been approved by the U.S.
EPA.
RCRA regulations also require the Company to carry environmental impairment
insurance against sudden and accidental occurrences, as well as against
non-sudden occurrences such as subsurface migration. See "Insurance". These
coverages are not available for the Sheffield, Illinois site due to its 1984
inclusion on the RCRA National Priorities List. Even though the site was removed
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from the list as a result of the consent agreement between the Company and U.S.
EPA, and the site has not received waste for 20 years, the site does not qualify
for environmental impairment insurance.
Maxey Flats, Kentucky Facility. Between 1963 and 1978, the Company operated
the Maxey Flats, Kentucky LLRW site, a facility that was owned, licensed and
maintained by the Commonwealth of Kentucky (the "Commonwealth"). In 1978, the
Commonwealth entered into an agreement with the Company to permanently close the
facility and the Commonwealth agreed, in part, to assume any and all liabilities
related to the facility and to exercise responsibility for perpetual care and
maintenance of the facility. The Commonwealth later filed a lawsuit against the
Company seeking to have that agreement declared invalid. The Company then filed
an action against the Commonwealth seeking cost recovery and contribution and to
enforce its rights under the agreement. After several federal court decisions in
favor of the Company on the issues, in July 1994, the Commonwealth and the
Company settled all pending litigation regarding the Maxey flats facility and
also agreed to cooperate in the resolution of any third party indemnification
claims against the Company from potentially responsible parties involved with
the facility. With the resolution of the Boston Edison vs. US Ecology case
discussed in Item 3, General Litigation, all third party indemnity claims
arising from Maxey Flats have now been resolved. The Company has recognized the
settlement terms in its 1997 financial statements.
REGULATION
The environmental services industry is subject to extensive regulation by
federal, state and local authorities. In particular, the regulatory process
requires the Company to obtain and retain numerous governmental permits or other
authorizations to conduct various aspects of its operations, any of which may be
subject to revocation, modification or denial. Adverse decisions by governmental
authorities on permit applications submitted by the Company may result in
premature closure of facilities or restriction of operations, which could have a
material adverse effect on the Company's results of operation.
Because of the heightened public awareness of environmental issues,
companies in the environmental service business, including the Company, may in
the normal course of their business be expected periodically to become subject
to judicial and administrative proceedings. The Company may also be subject to
actions brought by private parties or special interest groups in connection with
the permitting or licensing of its operations, alleging violations of such
permits, licenses or environmental laws and regulations.
The Company's business is heavily dependent upon environmental laws and
regulations which effectively require wastes to be managed in facilities of the
type owned and operated by the Company. The Company makes a continuing effort to
anticipate regulatory, political and legal developments that might affect its
operations, but is not always able to do so. Federal, state and local
governments have from time to time proposed or adopted other types of laws or
regulations which significantly affect the environmental services industry.
These have included laws and regulations to ban or restrict the interstate
shipment of hazardous wastes, impose higher taxes on out-of-state hazardous
waste shipments than in-state shipments and to reclassify certain categories of
hazardous wastes as non-hazardous. In particular, the federal government
currently is considering several fundamental changes to laws and regulations
that define which wastes are hazardous, that establish treatment standards for
certain wastes that could lead to their reclassification as non- hazardous, and
that revise the nature and extent of responsible parties' obligations to
remediate contaminated property. While the outcome of these deliberations cannot
be predicted, it is possible that some of the changes under consideration could
facilitate exemptions from hazardous waste requirements for significant volumes
of waste and alter the types of treatment and disposal that will be required. If
such changes are implemented, the overall impact on the Company's business is
likely to be unfavorable. The Company cannot predict the extent to which any
legislation or regulation that may be enacted or enforced in the future may
affect its operations.
Hazardous Waste Regulations. The Company is required to obtain federal,
state, local and foreign governmental permits for its hazardous waste treatment,
storage and disposal facilities. Such permits are difficult to obtain, and in
most instances extensive geological studies, tests and public hearings are
required before permits may be issued. In particular, the Company's operations
are subject to RCRA (as discussed below), the Safe Drinking Water Act (which
regulates deep well injection), TSCA (pursuant to which the EPA has promulgated
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regulations concerning the disposal of PCBs), the Clean Water Act (which
regulates the discharge of pollutants into surface waters and sewers by
municipal, industrial and other sources) and the Clean Air Act (which regulates
emissions into the air of certain potentially harmful substances). In its
transportation operations, the Company is subject to the jurisdiction of the
Interstate Commerce Commission and is regulated by the DOT and by state
regulatory agencies. Employee safety and health standards under the Occupational
Safety and Health Act ("OSHA") are also applicable to the Company's operations.
RCRA. Pursuant to RCRA, the EPA has established and administers a
comprehensive, "cradle-to-grave" system for the management of a wide range of
solid and "hazardous" wastes. States that have adopted hazardous waste
management programs with standards at least as stringent as those promulgated by
the EPA may be authorized by the EPA to administer their programs in lieu of the
EPA.
Under RCRA and federal transportation laws, all generators of hazardous
wastes are required to label shipments in accordance with detailed regulations
and prepare a detailed manifest identifying the material and stating its
destination before shipment off site. A transporter must deliver the hazardous
wastes in accordance with the manifest and generally only to a treatment,
storage or disposal facility having a RCRA permit or interim status under RCRA.
Every facility that treats or disposes of hazardous wastes must obtain a RCRA
permit from the EPA or an authorized state and must comply with certain
operating standards. The RCRA permitting process involves applying for interim
status and also for a final permit. The Company believes that each of its
facilities is in substantial compliance with the applicable requirements
promulgated pursuant to RCRA.
It is possible that the EPA may consider a number of fundamental changes to
its regulations under RCRA that could facilitate exemptions from hazardous waste
management requirements, including policies and regulations that could implement
the following changes: redefine the criteria for determining whether wastes are
hazardous; prescribe treatment levels which, if achieved, could render wastes
non-hazardous; encourage further recycling and waste minimization; reduce
treatment requirements for certain wastes to encourage alternatives to
incineration; establish new operating standards for combustion technologies; and
indirectly encourage on-site remediation. Because many of these initiatives are
in various stages of development and implementation, the Company cannot predict
the final outcome of EPA decisions or the extent of their impact on the
Company's business.
Superfund. Superfund provides for immediate response and removal actions
coordinated by the EPA to releases of hazardous substances into the environment,
and authorizes the federal government either to clean up facilities at which
hazardous substances have created actual or potential environmental hazards or
to order persons responsible for the situation to do so. Moreover, Superfund
grants a right of recovery to private parties who incur costs in response to the
release or threatened release of hazardous substances. Superfund has been
interpreted as creating strict, joint and several liability for costs of removal
and remediation, other necessary response costs and damages for injury to
natural resources. Liability extends to owners and operators of waste disposal
facilities (and waste transportation vehicles) from which a release occurs,
persons who owned or operated such facilities at the time the hazardous
substances were disposed, persons who arranged for disposal or treatment of a
hazardous substance at or transportation of a hazardous substance to such a
facility, and waste transporters who selected such facilities for treatment or
disposal of hazardous substances.
It is possible that the U.S. Congress could revise the Superfund statute in
the future. In addition to possible changes in the statute's funding mechanisms
and provisions for allocating cleanup responsibility, it is possible that
Congress could fundamentally alter the statute's provisions governing the
selection of appropriate site cleanup remedies, conclude not to continue
Superfund's current reliance on stringent technology standards issued under
other statutes to govern removal and treatment of remediation wastes or could
adopt new approaches such as national or site-specific risk based standards.
These and other potential policy changes could significantly affect the
stringency and extent of site remediation, the types of remediation techniques
that will be employed, and the degree to which permitted hazardous waste
management facilities will be used for remediation wastes.
LLRW Regulations. The LLRW services of the Company are also subject to
extensive governmental regulation. Various phases of the Company's LLRW services
are regulated by various state agencies, the Nuclear Regulatory Commission
("NRC") and the DOT. Regulations applicable to the Company's operations include
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those dealing with packaging, handling, labeling and routing of radioactive
materials, and prescribe detailed safety and equipment standards and
requirements for training, quality control and insurance, among other matters.
Employee safety and health standards under OSHA are also applicable to the
Company's operations.
Financial Assurance and Site Maintenance. The Company operates its
hazardous waste disposal sites under RCRA permits. The LLRW sites are operated
under licenses from state and, in some cases, federal agencies. When one of
these facilities reach capacity, or lease or license termination dates, the
facility must be closed and maintained for a period of time prescribed by law or
by license. In the case of the RCRA-permitted hazardous sites, federal
regulation requires that operators demonstrate the financial capability to close
sites on an immediate, unscheduled (worst-case) basis. The estimated costs of
such a closure are set forth in the operator's RCRA closure and post-closure
plan.
Financial assurance requirements for closure/post-closure plans may
generally be satisfied by various means, including insurance, letters of credit,
surety bonds, trust funds, a financial net worth test and/or a corporate
guarantee. The Company is currently satisfying such requirements through a
combination of certain of the various allowable methods. Cash and investment
securities totaling $14.3 million and $16.4 million at December 31, 1997 and
1996, respectively, have been pledged as collateral for the Company's closure
and post-closure obligations, performance of a Remedial Investigation and
Feasibility Study and performance of corrective action at the closed Sheffield,
Illinois facility, compliance with the TNRCC requirements related to the
Company's non-commercial use deepwell at its Robstown, Texas facility, closure
costs for Beatty, Nevada site, closure costs for the Recycle Center, closure
costs for the Winona, Texas facility, test borings at the proposed LLRW sites in
Nebraska and California, settlement with generators of waste at the Richland,
Washington LLRW facility and other general performance bonds. The amounts
pledged by the Company generally equal the present value of its estimated future
closure and post-closure obligations.
INSURANCE
The Company believes it operates professionally and prudently, however, the
environmental business exposes the Company to many risks. The risks include
potential harmful substances escaping into the environment causing damage or
injury. An insurance program has been reviewed and put into place that under its
insurance policies, the Company generally has self-insured retention limits or
deductibles. These range from $25,000 to $250,000 and include fully insured
layers of coverage above such retentions or deductibles. The nature of the
Company's business exposes it to accidental environmental contamination losses
which are generally not covered by primary casualty insurance programs. To
provide insurance protection for environmental claims the Company has obtained
environmental impairment liability insurance and professional environmental
consultants liability insurance for non-nuclear related occurrences. For
radioactive risk, the Company has purchased nuclear liability insurance covering
operations of its facilities, suppliers and transporters. In addition, the
Company has purchased primary casualty and excess liability policies all through
traditional third party insurance.
Pursuant to RCRA, the Company is required to maintain environmental
impairment liability insurance coverage with specified minimum limits for sudden
and non-sudden accidental occurrences. The Company is in compliance with
required limits and coverage with the exception of the Sheffield, Illinois site
where such insurance has been unavailable. See "Closed Facilities".
In 1987, the Company organized and funded a wholly-owned subsidiary,
American Liability and Excess Insurance Company ("ALEX") to reinsure financial
assurance insurance for the Company's closure and post-closure responsibilities
at certain of its sites. ALEX is currently reinsuring financial assurance for
closure and post-closure of the Company's facilities and underwriting a
performance bond for one of the Company's subsidiaries. ALEX has funded cash
reserves representing the approximate present value of the closure or
post-closure obligation being insured. As of December 31, 1997, the ALEX
investment portfolio was approximately $8 million.
17
<PAGE> 18
CUSTOMERS
Revenues resulting from the cost reimbursement contract with the Central
Interstate Low-Level Radioactive Waste Commission were approximately $7,579,000
or 18% and $5,711,000 or 11% in 1997 and 1996, respectively, of the Company's
consolidated revenues. No other single customer accounted for 10% or more of the
Company's consolidated revenues for 1997, or 1996.
PERSONNEL
The Company had a total of 305 employees as of March 13, 1998. The Company
has collective bargaining agreements which cover 11 employees at its Richland,
Washington facility and 67 employees at its Oak Ridge, Tennessee facility. The
Company believes that its relationship with its employees is good.
At the Oak Ridge facility the Company ended negotiations for a new contract
with OCAW local 3-983 February 10, 1998 with a strike by all 67 bargaining unit
employees. The facility continued to operate with supervisory non-union staff
until employees asked to return to work on March 2, 1998 under the terms and
conditions of the old contract.
The Company submitted a final proposal on March 4, 1998 which was rejected
by OCAW local 3-983. On March 5, 1998 the Company notified the OCAW that the
parties were at impasse and implemented the final proposal which was effective
at midnight on March 7, 1998. Bargaining unit employees continue to work under
the terms and conditions of the Company's final proposal.
The reasons for the strike were economic. In an effort to return
profitability to the facility the Company asked the bargaining unit employees to
accept wages and benefits in line with the rest of the Corporation. The OCAW
benefit package is superior and less costly to each OCAW employee, than the
benefit package available to other employees. During contract negotiations, the
benefits were a key issue, along with wages, vacation and attendance issues.
ITEM 2. PROPERTIES
The Company believes that its property and equipment are well-maintained,
in good operating condition and adequate for the Company's present needs. The
Company's headquarters are located in Boise, Idaho in leased office space. The
Company also leases sales and administrative offices in Washington, California,
Nebraska, Illinois, Nevada, Texas, and Kentucky.
The following table sets forth certain information regarding the principal
operating, treatment, processing or disposal facilities owned or leased by the
Company.
18
<PAGE> 19
<TABLE>
<CAPTION>
LOCATION FUNCTION ACREAGE OWN/LEASE UTILIZATION
-------- -------- ------- --------- -----------
<S> <C> <C> <C> <C>
CHEMICAL SERVICES
- -----------------
Beatty, Nevada Hazardous Waste Disposal Facility 80 acres Lease 100%
Houston, Texas Westheimer Office 33,800 sq. Lease(1) 0%
ft.
Houston, Texas Katy Freeway Office 11,000 sq. Leased/Sublet 0%
ft.
Pasadena, Texas Transportation Facility 3 acres Own 100%
Pasadena, Texas Storage Yard 2 acres Lease(2) 100%
Robstown, Texas Transportation Facility 1 acre Own 100%
Robstown, Texas Waste Disposal Facility 400 acres Own 100%
Robstown, Texas Future Expansion Area 40 acres Mortgage 100%
Winona, Texas Closed facility March 17, 1997 620 acres Own 10%
LLRW SERVICES
- -------------
Oak Ridge, Tennessee LLRW Processing Facility 16 acres Own 100%
Richland, Washington LLRW Disposal Facility 100 acres Lease 100%
</TABLE>
- --------
(1) This office space was vacated in about March 1996. Please refer to Item 3.
Legal Proceedings for discussion regarding the Westheimer lease from Houston
Office 88.
(2) The leased storage yard has been released back to the landlord, as of
December 31, 1997.
The principal properties of the Company make up less than 10% of the total
assets. The assets that are utilized are sufficient and suitable to the
Company's needs. The Company is planning for expansion at the Robstown, Texas
Hazardous and Non-Hazardous Waste Disposal Facility. There are only two cells
remaining on the currently permitted 240 acres. The adjoining 160 acres is
reserved for expansion but is not yet permitted.
All of the owned properties and assets of the Company are pledged to Chase
Bank of Texas as a part of the banking and loan agreement. Details of the debt
agreement are provided in Note 7, to the financial statements.
19
<PAGE> 20
ITEM 3. 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 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 established reserves for certain of the matters discussed
below, 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 described below, will not have a material adverse effect on
the operations or financial condition of the Company.
GENERAL LITIGATION
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 former 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 Company believes it conducted its
operations in accordance with applicable laws and regulations, that the lawsuit
is without merit and intends to vigorously defend the action. The Company's
insurance carrier is defending this matter. The case is currently stayed pending
the issuance of a scheduling order.
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. Plaintiff in this matter is the landlord of the former corporate
headquarters for the Company. The suit was based upon the Company's vacation of
lease premises prior to lease termination. The Plaintiff/landlord sought $52,543
per month in rent, escalations, parking and sales tax on parking for the period
beginning July 1, 1996. The lease termination date is December 7, 2002.
On January 13, 1998, the court granted a motion for summary judgment in favor of
Houston Office 88 in the amount of $2,044,346 and against the Company on its
counterclaims. Although presently an interlocutory order, Houston Office 88 has
moved to sever its claim against the Company, which, if granted, will make the
judgment final. The Company plans to file a motion to set the judgment aside
and, if denied, plans to file an appeal.
The Company filed a third-party complaint against Altra Energy for failure to
consummate a sublease agreement. The court also granted a summary judgment
against the Company and in favor of Altra Energy Technologies, L.L.C. on the
Company's third-party claims against Altra. The Company's motion to set such
judgment aside has been denied. The Company plans to file an appeal.
20
<PAGE> 21
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, American
Ecology Environmental Services Corporation (AEESC) and US Ecology Corporation
(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 Racketeer Influenced and
Corrupt Organization Act (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 activities of Phyllis Glazer and a non-profit
corporation organized by Glazer, her husband, mother, and Glazer's Wholesale
Drug Company, Inc. (dba Glazer Distributors), all of whom are defendants. The
action alleges that Defendants fraudulently sought to deprive Plaintiffs of
their property by publishing 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, alleging Plaintiffs have attempted to deny Defendants' right of free
speech. M.O.S.E.S., a non-profit corporation, claims actual and punitive damages
in excess of $1,000,000 based on alleged reputational damage, reduced income (in
the form of reduced contributions) and costs of legal representation.
Notwithstanding its decision to close the Winona facility, the Company intends
to vigorously prosecute this case to its conclusion. Extensive discovery by both
the Company and the Defendants is ongoing in preparation for trial, currently
scheduled for August 1998.
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 US Ecology, a subsidiary of the Company, in the U.S. District
Court of Massachusetts alleging claims related to various costs arising out of
the shipping and burial of waste materials at the Maxey Flats Nuclear Disposal
Site. US Ecology had entered into a series of contracts with Boston Edison to
provide radioactive waste disposal services at this site. Boston Edison claimed
that US Ecology breached the contracts by failing to indemnify Boston Edison for
its costs. Boston Edison also alleged that US Ecology committed unfair and
deceptive trade practices in Massachusetts by not indemnifying Boston Edison.
Finally, Boston Edison sought a declaratory judgment that would set forth the
contractual rights and liabilities of the parties. Boston Edison claimed
$600,000 in past and future costs for the alleged breach of the contracts,
trebled under the Massachusetts Deceptive Trade Practices Act. US Ecology
successfully moved the case from Massachusetts to federal court in Kentucky.
On February 23, 1998, US Ecology and Boston Edison agreed to a full a complete
settlement of this litigation. US Ecology agreed to pay Boston Edison specified
annual payments of $25,000, $25,000, $40,000, $40,000 and $200,000 beginning
September 1, 1998 and ending September 1, 2002, plus $100,000 after the first
anniversary of operations at the Company's planned Ward Valley facility, if it
is opened.
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 Adams case discussed above,
involve AEESC, a subsidiary of the Company, and its Winona, Texas facility. As
discussed elsewhere herein, AEESC has decided to close that facility
21
<PAGE> 22
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.
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. In the
Moncrief, Steich, Williams and Daniels cases, AEESC is relying upon its
predecessor parent corporation's insurance coverage for defense and indemnity
purposes. 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 appealed the verdict requesting a new trial. The Williams case was
dismissed with prejudice by the trial court May 12, 1997 because Plaintiffs
failed to file affidavits identifying injuries and causes suffered as required
by the Court's Case Management Order. Plaintiffs' motion for a new trial was
denied. Plaintiffs have appealed. Defendants are similarly seeking dismissal of
the Daniels case based on the inadequacy of the affidavits filed in that case
under a similar Case Management Order. The Court has not yet ruled on
Defendants' motion, and the case is currently stayed. The Court ordered the
parties in the Steich case to mediation, which settled on January 27, 1998 for
payment of $350,000 to plaintiffs by the Company's predecessor's insurance
company.
PERKINS COIE V. AMERICAN ECOLOGY CORPORATION, SUPERIOR COURT, KING COUNTY
WASHINGTON, CASE NO. 97-2-30472-5SEA. This is an action to collect an alleged
balance due for legal services provided to American Ecology and its subsidiaries
between 1993 and 1997 allegedly in the amount of $669,987, including interest.
An answer to the complaint has been filed and discovery has commenced. The
Company intends to defend the action on the basis of certain legal defenses and
to negotiate a structured settlement, if possible. Trial is set for June, 1999.
In the event of an adverse outcome, management does not believe there would be a
material adverse impact in the Company's earnings.
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 to be used for long term care of
the facility after title 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 argued that it should not be required to provide the decreasing
letter of credit since any failure to meet the financial covenants which may
exist is likely to be temporary and the site is scheduled to be transferred to
the state in May 1998 in any event. The Company offered to extend the Company's
maintenance period for a limited time in lieu of providing this letter of
credit, but this offer was rejected. 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 Company expects to defend the lawsuit on
the basis of these arguments. At this time it is not possible to predict the
outcome of this matter.
22
<PAGE> 23
ENVIRONMENTAL MATTERS
IN RE RAMP INDUSTRIES, INC. SITE (COLORADO), U.S. ENVIRONMENTAL PROTECTION
AGENCY, DENVER, REGION 8. US Ecology responded to a CERCLA 104(e) Information
Request in March 1996 sent by USEPA to numerous Potentially Responsible Parties
("PRP"). Thus far, US Ecology has not been formally named as a responsible party
at the CERCLA site, but the EPA issued a preliminary finding of liability by US
Ecology of $28,993 on September 8, 1997. Hazardous substances may have been sent
by US Ecology 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 and preliminary determination of liability.
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 and the Washington Department of Ecology have
contractually agreed to investigate the integrity of the site to determine
whether and what remedial action, if any, is appropriate. The Company
anticipates gathering the requisite data in 1998. At this time it is not
possible to predict the outcome of this matter.
OTHER MATERIAL LITIGATION
The following two cases, in which one of the Company's principal
subsidiaries is a plaintiff against the United States, are not required to be
reported under the Securities and Exchange Commission regulations, but we have
chosen to do so because of the potential significant impact one or more
favorable results would have on the Company's Ward Valley project.
US ECOLOGY, INC. V. UNITED STATES OF AMERICA, UNITED STATES COURT OF FEDERAL
CLAIMS, CASE NO. 97-65C. This case, commenced on January 30, 1997, by US Ecology
is against the United States of America for breach of a contract to sell 1,000
acres of federal land located in Ward Valley, California to the State of
California. California granted US Ecology a license to construct and operate a
regional low-level radioactive waste disposal facility at the Ward Valley site.
US Ecology is seeking damages in the amount of approximately $73,100,000 for its
past costs expended and unspecified future lost profits, lost opportunity costs,
lawful interest and costs incurred in the action. The first claim for relief is
breach of an express contract which arose when the Secretary of Interior made a
determination that all requirements under federal law and regulation necessary
prior to the land transfer had been met and the United States accepted payment
of the purchase price for the land in January 1993. Subsequently, a different
Secretary of Interior refused to complete the transaction and continues to
refuse to convey the land to California. US Ecology is a third-party beneficiary
of the contract because it was chosen to operate the facility. The second claim
for relief is breach of a contract which, by law, may be implied from the United
States having induced US Ecology to incur substantial costs, when US Ecology was
led to believe the United States would act fairly and honestly in conducting
requisite reviews, in granting approval of the transfer, and in conveying title
to the land upon completion of the review process in accordance with federal law
and regulation. Since 1988 the United States has made a number of determinations
regarding the sites' suitability for sale and subsequent use as a LLRW disposal
facility site. Notwithstanding those determinations, the United States refused
and continues to refuse to transfer title of the land to California so the
facility can be constructed. US Ecology intends to aggressively pursue its
damage claims in this matter. Cross motions for summary judgment were argued
February 3, 1998. The Court's decision as to the existence and breach of
contract and third party beneficiary status of US Ecology is expected within the
first half of 1998.
23
<PAGE> 24
US ECOLOGY, INC. V. U.S. DEPARTMENT OF THE INTERIOR, ET AL, U.S. DISTRICT COURT,
DISTRICT OF COLUMBIA, CASE NO. 1:97CV00365. This case, commenced on February 24,
1997, is based on the same operative facts as those of the breach of contract
claims brought in the U.S. Court of Federal Claims by US Ecology. This complaint
is similar to that brought by the California Department of Health Services
against Bruce Babbitt, Secretary of Interior, the U.S. Department of the
Interior and the U.S. Bureau of Land Management. US Ecology seeks relief in the
form of a writ of mandamus compelling the Secretary of Interior to convey title
to the land at Ward Valley, California to California, in accordance with the
lawful determinations made by his predecessor in office. Additionally, US
Ecology is seeking judgment against the Defendants that their purported
rescission of the prior Secretary's decision and their continuing failure to
deliver title to the land is unlawful, arbitrary, an abuse of discretion and
beyond their statutory authority and that therefore their actions hindering and
delaying the transfer should be set aside, including a decision to engage in a
Supplemental Environmental Impact Statement.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to the Company's security holders during the
fourth quarter of 1997.
PART II
ITEM 5. MARKET FOR AMERICAN ECOLOGY CORPORATION COMMON STOCK AND RELATED
STOCKHOLDER MATTERS
American Ecology Corporation common stock is currently listed on the NASDAQ
National Market System under the symbol ECOL. As of March 23, 1998, there were
approximately 7,600 record holders of common stock. The high and low sales
prices for the common stock on the NASDAQ and the dividends paid per common
share for each quarter in the last two years are shown below:
<TABLE>
<CAPTION>
1997 1996 Dividends Per Share
---- ---- -------------------
PERIOD High Low High Low 1997 1996
---- --- ---- --- ---- ----
<S> <C> <C> <C> <C> <C> <C>
1st Quarter 3 1 3-1/2 1-7/8 $ -- $ --
2nd Quarter 1-7/8 1 2-1/2 7/8 -- --
3rd Quarter 2-1/10 1-1/2 1-9/16 7/8 -- --
4th Quarter 1-7/8 1-1/4 1-5/16 15/16 -- --
</TABLE>
The Company's amended credit facility with its bank lender prohibits cash
dividends on common stock.
24
<PAGE> 25
ITEM 6. SELECTED FINANCIAL DATA
AMERICAN ECOLOGY CORPORATION
This summary should be read in conjunction with the consolidated financial
statements and related notes.
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, 1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Revenues $ 41,522 $ 49,972 $ 67,895 $ 71,891 $ 60,312
% Increase (decrease) in revenues from prior year (16.9)% (26.4)% (5.6)% 19.2% (15.0)%
Net income (loss) (1) $ (676) $(11,407) $(48,903) $ 3,850 $ 4,744
Basic earnings per share $ $ (1.47) $ (6.12) $ $
(.17) .48 .57
Shares used to compute income (loss) per share (000's) 8,163 7,907 7,826 7,851 8,097
Working capital (deficit) $ (16,930) $(16,693) $(16,115) $ 1,563 $ 4,771
Total assets $ 98,431 $ 99,027 $114,125 $155,439 $ 108,122
Long-term debt, net of current portion $ 39,872 $ 36,202 $ 28,357 $ 33,493 $ --
Shareholders' equity $ 13,380 $ 13,604 $ 22,024 $ 67,045 $ 63,564
Long-term debt to total capitalization as a percentage 74.9% 72.7% 56.3% 33.3% --%
Current ratio (current assets divided by current liabilities) 0.4:1 0.4:1 0.6:1 1.0:1 1.2:1
Return on average equity (5.0)% (64.0)% (109.8)% 5.9% 8.0%
Dividends declared per common share $ $ $ .025 $ $
-- -- .10 --
Capital spending, including capital expenditures and site
development costs $ 3,442 $ 5,659 $ 8,445 $ 8,035 $ 12,558
Depletion, depreciation and amortization expense $ 3,106 $ 5,383 $ 7,319 $ 6,279 $ 4,356
</TABLE>
Per SFAS 128 basic earnings per share is restated. (1) 1996 expenses
include $7,451 in impairment losses on long-lived assets for the Winona facility
and 1995 includes $33,048 in impairment losses on long-lived assets for the
Recycle Center, WPI Waste Processors and the Winona facility.
ITEM 7. 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 to the Consolidated Financial
Statements herein, Part I, Item 3. Legal Proceedings, and the discussion below.
The following discussion and analysis should be read in conjunction with the
Financial Statements and Notes thereto included elsewhere in this Form 10-K.
25
<PAGE> 26
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. These infusions totaled $8 million, and still the
ongoing losses have resulted in working capital deficits of $16,930,000,
$16,693,000, and $16,115,000 for the years 1997, 1996, and 1995, respectively.
The Company made a Rights Offering in late 1997, and completed it February
10, 1998. This offering had positive support from the shareholders as $2,912,000
of new cash was generated. This offering was placed in conjunction with the
terms of the banking agreement, that provided for the Company to use its best
efforts to raise additional capital. That offering was therefore considered
successful as a total of $2,000,000 of new capital was raised. Please see Note 9
describing the total effect of the Rights Offering.
The Company cannot be certain about its ability to improve short-term
operating results. The Company's financial statements as of December 31, 1997,
contain no adjustments to the asset carrying amounts but, certain reserves have
been made for litigation issues as explained in Note 13. Management's actions
and plans to address these issues are as follows:
Credit Agreement
The Company has made no changes to its Credit Agreement since the Third
Amended and Restated Credit Agreement was executed on December 31, 1996. 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 has been filed as an Exhibit with the Securities and Exchange
Commission. As of December 31, 1997, the Company had borrowed all amounts
available under its Credit Agreement except for $3.1 million in interest to be
accrued in 1998 and added to the loan balance.
National Stock Market Exchange
The Company received a letter dated February 27, 1998 from the NASDAQ Stock
Market, Inc. This letter explained that with the new market value of public
float requirement, American Ecology Corporation will need to either regain
market position or be faced with a possible de-listing. The Company believes it
is taking the best position possible, but the results can not be predicted at
this time.
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 that started in 1996, was 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. There are many factors causing these results. These areas of
concern are discussed in both the MD&A and Item 1. Business.
Senior Management Changes
On February 13, 1998 Joe Nagel was elected as the new President and Chief
Operating Officer of American Ecology Corporation.
Measures to Reduce Costs
Management has been implementing a very aggressive plan since 1995, where
the Company has sized up its position to the surrounding market, where customer
potentials have been measured, where managing the Company can be improved and as
26
<PAGE> 27
a result, unprofitable divisions have been either eliminated or reorganized to
be efficient and effective. The reorganized divisions have been dissected and
analyzed to measure break-even points, maximum revenues from customers, and
optimum operating levels to maximize profitability. These variables of operation
for the Company have been adjusted and measured to fit the changing times of the
environmental industry. As discussed in Item 1. Business, the waste generators
are generating less waste now due to both Federal and State constricting the
areas in the regulations where generators were relaxed about disposal practices.
These environmental proceedings and regulations have forced all of the
environmental companies to evaluate their part in the industry. The outcome in
many areas is difficult to forecast, but the management of the Company and the
strategic plans include the flexibility to adapt to these industry changes.
The 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 is in the process of
relocating these operations to the Robstown, Texas area to work in conjunction
with Texas Ecologists landfill. This effort will result in further layoffs of
personnel and a further reduction of direct costs to the transportation
business.
At the Winona facility, the Company will continue 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 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
As a result of the changes to its management and operations in 1997, and
the implementation of the business plan, 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 in 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 February
24, 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. 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
27
<PAGE> 28
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.
In addition, the Company expects to receive federal income tax refunds of
approximately $740,000 during 1998.
RESULTS OF OPERATIONS - 1997 VS. 1996
The Company as a whole has shown improvement in operations since 1995, but
continues to report a loss. In 1997, the Company is reporting a Net Loss of
$676,000 before preferred stock dividends of $760,000. This compares to losses
of 11,407,000 and 48,903,000 for 1996, and 1995. The following table allows for
a comparison of the two service groups without consolidated corporation costs or
the captive insurance company ALEX.
In the discussions for Net Earnings (Loss), Revenues, Operating Costs and
Selling, General and Administrative (S,G&A) Expenses, comparisons are made for
all three years for the Consolidated Statements of Operations 1997, 1996, and
1995.
These comparisons reflect the changes made as a result of the
reclassification of costs between the operating and S,G&A costs. In the years
before 1997, Surecycle was included as a part of the Winona facility until the
Winona facility was closed. Also, in 1995, the discussions reflect AET
Transportation results that include costs of Transtec, American Ecology Services
Corporation, and Waste Processors Incorporated, all of which have had little to
no activity since 1995.
NET EARNINGS (LOSS)
Reported in $000
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
CHEMICAL SERVICES
Teco Beatty AET Trans Surecycle Winona Total
---- ------ --------- --------- ------ -----
Year End 1997 (104) (333) (986) (19) (1,684) (3,126)
Year End 1996 427 (1,385) (1,160) 0 (11,491) (13,609)
Year End 1995 859 (2,654) (9,748) 0 (8,488) (20,031)
LLRW SERVICES
Richland AERC Mid West CIC Compact Sheffield Total
-------- ---- -------- ----------- --------- -----
Year End 1997 3,367 265 (127) 375 0 3,880
Year End 1996 1,679 (3,407) 883 314 (224) (755)
Year End 1995 791 (28,292) 821 199 (2,032) (28,513)
</TABLE>
The 1996 results included pre-tax charges totaling $7,563,000 for unusual
events and non-recurring adjustments of which $7,451,000 related to the closed
Winona facility. For both 1997, and 1996, it is readily apparent that the
Company is supported by LLRW Services and is encumbered by Chemical Services.
The Company continues to make changes in an effort to suppress or eliminate
Chemical Service losses.
28
<PAGE> 29
The following table sets forth items in the Statements of Operations for
the three years ended December 31, 1997, as a percentage of revenue:
<TABLE>
<CAPTION>
Percentage of Revenues for the
Year Ended December 31,
-----------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Revenues 100.0% 100.0% 100.0%
Operating costs 55.9 67.2 79.3
------------ ------------ ------------
Gross profit (loss) 44.1 32.8 20.7
Selling, general and administrative expenses 52.8 48.4 49.6
Impairment losses on long-lived assets -- 14.9 48.7
-------------- ------------ ------------
Income (loss) from operations (8.7) (30.5) (77.6)
Other (income) expense, net 7.4 4.6 2.4
------------- ------------- -------------
Income (loss) before income taxes (1.3) (25.9) (80.0)
Income tax expense (benefit) (0.3) (3.0) (8.0)
------------- ------------- -------------
Preferred stock dividends 1.8 0.9 0.1
------------- ------------- -------------
Net income (loss) to common shareholders (3.4)% (23.8)% (72.1)%
============= ============= =============
</TABLE>
Revenues
Revenues for 1997 were $41,522,000, a 17% decrease from 1996 revenues of
$49,972,000, a 26% decrease from 1995 revenues of $67,895,000. The reasons for
these declines have included the closing of certain facilities and operations
that were not profitable. Even though management has implemented through its
strategic plan the closure or combining of certain operations that were
generating revenue, the overall health of the Company has improved but, on a
declining basis. The environmental industry has been impacted by many changes in
the past three years. All of these changes have made an impact that has reduced
revenues. These changes have included stricter regulations for waste generators,
therefore less waste is being generated, federal and state reclassification of
waste, and stiff competition, in a declining industry.
The following table shows the comparative results of Chemical Services and
LLRW Services. The revenues indicated here are from each site facility and do
not include consolidation adjustments. The Chemical Services revenues have
declined 36% and 40%, for 1997, and 1996. The LLRW Services have remained fairly
constant with a decline of only 3% and an increase of 1% for 1997, and 1996. A
36% and 40% decrease for 1997, and 1996 in Chemical Services is a dramatic
decline. Several factors have caused the Chemical Service revenues to decline.
On a national level for the period 1994 through 1997, hazardous waste generation
is down approximately 30 percent, while the number of generators is down 11
percent. The number of treatment, storage, and disposal companies has declined a
remarkable 49 percent marking a significant exit from and consolidation in the
market, and that trend seems to be continuing. Hazardous and non-hazardous waste
market trends are continually driven by new regulations, changes in regulations,
available disposal capacity, recycling and reuse technology development, and
disposal pricing. It is abundantly clear that the volume of hazardous waste
generated annually is declining, and the available market is shrinking. This
volume decline is resulting from a concerted effort by the industry to minimize
waste generation in general, and to encourage the reuse of waste as by-product
for other processes. Additionally, various industry sectors have influenced a
revision of regulations and consequently have been able to reclassify waste
streams.
29
<PAGE> 30
REVENUES
Reported in $000
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
CHEMICAL SERVICES
Teco Beatty AET Trans Surecycle Winona Total
---- ------ --------- --------- ------ -----
Year End 1997 5,179 6,426 3,035 2,180 0 16,820
Year End 1996 6,957 8,307 4,379 0 6,834 26,477
Year End 1995 7,731 19,297 5,399 0 11,587 44,014
LLRW SERVICES
Richland AERC Mid West CIC Compact Sheffield Total
-------- ---- -------- ----------- --------- -----
Year End 1997 6,911 8,892 2,938 7,579 0 26,320
Year End 1996 5,339 9,686 6,289 5,711 0 27,025
Year End 1995 5,163 8,566 4,914 8,104 0 26,747
</TABLE>
The Company continues to monitor closely the activity of Chemical Services.
Without further expansion into the commercial waste disposal, it does not seem
likely that revenues will increase. The TECO facility at Robstown, Texas has
nearly reached landfill capacity and continues to attempt permitting a 400 acre
commercial landfill with the TNRCC. This space is adjoining to the existing
facility but, there are many issues that remain unresolved that were discussed
in Item 1. Business.
The revenues from LLRW Services remain steady, but certain negotiations
with the union labor OCAW, at Oak Ridge, Tennessee may cause a reduction of
revenues in 1998. The Company will continue to maintain strong alliances with
others in the LLRW industry. These alliances and others are a part of the
strategic plan to develop further the LLRW Services. There are many government
restrictions that make it difficult to forecast if the strategic plan of growing
LLRW Services will be successful.
Operating Costs
The operating costs have been restated for the comparative years of 1997,
1996, and 1995. The restatement is reflected in Item 8. Financial Statements and
Supplemental Data, on the Consolidated Statement of Operations.
During 1997 management decided to reclassify certain costs previously
reported as operating costs to selling, general, and administrative expense. The
Company has reclassified insurance and depreciation expense previously recorded
as operating costs to selling, general, and administrative expense for all years
presented. Certain other operating site expenses for 1996 and 1995 that were
previously classified as operating costs have been reclassified as selling,
general, and administrative expenses. Management believes that these costs are
more appropriately classified as selling, general, and administrative expenses
than as operating costs.
Comparatively, operating costs have decreased while revenues were
declining. The improvement is marked by the effects of management's strategic
plan to reduce costs and increase gross profit. The following table reflects
operating costs as a percent of revenue with 55.9%, 67.2%, and 79.3% for the
years ended 1997, 1996, and 1995. These decreasing percentages of operating
costs result in a higher gross profit in 1997, over the prior two years.
Consolidated Results of Operations (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Revenues $41,522 $49,972 $67,895
Operating costs 23,219 55.9% 33,571 67.2% 53,823 79.3%
------ ------ ------
Gross profit (loss) $18,303 44.1% $16,401 32.8% $14,072 20.7%
</TABLE>
Operating costs decreased 30.8% from 1996, and in 1996, operating costs
decreased 37.6% from 1995. In 1997, there were no material amounts that were
written off as unusual and non-recurring type operating costs. The closure of
the Winona facility and reduced activity at the Beatty facility have generated
most of the decrease in costs. However, management has enforced many measures by
which operations have improved and become much more cost effective and operating
efficient.
30
<PAGE> 31
The following table reflects the results of Chemical Services downsizing
and lost revenues resulting in a reduction of operating costs. LLRW Services
operating costs have stayed fairly constant which is reflective of only a 3%
decline in revenues. These operating costs are by site facility or location and
include the reclassification between operating and S,G&A expenses but, do not
include the corporate consolidated adjustments or eliminations.
OPERATING COSTS
Reported in $000
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
CHEMICAL SERVICES
Teco Beatty AET Trans Surecycle Winona Total
---- ------ --------- --------- ------ -----
Year End 1997 2,867 3,034 2,147 1,710 893 10,651
Year End 1996 3,865 5,679 3,102 0 7,376 20,022
Year End 1995 4,007 15,094 4,775 0 11,814 35,690
LLRW SERVICES
Richland AERC Mid West CIC Compact Sheffield Total
-------- ---- -------- ----------- --------- -----
Year End 1997 1,333 4,211 1,660 6,982 0 14,186
Year End 1996 1,293 6,777 4,238 5,158 0 17,466
Year End 1995 1,594 7,430 3,078 7,731 1,396 21,229
</TABLE>
Selling, General and Administrative Expenses
The Selling, General and Administrative Expenses have been restated for the
comparative years of 1997, 1996, and 1995. The reinstatement is reflected in
Item 8. Financial Statements and Supplemental Data, on the consolidated
Statement of Operations.
Consolidated Results of Operations (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Revenues $41,522 $49,972 $67,895
Selling, G&A expenses 21,909 52.8% 24,187 48.4% 33,717 49.6%
------ ------ ------
</TABLE>
S,G&A decreased $2,278,000 or 9.4% from 1996, and in 1996, S,G&A decreased
$9,530,000 or 28.3% from 1995. These decreases are a result of management's
efforts and employment of the strategic plan. The plan included all of the
employees of the Company and their concerted efforts as well. In 1995, the S,G&A
costs were higher as a result of the two acquisitions in 1994 of Gibraltor
Chemical and Quadrex. S,G&A expense as a percent of revenue has increased mainly
as a result of the shift of depreciation out of direct operating costs and into
indirect S,G&A costs classification. While the legal fees remain high,
management has made many efforts to reduce and eliminate any unnecessary legal
fees. Management has also made further efforts in areas of reduced travel
expense, incentive bonus compensation, and unnecessary selling and marketing
costs. There will be a need to increase revenues in the future and as a result
certain areas of the Company's marketing program will be increased.
The following table reflects the results of Chemical Services having
downsized but, both Chemical and LLRW services have reduced their S,G&A
expenses. AET Transport has not proved to be a successful operation from the
time it was acquired as WPI Waste Processors. The remaining parts of the
transportation business are being relocated from Pasadena, Texas to the
Robstown, Texas TECO facility. LLRW Services S,G&A made considerable improvement
by decreasing 12.1% in 1997 and 7.3% in 1996. The S,G&A costs are by site
facility or location and include the reclassification between operating and
S,G&A expenses but, do not include the corporate consolidated adjustments or
eliminations.
31
<PAGE> 32
S,G&A EXPENSES
Reported in $000
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
CHEMICAL SERVICES
Teco Beatty AET Trans Surecycle Winona Total
---- ------ --------- --------- ------ -----
Year End 1997 1,814 3,119 1,496 380 952 7,761
Year End 1996 1,770 3,032 1,720 0 2,696 9,218
Year End 1995 1,890 4,209 3,016 0 3,482 12,597
LLRW SERVICES
Richland AERC Mid West CIC Compact Sheffield Total
-------- ---- -------- ----------- --------- -----
Year End 1997 1,579 3,655 582 319 6 6,141
Year End 1996 1,514 4,687 413 234 138 6,986
Year End 1995 1,850 4,434 571 174 507 7,536
</TABLE>
Investment Income
Investment income is comprised principally of interest income earned on
various investments in securities held-to-maturity, dividend income, realized
and unrealized gains and losses earned on the Company's stock portfolio
classified as trading securities. As of December 31, 1997 the Company reported
an unrealized gain of $538,000 on investments. The realized gains or losses on
securities available-for-sale are included as a component of investment income
when realized, and during one six month period ending June 30, 1997 the Company
sold the entire balance of its holding in Perma-Fix (PESI) common stock, 795,000
shares, for a loss of $59,000. The Company had acquired this stock on the
acquisition of the Quadrex Recycle Center in September 1994. These shares were
sold to help generate cash, after compliance with the terms of the current
banking agreement.
Interest Expense
Interest expense is the total interest expense incurred by the Company on
outstanding indebtedness less capitalized amounts. In 1997, 1996, and 1995, the
Company incurred $3,708,000, $3,558,000, and $3,281,000, respectively, in
interest cost, all of which was capitalized for the development of the Company's
LLRW facilities in California in accordance with Statement of Financial
Accounting Standards No. 34, Capitalization of Interest Cost. Substantially all
of the interest cost incurred for 1997, 1996, and 1995 related to borrowings
under the Company's Credit Agreement with its bank lender.
Income Taxes
The Company's federal effective income tax (benefit) rates were 0%, (12)%,
and (10)%, for the fiscal years 1997, 1996, and 1995, respectively. The
effective rate of 0% in 1997 does not reflect any recognition of future tax
benefits on timing differences or net operating loss carryforwards.
Financial Assurance and Site Maintenance
The Company operates its hazardous waste disposal sites under RCRA of 1976
("RCRA") permits. The LLRW sites are operated under licenses from state and, in
some cases, federal agencies. When these facilities reach capacity, or lease or
license termination dates, as the case may be, they must be closed and
maintained for a period of time prescribed by law or by license. In the case of
the RCRA-permitted hazardous sites, federal regulation requires that operators
demonstrate the financial capability to close sites on an immediate, unscheduled
(worst-case) basis. The estimated costs of such a closure are set forth in the
operator's RCRA closure/post-closure plan.
To secure closure/post-closure obligations of its hazardous waste disposal
sites under federal and state regulations, the Company has provided letters of
credit, certificates of insurance, and corporate guarantees as financial
assurance. Cash and investment securities totaling $14,287,000 and $16,394,000
at December 31, 1997 AND 1996, respectively, have been pledged as collateral for
the Company's closure/post-closure obligations. During the year ended December
31, 1997 the total value of pledged securities decreased by $2,107,000. This
decrease was the result of the sale of the Company's holdings of 795,000 shares
of Perma-Fix stock, for which approximately $1,660,000 was realized, and in the
reduction in the amount of a Letter of Credit by about $600,000, secured by
cash. These securities are pledged for the performance of a Remedial
Investigation and Feasibility Study ("RI/FS") and performance of corrective
32
<PAGE> 33
action at the closed Sheffield, Illinois chemical waste facility, compliance
with the TNRCC requirements related to a deepwell at the Company's Robstown,
Texas hazardous disposal site, closure costs for the Beatty, Nevada LLRW site,
closure costs for the Recycle Center, closure costs for the Winona facility,
test borings at the proposed LLRW sites in Nebraska and California, settlement
with generators of waste at the Richland, Washington facility and performance
bonds.
The RI/FS for the Sheffield facility was completed and approved by the EPA
in 1990. The Company is in the remedial phase of the Sheffield program as set
forth in the EPA's corrective measures implementation plan. During 1997, the
Company spent approximately $457,000 on remediation at the closed Sheffield
hazardous disposal site.
The nature of the hazardous material handled by the Company and its
subsidiaries could give rise to substantial damages if spills, accidents or
migration of hazardous material occurs. The occurrence of such events could have
a material adverse effect upon the Company's liquidity and operating results.
Subsequent Event
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 26, 1998.
Corporate Development Considerations
See "Business - Low-Level Radioactive Waste Services - Disposal Services -
Proposed Ward Valley, California Facility" and "Proposed Butte, Nebraska
Facility" for a description of the Company's facilities, and the impact of such
facilities and other future considerations on the Company's consolidated
financial condition and results of operations.
33
<PAGE> 34
INDEPENDENT AUDITORS' REPORT
To the Shareholders and Board of Directors
American Ecology Corporation
We have audited the accompanying consolidated balance sheets of American Ecology
Corporation and subsidiaries as of December 31, 1997 and 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 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 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, 1997 and 1996, and the results of their
operations and their cash flows for the years 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 and
had working capital deficit of $16.9 million as of December 31, 1997. 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 6, 1998
34
<PAGE> 35
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To American Ecology Corporation:
We have audited the accompanying consolidated statements of operations,
shareholders' equity and cash flows of American Ecology Corporation (a Delaware
Corporation) for the year 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 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 results of operations and cash flows of American
Ecology Corporation and subsidiaries for the year 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 $16.1 million. During 1995, the
Company obtained capital contributions from certain of its directors and others
and restructured its Credit Agreement with the bank; however, the Company
continues to have limited cash resources available and has substantial
obligations that are due in the future. Under the terms of the Credit Agreement,
the bank may accelerate the maturity of the debt in the event of violation of
any covenant of the Credit Agreement or if a material adverse event is deemed by
the bank to have occurred. If the Company is unable to remain in compliance with
the terms of the Credit Agreement or obtain waivers in the event of a default
and the bank accelerates maturity of the Credit Agreement, the Company does not
have adequate financial resources to extinguish the loan and the Company's
operations may be negatively impacted. As discussed in Note 13 to the
consolidated financial statements, the Company is involved in various
significant permitting efforts, claims, lawsuits and other administrative
matters which are uncertain at this time. The foregoing matters raise
substantial doubt about the Company's ability to continue as a going concern.
Management's plans in regard to these matters are also described in Note 1. The
accompanying consolidated financial statements do not include any adjustments
relating to the recoverability and classification of asset carrying amounts or
the amounts and classification of liabilities that might be necessary should the
Company be unable to continue as a going concern, or adjustments, if any, that
may be necessary as a result of the outcome of the matters discussed above.
ARTHUR ANDERSEN LLP
Houston, Texas
April 11, 1996
35
<PAGE> 36
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
AMERICAN ECOLOGY CORPORATION
CONSOLIDATED BALANCE SHEETS
($ IN 000'S EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
As of December 31,
------------------
1997 1996
---- ----
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 366 $ 185
Investment securities -- 410
Receivables, net of allowance for doubtful
accounts of $1,440 and $1,155, respectively 7,929 10,396
Income taxes receivable 740 740
Prepayments and other 877 949
------------- -------------
Total current assets 9,912 12,680
Cash and investment securities, pledged 14,287 16,394
Property and equipment, net 13,004 14,255
Deferred site development costs 58,890 53,030
Intangible assets relating to acquired businesses, net 438 462
Other assets 1,900 2,206
------------- -------------
Total Assets $ 98,431 $ 99,027
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities:
Revolving credit loan $ -- $ --
Current portion of long term debt 111 503
Accounts payable 8,997 10,470
Accrued liabilities 14,801 15,376
Deferred site maintenance, current portion 2,842 3,024
Income taxes payable 91 --
------------- -------------
Total current liabilities 26,842 29,373
Long term debt, excluding current portion 39,872 36,202
Deferred site maintenance, excluding current portion 18,337 19,848
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 shares issued and outstanding 3,000 3,000
Common stock, $.01 par value, 25,000,000 authorized, 8,462,533
and 8,010,017 shares issued and outstanding, respectively 85 80
Additional paid-in capital 47,701 46,971
Unrealized gain (loss) on securities available-for-sale -- (477)
Retained earnings (deficit) (37,407) (35,971)
------------- -------------
Total shareholders' equity 13,380 13,604
------------- -------------
Total Liabilities and Shareholders' Equity $ 98,431 $ 99,027
============= =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
36
<PAGE> 37
AMERICAN ECOLOGY CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
($ IN 000'S EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Revenues $ 41,522 $ 49,972 $ 67,895
Operating costs 23,219 33,571 53,823
-------- -------- --------
Gross profit (loss) 18,303 16,401 14,072
Selling, general and administrative expenses 21,909 24,187 33,717
Impairment loss on long-lived assets -- 7,451 33,048
-------- -------- --------
Loss from operations (3,606) (15,237) (52,693)
Investment income (1,203) (932) (582)
(Gain) or loss on sale of assets (136) (55) 1,386
Other expense (1,723) (1,326) 821
-------- -------- --------
Loss before income taxes (544) (12,924) (54,318)
Income tax expense (benefit) 132 (1,517) (5,415)
-------- -------- --------
Net income or (loss) (676) (11,407) (48,903)
Preferred stock dividends 760 465 88
-------- -------- --------
Net loss available to common shareholders $ (1,436) $ (11,872) $ (48,991)
========== ========== =========
Basic earnings per share $ (.17) $ (1.47) $ (6.12)
========== ========== =========
Diluted earnings per share $ (.17) $ (1.47) $ (6.12)
========== ========== =========
Dividends paid per common share $ -- $ -- $ .025
========== ========== =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
37
<PAGE> 38
AMERICAN ECOLOGY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
($ 000'S)
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (676) $ (11,407) $ (48,903)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Impairment loss on long-lived assets -- 7,451 33,048
Depletion, depreciation and amortization 3,106 5,383 7,319
Deferred income taxes -- -- 816
(Gain) loss on sale of assets (136) (58) 1,386
Loss on sale of securities 59 -- --
Debt restructure fees -- 265 --
Realized loss on sales of securities available-for-sale -- -- 101
Stock compensation 198 -- --
Changes in assets and liabilities:
Receivables 2,467 6,542 12,655
Income taxes receivable -- 4,599 (5,339)
Proceeds from insurance claim -- 2,538 --
Investment securities classified as trading 1,953 (582) (354)
Other assets (68) (850) ( 1,016)
Deferred site maintenance (1,693) (2,278) (40)
Other liabilities (2,225) (6,433) 2,923
--------- ---------- ---------
Total adjustments 3,661 16,577 51,499
--------- ---------- ---------
Net cash provided by operating activities 2,985 5,170 2,596
Cash flows from investing activities:
Capital expenditures, excluding site development costs (1,356) (1,677) (2,320)
Site development costs, including capitalized interest (2,086) (3,982) (6,125)
Proceeds from sales of assets -- 31 1,080
Net proceeds from sales of investment securities 1,660 (1,993) 214
Transfers to (from) cash and investment securities, pledged (678) 384 (241)
--------- ---------- ---------
Net cash used in investing activities (2,460) (7,237) (7,392)
Cash flows from financing activities:
Proceeds from issuances and indebtedness 23,022 29,008 26,640
Payments of indebtedness (23,518) (29,985) (26,430)
Proceeds from common stock issued -- -- 98
Proceeds from preferred stock issued, net -- 3,000 4,759
Liquidation of shareholders' rights -- -- (78)
Payment of cash dividends -- -- (195)
Stock options exercised 152 -- --
--------- ---------- ---------
Net cash provided by (used in) financing activities (344) 2,023 4,794
--------- ---------- ---------
Increase (decrease) in cash and cash equivalents 181 (44) (2)
Cash and cash equivalents at beginning of year 185 229 231
--------- ---------- ---------
Cash and cash equivalents at end of year $ 366 $ 185 $ 229
========= ========== =========
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest, net of amounts capitalized $ 128 $ -- $ --
Income taxes paid $ 88 $ -- $ --
</TABLE>
The accompanying notes are an integral part of these financial statements.
38
<PAGE> 39
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, 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 -- --
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)
Net loss -- -- -- -- -- (676)
Common stock issuances -- -- 5 730 -- --
Dividends - preferred stock -- -- -- -- -- (760)
Unrealized gain (loss) on
securities available-for-sale -- -- -- -- 477 --
----- ----- ----- -------- ---- --------
Balance, December 31, 1997 $ 1 $3,000 $ 85 $ 47,701 $ -- $(37,407)
===== ===== ===== ======== ==== ========
</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.
39
<PAGE> 40
AMERICAN ECOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. NATURE OF 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 the larger market share is in the Gulf and West Coast regions of the country
at its hazardous waste landfill disposal sites in Robstown, Texas and Beatty,
Nevada. 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.
The accompanying financial statements are prepared on a consolidated basis.
There are eight reporting subsidiaries with activity and three subsidiaries that
had no activity in 1997.
Certain estimates and assumptions have been made by the Company for the
consolidated financial statements. The consolidated financial statements are
prepared in accordance with Generally Accepted Accounting Principles.
Business Conditions
The Company has incurred significant losses during the last three years and
had a working capital deficit of $16.9 million as of December 31, 1997. In the
first two months of 1998, the Company also suffered operating losses. At
February 28, 1998 the year to date loss was $336,000. Although the Company
obtained capital contributions of approximately $2.9 million from a rights
offering subsequent to year end and received certain new waivers for financial
and other covenants in the Credit Agreement from the bank for 1997, the Company
continues to have limited cash resources available and is currently experiencing
difficulty paying its on-going obligations as they become due. 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 continued with an aggressive business plan to improve the
Company's financial status by substantially reducing operating expenses and
enhancing 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. Management believes the plans that have
been implemented and the strategies exercised will continue to show improvement.
However, there can be no assurance that achievement of the business plan will be
successful.
Management is also pursuing legal claims for breach of contract against the
federal government and various federal agencies relating to the transfer of land
located in Ward Valley, California to the state of California for the
development and construction of a LLRW site for the Southwestern Compact. See
note 13 for more details. Management believes that if the Company is successful
in prevailing in these legal claims, sufficient cash and revenues will be
generated to eliminate the cash flow problems previously described.
In the event the Company does not meet its business plan objectives or
prevail in claims against the government and 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.
40
<PAGE> 41
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.
At the Oak Ridge facility the Company ended negotiations for a new contract
with OCAW local 3-983 February 10, 1998 with a strike by all 67 bargaining unit
employees. The facility continued to operate with supervisory non-union staff
until employees asked to return to work on March 2, 1998 under the terms and
conditions of the old contract.
The Company submitted a final proposal on March 4, 1998 which was rejected
by OCAW local 3-983. On March 5, 1998 the Company notified the OCAW that the
parties were at impasse and implemented the final proposal which was effective
at midnight on March 7, 1998. Bargaining unit employees continue to work under
the terms and conditions of the Company's final proposal.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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.
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. The Company engaged independent surveys by
certified engineers and surveyors to measure remaining cell volume for each site
for December 31, 1997. 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 4 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 1997, 1996, and 1995, maintenance and repairs expenses were $521,000,
$982,000, and $1,224,000, 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 Company currently holds the license and permits from the State of
California to operate the Ward Valley LLRW facility, as part of the Southwestern
Compact. However, neither the Company nor the State of California have the land
to operate this facility at the proposed site in Ward Valley. The US Government
will need to transfer the land to the State of California, or the Company will
need to recover monetary damages from the lawsuit that it has filed against the
US Government. In the first quarter of 1997, the Company filed two lawsuits
against the United States. The first was filed in the Court of Federal Claims,
seeking monetary damages in excess of $73 million. The second case was filed in
the Federal District Court in Washington D.C. seeking injunctive relief and a
writ of mandamus ordering the land transfer to California. Both cases are
pending.
41
<PAGE> 42
All costs related to the development of the Ward Valley facility have been
capitalized by the Company. As of December 31, 1997, the Company had deferred
$51,318,000 (52% of total assets) of pre-operational facility development costs
of which $10,035,000 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 Department of Health Services (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
$7,579,000, $5,711,000, and $8,100,000, in 1997, 1996, and 1995, respectively.
Substantially all funding to develop the Butte facility is being provided by the
major generators of waste in the CIC. As of December 31, 1997 the Company has
contributed and deferred approximately $7,572,000 (8% of total assets), of which
$1,480,000 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 was $3,708,000 in 1997, $3,558,000 in 1996 and $3,281,000 in 1995.
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 $312,000, $288,000, and $314,000 at December 31, 1997, 1996, and
42
<PAGE> 43
1995, respectively. Amortization of intangible assets was $24,000, $24,000, and
$742,000 in 1997, 1996, and 1995, 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, included under the caption Other Assets
in the Consolidated Balance Sheets, are primarily comprised of outside
engineering and legal expenses and are capitalized and amortized over the life
of the applicable permits. At December 31, 1997 and 1996, there were $1,295,000
and $1,224,000, respectively, of unamortized costs included in other assets in
the accompanying consolidated balance sheets.
The Company operates its various sites under the regulations of, and
permits issued by various state and federal agencies. Several of the Company's
existing sites are currently seeking permit renewals and/or expansion permits.
There is no assurance of the outcome of any permitting efforts. The permitting
process is subject to regulatory approval, time delays, local opposition and
potential stricter governmental regulation. Substantial losses which 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, 1997, management believes that assets which could currently be
affected by permitting efforts are recoverable at their recorded values.
Self-Insurance. The Company has insurance policies which cover any annual
losses exceeding $75,000 per employee for employee health care. The Company also
has insurance policies covering claims in excess of $100,000 for workers'
compensation, auto, and general liability costs. Self insurance liabilities are
based on claims filed and estimates for claims incurred but not reported.
The Company believes it operates professionally and prudently, however, the
environmental business exposes the Company to many risks. The risks include
potential harmful substances escaping into the environment causing damage or
injury. An insurance program has been reviewed and put into place that under its
insurance policies, the Company generally has self-insured retention limits or
deductibles. These range from $25,000 to $250,000 and include fully insured
layers of coverage above such retentions or deductibles. The nature of the
Company's business exposes it to accidental environmental contamination losses
which are generally not covered by primary casualty insurance programs. To
provide insurance protection for environmental claims the Company has obtained
environmental impairment liability insurance and professional environmental
consultants liability insurance for non-nuclear related occurrences. For
radioactive risk, the Company has purchased nuclear liability insurance covering
operations of its facilities, suppliers and transporters. In addition, the
Company has purchased primary casualty and excess liability policies all through
traditional third party insurance.
Pursuant to RCRA, the Company is required to maintain environmental
impairment liability insurance coverage with specified minimum limits for sudden
and non-sudden accidental occurrences. The Company is in compliance with
required limits and coverage with the exception of the Sheffield, Illinois site
where such insurance has been unavailable.
In 1987, the Company organized and funded a wholly-owned subsidiary,
American Liability and Excess Insurance Company ("ALEX") to reinsure financial
assurance insurance for the Company's closure and post-closure responsibilities
at certain of its sites. ALEX is currently reinsuring financial assurance for
closure and post-closure of the Company's facilities and underwriting a
performance bond for one of the Company's subsidiaries. ALEX has funded cash
reserves representing the approximate present value of the closure or
post-closure obligation being insured. As of December 31, 1997, the ALEX
investment portfolio was approximately $8 million.
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
43
<PAGE> 44
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 Resource Conservation and Recovery Act (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. The Company has not discounted any of the deferred site
maintenance accruals for either 1997 or 1996
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.
<TABLE>
<CAPTION>
(000's except per share amounts)
Year Ended December 31,
-----------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Net income (loss) $ (676) $(11,407) $ (48,903)
Adjustments to net income (loss):
Preferred stock dividends 760 465 88
--------- --------- ----------
Adjusted net income (loss) available to
common shareholders $(1,436) $(11,872) $ (48,991)
Weighted average shares outstanding-
Common shares outstanding at year end 8,163 7,907 7,826
Adjustment factor for rights offering 1.022 1.022 1.022
--------- --------- ----------
Adjusted shares 8,342 8,081 7,998
Basic EPS $ (.17) $ (1.47) $ (6.12)
====== ======= =======
Diluted EPS $ (.17) $ (1.47) $ (6.12)
====== ======= =======
</TABLE>
Restated EPS for the Effects of the Rights Offering. On December 30, 1997
the Company filed its prospectus and Form S-3 for a rights offering. The Company
issued non-transferable rights to subscribe for up to 8,379,813 shares of the
Company's Common Stock $.01 par value per share. Each holder of the Company's
Common Stock was entitled to receive one Right for each share of Common Stock
held on the Record Date of December 8, 1997. Each holder was entitled to
purchase one additional share of Common Stock for each Right held. The Rights
Offering expired on February 10, 1998 at 5:00 PM eastern time. A total of
3,912,936 shares were issued from the Rights Offering.
44
<PAGE> 45
RESTATED EPS
- ------------
1997 1996 1995
---- ---- ----
Basic EPS $ (.17) $ (1.47) $ (6.12)
Diluted EPS $ (.17) $ (1.47) $ (6.12)
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 6, 7 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 $7,579,000 and $5,711,000, in 1997 and 1996, respectively, or 18%
and 11% of the Company's consolidated revenues. No other single customer
accounted for 10% or more of the Company's consolidated revenues for 1997, or
1996.
Credit Risk Concentration. Concentrations of credit risk with respect to
accounts receivable are believed to be limited due to the number,
diversification and character of the obligors and the Corporation's credit
evaluation process. Typically, the Corporation has not required collateral for
such obligations.
Fair Value of 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 interest rate terms set forth in the bank credit facility
agreement.
Reclassification. During 1997 management decided to reclassify certain
costs previously reported as operating costs to selling, general, and
administrative expense. The Company has reclassified insurance and depreciation
expense previously recorded as operating costs to selling, general, and
administrative expense for all years presented. Certain other operating site
expenses for 1996 and 1995 that were previously classified as operating costs
have been reclassified as selling, general, and administrative expenses.
Management believes that these costs are more appropriately classified as
selling, general, and administrative expenses than as operating costs.
Special Charges. Please refer to Note 13, for the discussion on Houston 88.
In this case the court judgment ordered American Ecology to pay $2,044,000. The
full amount of this judgment has been accrued and accounted for in the financial
statements at December 31, 1997. The Company has filed an appeal, but the
outcome is unknown, and cannot be determined.
NOTE 3. CASH AND INVESTMENT SECURITIES
In the first quarter of 1997, the Company changed security brokers to
Merrill Lynch Company. Merrill Lynch and Chase Bank of Texas now hold the
securities and cash of the Company and the wholly owned subsidiary American
Liability and Excess Insurance Company (ALEX). ALEX is a captive insurance
company serving the Company's closure and post closure obligations in
conjunction with the Company's insurance carrier. The pledged cash and
investment securities represent collateral for these closure obligations,
performance of remedial investigations and feasibility studies (RI/FS), and
performance of corrective action at the closed Sheffield, Illinois facility,
compliance with Texas Natural Resource Conservation Commission (TNRCC)
requirements related to Texas Ecologists closure, closure for USE at the Beatty,
Nevada facility, and test borings at the proposed Nebraska and California
facilities, and settlement with waste generators at USE's Richland, Washington
facility, and various performance bonds. The investment mix was changed from
primarily preferred stocks to a combination of preferred stocks, treasury bond
45
<PAGE> 46
futures, bonds, and money market securities. Costs of all securities held by the
Company are determined using a specific identification method.
Cash and investment securities at December 31, 1997 and 1996, were as
follows (in thousands):
December 31, 1997
Market Unrealized
Costs Value Gain/(Loss)
------------- ------------ -----------
Cash and cash equivalents $ 3,484 $ 3,484 $ --
Trading securities 6,243 6,781 538
Securities held-to-maturity 4,388 4,388 --
------------- ------------ ----------
$ 14,115 $ 14,653 $ 538
============= ============ ==========
December 31, 1996
Cash and cash equivalents $ 788 $ 788 $ --
Trading securities 7,573 7,576 3
Securities held-to-maturity 7,383 7,383 --
Securities available for sale 1,719 1,242 (477)
------------- ------------ -----------
$ 17,463 $ 16,989 $ (474)
============= ============ ===========
Investments in securities available-for-sale consisted of common stock of
Perma-Fix, Inc. which had 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 was included as a separate component of shareholders' equity
during the period ending 1996. In 1997 proceeds of $1,660,000 received on sales
of securities available-for-sale during 1997 resulted in realized losses of
$59,000. In 1997 and 1996, investment securities held to maturity were purchased
and held, there were no gains or losses realized. In 1995, proceeds of $214,000
received on sales of securities classified available-for-sale resulted in
realized losses of $101,000.
The change in net unrealized holding gains on trading securities was
$503,000 in 1997 and $115,000 in 1996 each of which has been included in
earnings. Investments in securities held-to-maturity mature over various dates
during 1998 and are reported at their amortized cost basis, which approximates
fair value at December 31, 1997. Investments in securities held-to-maturity at
December 31, 1997 and 1996, consisted of the following (in thousands):
1997 1996
---- ----
U.S. Government securities $ 4,147 $ 7,156
Certificates of deposit 83 69
Money market accounts and other 158 158
---------- ----------
$ 4,388 $ 7,383
========== ==========
Certain cash accounts and substantially all investments in securities
held-to-maturity and trading securities totaling $14,287,000, and $16,394,000 at
December 31, 1997 and 1996, respectively, have been classified as non-current
assets as cash and investment securities, pledged. The amounts pledged by the
Company generally equal the present value of its estimated future closure and
post-closure obligations.
46
<PAGE> 47
NOTE 4. PROPERTY AND EQUIPMENT
Property and equipment at December 31, 1997 and 1996, was as follows (in
thousands):
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Land $ 1,819 $ 1,819
Cell development costs 11,035 10,540
Buildings and improvements 7,531 6,425
Decontamination and processing equipment 1,143 2,155
Vehicles and other equipment 18,624 17,944
-------- -------
40,152 38,883
Less: Accumulated depletion, depreciation and amortization (27,148) (24,628)
-------- -------
$13,004 $14,255
======== =======
</TABLE>
Depreciation expense was $2,637,000, $4,798,000, and $6,530,000 for 1997,
1996, and 1995, respectively.
NOTE 5. ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS
In March 1995, the Financial Accounting Standards Board issued SFAS 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 were
no impairments in 1997. The Company has made a complete evaluation of assets
every year since 1995, and applied the accounting rules of FASB 121 in 1995,
1996 and 1997. The impairment in 1996 was for the Winona, Texas facility when
the Company determined operations were to be discontinued.
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Writedown of the carrying amount of goodwill resulting from
the acquisition of the Recycle Center $ -- $ -- $ 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 -- -- 3,458
Writedown of property and equipment at the Winona facility -- -- 1,681
-------------- ----------- ----------
Total impairment losses $ -- $ 7,451 $ 33,048
============== =========== ==========
</TABLE>
The circumstances that led to the impairment losses included an
accumulation of costs significantly in excess of the amount of acquisition
costs. Contributing factors in 1996, and 1995, included operating and cash flow
losses and the Company's inability to achieve the operating results that were
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, contributed to the Company's inability to
achieve anticipated operating results.
47
<PAGE> 48
NOTE 6. ACCRUED LIABILITIES
Accrued liabilities at December 31, 1997 and 1996 were as follows (in
thousands):
1997 1996
---- ----
Waste processing and burial $ 5,567 $ 6,240
State disposal fees and taxes 1,360 2,359
Regulated rate settlements 1,238 1,643
Compensation costs 680 1,010
Deferred revenue 948 674
Houston office 88 lease 2,044 621
Other 2,030 2,273
Preferred stock dividends 934 556
---------- ----------
$ 14,801 $ 15,376
========== ==========
In September 1997, the Company conducted a complete physical inventory of
all wastes on site and reconciled the results with the historical automated
waste tracking data system. The inventory included all aspects of the costs to
process and remove waste from the facility. The re-evaluation resulted in a
recorded liability of $5,567,000. The Company continues to evaluate alternative
methods of treatment and disposal which may be less costly but would still
comply with state and federal regulations. However, it is believed there is an
adequate accrual reserved in the event less costly alternatives are not
available.
In 1996, the Company proposed, and the Tennessee Division of Radiological
Health approved, a schedule to remove all legacy waste from the site by the end
of 1997. Due to financial limitations, the Company was unable to remove all of
the waste on schedule. However, in addition to the physical waste inventory
mentioned above, the Company hired a full time waste inventory manager, retained
a full time consultant to improve and expand waste handling service lines,
acquired or transferred equipment to improve waste handling, began processing
waste waters consistently, eliminated 21,000 cubic feet of waste soil, and
shipped wastes to a Utah disposal facility. These base line improvements should
improve the Company's ability to dispose of legacy waste and manage future
wastes more efficiently. Based on that, the Company met with the Tennessee
Division of Radiological Health and submitted a new draft proposal for
disposition of the legacy wastes which the Division is currently reviewing.
Preliminary indications are the Division will not take enforcement action
against the facility and will continue to work with the Company to resolve the
problem.
NOTE 7. DEFERRED SITE MAINTENANCE
Deferred site maintenance accruals at December 31, 1997 and 1996 were as
follows (in thousands):
1997 1996
---- ----
Accrued costs associated with open facilities $ 9,585 $12,214
Accrued costs associated with closed facilities 11,594 10,658
------ ------
Sub-total 21,179 22,872
Less: current portion (2,842) (3,024)
------ ------
Deferred site maintenance, excluding current portion $18,337 19,848
====== ======
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 Company generally provides
accruals for the estimated costs of closures and post-closures 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.
48
<PAGE> 49
The portion of these obligations expected to be spent within the following
twelve month period is classified as current.
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, Texas facility,
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 $5,509,000
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 $1,213,000 at December 31, 1997.
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 ($1,733,000 balance at December 31, 1997) 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.
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
$797,000 is included in the Company's deferred site maintenance accruals at
December 31, 1997.
In November 1997, the Texas Natural Resource Conservation Commission
(TNRCC), considered the oral report, and after proper notice, and consideration,
accepted the request and the Agreed Order was entered in a matter of public
record on November 21, 1997 for the closure of the American Ecology
Environmental Services Corporation facility at Winona, Texas. This facility will
be closed under the regulations of the Resource Conservation and Recovery Act of
1976, as amended ("RCRA"), and any other applicable state and federal
regulations.
As part of the technical requirement to the Agreed Order, the Company is
required to provide financial assurance. Financial assurance is provided for the
closure of the AEESC Winona facility in the amount of $1,318,478. This amount
will not be reduced until closure, corrective action and post-closure care have
been completed. The Company believes that this will be completed by the year
2001.
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 and the groundwater contamination
remediation at the Winona, Texas 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, 1997, the Company had accrued
49
<PAGE> 50
$9,479,000 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. 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, 1997
includes $28,000 for 1998.
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 8. REVOLVING CREDIT LOAN AND LONG TERM DEBT
Long term debt at December 31, 1997 and 1996 consisted of the following (in
thousands):
1997 1996
---- ----
Secured bank credit facility $39,257 $36,116
Capital lease obligations and other 726 589
------- -------
39,983 36,705
Less: Current maturities (111) (503)
------- -------
Long term debt $39,872 $36,202
======= =======
Aggregate maturities of long-term debt and the future minimum payments
under capital leases are as follows (in thousands):
Year Ended
December 31,
------------
1998 $ 111
1999 5,119
2000 34,352
2001 401
----------
Total $ 39,983
==========
On October 31, 1996 the Company renegotiated its prior bank debt under the
terms of a Third Amended and Restated Credit Agreement ("Credit Agreement").
Those terms, 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 percent through 1998.
Thereafter, interest is to be paid quarterly at the rate of 10 percent 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. No further amendments have been made to this Credit Agreement.
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.
At December 31, 1997 the outstanding balance of the Term Loan was
$39,257,562. Interest accrued at 7 percent in the amount of $4,288,346 was
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 $1,284,185 at December 31, 1997.
50
<PAGE> 51
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 December 31, 1997 the Company had issued letters of credit with an
outstanding face value of $5,017,000, including $1,842,000 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 for 1997, and 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, as
of December 31, 1997 and for the periods ended January and February 1998. The
following defaults were:
Section 7.01(a) Financial Statements: Submit monthly financial statements
within 15 business days of the end of each month.
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 1997 and 1998 to be $500,000 and $1,000,000 or more,
respectively, and on the last day of each month in 1998 to be $250,000 or more.
The following occurred at:
December 31, 1997 $1,438,000 in default of quarterly bank covenant
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 can not assert that it will not be in
default of certain covenant provisions again in the future.
NOTE 9. 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,
51
<PAGE> 52
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 26, 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 $934,000 and $514,000 at December 31, 1997 and 1996,
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.
NOTE 10. INCOME TAXES
The components of the income tax provision (benefit) were as follows (in
thousands):
Year Ended December 31,
1997 1996 1995
---- ---- ----
Current - Federal $ -- $ (1,552) $ (6,061)
- State 132 35 (170)
------- -------- --------
132 (1,517) (6,231)
------- -------- --------
Deferred - Federal -- -- 816
------- -------- --------
$ 132 $ (1,517) $ (5,415)
======= ======== ========
52
<PAGE> 53
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,
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Income tax (benefit) - statutory rate (34.0)% (34.0)% (34.0)%
State income taxes, net of federal tax benefit -- -- (.3)
Dividend income excluded from taxable income -- -- (.1)
Non-deductible goodwill amortization -- -- 5.3
Valuation allowance for deferred tax assets 26.2 14.9 18.0
Tax refund -- 5.7 --
Other, net 7.8 1.4 1.1
------- ------- -------
Total effective tax (benefit) rate --% (12.0)% (10.0)%
======= ======= =======
</TABLE>
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,
1997 Provision 1997
---- --------- ----
<S> <C> <C> <C>
Deferred tax assets:
Environmental compliance and
other site related costs,
principally due to accruals for
financial reporting purposes $ 8,307 $ (668) $ 7,639
Depreciation and amortization 8,365 (1,245) 7,120
Net operating loss carryforward 7,145 3,197 10,342
Other 891 (179) 712
-------- ------- ---------
Total gross deferred tax assets 24,708 1,105 25,813
Less valuation allowance (20,388) 257 (20,131)
-------- ------- ---------
Net deferred tax assets 4,320 1,362 5,682
-------- ------- ---------
Deferred tax liabilities:
Site development costs (2,042) 98 (1,944)
Other (2,278) (1,460) (3,738)
-------- ------- ---------
Total gross deferred tax liabilities (4,320) (1,362) (5,682)
-------- ------- ---------
Net deferred tax assets $ -- $ -- $ --
======== ======= =========
</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
53
<PAGE> 54
approximately $30,418,000 at December 31, 1997, begins to expire in the year
2006. Of this carryforward, $2,744,000 is limited pursuant to the net operating
loss limitation rules of Internal Revenue Code Section 382. The portion of the
carryforward limited under Internal Revenue Code Section 382 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, $12,315,000 in 2011 and
$10,679,000 in 2012. The Company's federal income tax returns and amended
federal income tax returns to report net operating loss carrybacks are currently
under examination. As of December 31, 1997, certain refunds claimed had not been
received and $740,000 is reflected as income taxes receivable.
NOTE 11. EMPLOYEE'S BENEFIT PLANS
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 percentage of salary up to the IRS
limits. The Company's contribution matches 55% of participant contributions up
to 6% of deferred compensation.
The Company contributions for the 401(k) plan were $147,000, $269,000, and
$829,000 for 1997, 1996 and 1995. The Company has no post-retirement or
post-employment benefit plan.
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 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.
NOTE 12. 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.
54
<PAGE> 55
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 1997, 1996, and 1995. Had compensation cost for the plans
been determined consistent with FASB Statement No. 123, "Accounting for
Stock-Based Compensation", the Company's 1997, 1996, and 1995 net loss would
have been increased pro forma by $493,603, $49,118, and $683,375. Basic loss per
share would have increased $.06, $.01, and $.09 for 1997, 1996, and 1995,
respectively. Diluted loss per share would have been the same as basic loss per
share as the common stock equivalents are 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 fair value of each option grant is estimated using the Black-Scholes
option-pricing model with the following weighted-average assumptions used for
grants in 1997, 1996, and 1995:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Expected volatility 137% -- 94%
Risk-free interest rates 6.0% -- 6.0%
Expected lives 3 years -- 6.5 years
Dividend yield 0% -- 0%
Weighted-average fair value of options granted
during the year (Black-Scholes) $ 1.38 -- $ 3.28
Under option:
Options outstanding, beginning of year 542,600 1,186,600 691,950
Granted 340,000 -- 706,000
Exercised (97,500) -- (6,800)
Canceled (68,450) (644,000) (204,550)
--------- ---------- ----------
Options outstanding, end of year 716,650 542,600 1,186,600
========= ========== ==========
Price range per share of outstanding options $ 1.00- $ 4.00- $ 4.00-
$ 14.75 $ 14.75 $ 14.75
========= ========== ==========
Price range per share of options exercised $ 1.25- $ -- $ 2.79
$ 2.00 $ -- $ 2.79
========= ========== ==========
Price range per share of options canceled $ 5.50- $ 4.62- $ 6.38-
$ 14.25 $ 14.25 $ 14.75
========= ========== ==========
Options exercisable at end of year 609,320 417,070 721,340
========= ========== ==========
Options available for future grant at end of year 733,350 1,073,350 1,073,350
========= ========== ==========
</TABLE>
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 and 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.
While the final resolution of any matter may have an impact on the
Company's consolidated financial results, management has chosen a conservation
position and accrued a liability of approximately $3,000,000. 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 described below, will not have
a material adverse effect on the operations or financial condition of the
Company.
55
<PAGE> 56
GENERAL LITIGATION
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 former 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 Company believes it conducted its
operations in accordance with applicable laws and regulations, that the lawsuit
is without merit and intends to vigorously defend the action. The Company's
insurance carrier is defending this matter. The case is currently stayed pending
the issuance of a scheduling order.
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. Plaintiff in this matter is the landlord of the former corporate
headquarters for the Company. The suit was based upon the Company's vacation of
lease premises prior to lease termination. The Plaintiff/landlord sought $52,543
per month in rent, escalations, parking and sales tax on parking for the period
beginning July 1, 1996. The lease termination date is December 7, 2002.
On January 13, 1998, the court granted a motion for summary judgment in favor of
Houston Office 88 in the amount of $2,044,346 and against the Company on its
counterclaims. Although presently an interlocutory order, Houston Office 88 has
moved to sever its claim against the Company, which, if granted, will make the
judgment final. The Company plans to file a motion to set the judgment aside
and, if denied, plans to file an appeal.
The Company filed a third-party complaint against Altra Energy for failure to
consummate a sublease agreement. The court also granted a summary judgment
against the Company and in favor of Altra Energy Technologies, L.L.C. on the
Company's third-party claims against Altra. The Company's motion to set such
judgment aside has been denied. The Company plans to file an appeal.
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, American
Ecology Environmental Services Corporation (AEESC) and US Ecology Corporation
(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 Racketeer Influenced and
Corrupt Organization Act (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 activities of Phyllis Glazer and a non-profit
corporation organized by Glazer, her husband, mother, and Glazer's Wholesale
Drug Company, Inc. (dba Glazer Distributors), all of whom are defendants. The
action alleges that Defendants fraudulently sought to deprive Plaintiffs of
their property by publishing 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, alleging Plaintiffs have attempted to deny Defendants' right of free
speech. M.O.S.E.S., a non-profit corporation, claims actual and punitive damages
56
<PAGE> 57
in excess of $1,000,000 based on alleged reputational damage, reduced income (in
the form of reduced contributions) and costs of legal representation.
Notwithstanding its decision to close the Winona facility, the Company intends
to vigorously prosecute this case to its conclusion. Extensive discovery by both
the Company and the Defendants is ongoing in preparation for trial, currently
scheduled for August 1998.
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 US Ecology, a subsidiary of the Company, in the U.S. District
Court of Massachusetts alleging claims related to various costs arising out of
the shipping and burial of waste materials at the Maxey Flats Nuclear Disposal
Site. US Ecology had entered into a series of contracts with Boston Edison to
provide radioactive waste disposal services at this site. Boston Edison claimed
that US Ecology breached the contracts by failing to indemnify Boston Edison for
its costs. Boston Edison also alleged that US Ecology committed unfair and
deceptive trade practices in Massachusetts by not indemnifying Boston Edison.
Finally, Boston Edison sought a declaratory judgment that would set forth the
contractual rights and liabilities of the parties. Boston Edison claimed
$600,000 in past and future costs for the alleged breach of the contracts,
trebled under the Massachusetts Deceptive Trade Practices Act. US Ecology
successfully moved the case from Massachusetts to federal court in Kentucky.
On February 23, 1998, US Ecology and Boston Edison agreed to a full a complete
settlement of this litigation. US Ecology agreed to pay Boston Edison specified
annual payments of $25,000, $25,000, $40,000, $40,000 and $200,000 beginning
September 1, 1998 and ending September 1, 2002, plus $100,000 after the first
anniversary of operations at the Company's planned Ward Valley facility, if it
is opened.
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 Adams case discussed above,
involve AEESC, a subsidiary of the Company, and its 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.
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. In the
Moncrief, Steich, Williams and Daniels cases, AEESC is relying upon its
predecessor parent corporation's insurance coverage for defense and indemnity
purposes. 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 appealed the verdict requesting a new trial. The Williams case was
dismissed with prejudice by the trial court May 12, 1997 because Plaintiffs
failed to file affidavits identifying injuries and causes suffered as required
by the Court's Case Management Order. Plaintiffs' motion for a new trial was
denied. Plaintiffs have appealed. Defendants are similarly seeking dismissal of
the Daniels case based on the inadequacy of the affidavits filed in that case
under a similar Case Management Order. The Court has not yet ruled on
Defendants' motion, and the case is currently stayed. The Court ordered the
parties in the Steich case to mediation, which settled on January 27, 1998 for
payment of $350,000 to plaintiffs by the Company's predecessor's insurance
company.
PERKINS COIE V. AMERICAN ECOLOGY CORPORATION, SUPERIOR COURT, KING COUNTY
WASHINGTON, CASE NO. 97-2-30472-5SEA. This is an action to collect an alleged
balance due for legal services provided to American Ecology and its subsidiaries
between 1993 and 1997 allegedly in the amount of $669,987, including interest.
An answer to the complaint has been filed and discovery has commenced. The
57
<PAGE> 58
Company intends to defend the action on the basis of certain legal defenses and
to negotiate a structured settlement, if possible. Trial is set for June, 1999.
In the event of an adverse outcome, management does not believe there would be a
material adverse impact in the Company's earnings.
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 to be used for long term care of
the facility after title 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 argued that it should not be required to provide the decreasing
letter of credit since any failure to meet the financial covenants which may
exist is likely to be temporary and the site is scheduled to be transferred to
the state in May 1998 in any event. The Company offered to extend the Company's
maintenance period for a limited time in lieu of providing this letter of
credit, but this offer was rejected. 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 Company expects to defend the lawsuit on
the basis of these arguments. At this time it is not possible to predict the
outcome of this matter.
ENVIRONMENTAL MATTERS
IN RE RAMP INDUSTRIES, INC. SITE (COLORADO), U.S. ENVIRONMENTAL PROTECTION
AGENCY, DENVER, REGION 8. US Ecology responded to a CERCLA 104(e) Information
Request in March 1996 sent by USEPA to numerous Potentially Responsible Parties
("PRP"). Thus far, US Ecology has not been formally named as a responsible party
at the CERCLA site, but the EPA issued a preliminary finding of liability by US
Ecology of $28,993 on September 8, 1997. Hazardous substances may have been sent
by US Ecology 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 and preliminary determination of liability.
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 and the Washington Department of Ecology have
contractually agreed to investigate the integrity of the site to determine
whether and what remedial action, if any, is appropriate. The Company
anticipates gathering the requisite data in 1998. At this time it is not
possible to predict the outcome of this matter.
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<PAGE> 59
OTHER MATERIAL LITIGATION
The following two cases, in which one of the Company's principal
subsidiaries is a plaintiff against the United States, are not required to be
reported under the Securities and Exchange Commission regulations, but we have
chosen to do so because of the potential significant impact one or more
favorable results would have on the Company's Ward Valley project.
US ECOLOGY, INC. V. UNITED STATES OF AMERICA, UNITED STATES COURT OF FEDERAL
CLAIMS, CASE NO. 97-65C. This case, commenced on January 30, 1997, by US Ecology
is against the United States of America for breach of a contract to sell 1,000
acres of federal land located in Ward Valley, California to the State of
California. California granted US Ecology a license to construct and operate a
regional low-level radioactive waste disposal facility at the Ward Valley site.
US Ecology is seeking damages in the amount of approximately $73,100,000 for its
past costs expended and unspecified future lost profits, lost opportunity costs,
lawful interest and costs incurred in the action. The first claim for relief is
breach of an express contract which arose when the Secretary of Interior made a
determination that all requirements under federal law and regulation necessary
prior to the land transfer had been met and the United States accepted payment
of the purchase price for the land in January 1993. Subsequently, a different
Secretary of Interior refused to complete the transaction and continues to
refuse to convey the land to California. US Ecology is a third-party beneficiary
of the contract because it was chosen to operate the facility. The second claim
for relief is breach of a contract which, by law, may be implied from the United
States having induced US Ecology to incur substantial costs, when US Ecology was
led to believe the United States would act fairly and honestly in conducting
requisite reviews, in granting approval of the transfer, and in conveying title
to the land upon completion of the review process in accordance with federal law
and regulation. Since 1988 the United States has made a number of determinations
regarding the sites' suitability for sale and subsequent use as a LLRW disposal
facility site. Notwithstanding those determinations, the United States refused
and continues to refuse to transfer title of the land to California so the
facility can be constructed. US Ecology intends to aggressively pursue its
damage claims in this matter. Cross motions for summary judgment were argued
February 3, 1998. The Court's decision as to the existence and breach of
contract and third party beneficiary status of US Ecology is expected within the
first half of 1998.
US ECOLOGY, INC. V. U.S. DEPARTMENT OF THE INTERIOR, ET AL, U.S. DISTRICT COURT,
DISTRICT OF COLUMBIA, CASE NO. 1:97CV00365. This case, commenced on February 24,
1997, is based on the same operative facts as those of the breach of contract
claims brought in the U.S. Court of Federal Claims by US Ecology. This complaint
is similar to that brought by the California Department of Health Services
against Bruce Babbitt, Secretary of Interior, the U.S. Department of the
Interior and the U.S. Bureau of Land Management. US Ecology seeks relief in the
form of a writ of mandamus compelling the Secretary of Interior to convey title
to the land at Ward Valley, California to California, in accordance with the
lawful determinations made by his predecessor in office. Additionally, US
Ecology is seeking judgment against the Defendants that their purported
rescission of the prior Secretary's decision and their continuing failure to
deliver title to the land is unlawful, arbitrary, an abuse of discretion and
beyond their statutory authority and that therefore their actions hindering and
delaying the transfer should be set aside, including a decision to engage in a
Supplemental Environmental Impact Statement.
NOTE 14. SUBSEQUENT EVENT
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
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<PAGE> 60
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 26, 1998.
The Company considers the rights offering and Series E preferred issuance
to have been a success in that $5.0 million of new equity was raised by the
Company. That success fulfilled integral covenants in the Company's 1996
restructured Bank Agreement.
The $2.0 million of equity received by the Company from the rights
offering was employed as working capital to reduce the Company's accounts
payable in February 1998. While the outstanding accounts payable reduction
improved the Company's balance sheet position, it is still difficult for the
Company to meet its obligations as they become due. In the event the Company's
business plan objectives are not met or alternative financing obtained, there
can be no assurance that the Company will be able to meet its obligations as
they become due or obtain forebearance from the bank.
A description for the retirement of Series E preferred stock is in Note 9.
NOTE 15. LEASES
The Company leases equipment, land, and buildings. The leases, which
expire between December 1993 and December 2005 are classified as operating
leases. There are no significant renewal or purchase options or escalation
clauses.
The future minimum payments by fiscal year under noncancellable operating
lease agreements at December 31, 1997 were:
1998 $201,000
1999 96,000
2000 61,000
2001 61,000
2002 61,000
Thereafter 183,000
--------
Total $672,000
========
Rental expenses were:
1997 1996 1995
---------- ---------- ----------
Rental expense $1,108,000 $1,751,000 $2,224,000
ITEM 9. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
Items 10, 11, 12 and 13 of Part III have been omitted from this report
because the Company will file with the Securities and Exchange Commission, no
later than 120 days after the close of its fiscal year, a definitive proxy
statement. The information required by Items 10, 11, 12 and 13 of this report,
which will appear in the definitive proxy statement, is incorporated by
reference into Part III of this report.
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PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(A) FINANCIAL STATEMENTS, SCHEDULES AND EXHIBITS
1. Financial statements and reports of Balukoff,
Lindstrom & Co., P.A. and Arthur Andersen LLP
Independent Auditors' Report
Reports of Independent Auditors
Consolidated Balance Sheets - December 31, 1997 and 1996
Consolidated Statements of Operations for the years ended
December 31, 1997, 1996 and 1995
Consolidated Statements of Shareholders' Equity for the
years ended December 31, 1997, 1996 and 1995
Consolidated Statements of Cash Flows for the years ended
December 31, 1997, 1996 and 1995
Notes to Consolidated Financial Statements
2. Financial statement schedules
Other schedules are omitted because they are not
required or because the information is included in
the financial statements or notes thereto
3. Exhibits
<TABLE>
<CAPTION>
Incorporated by
Exhibit Reference from
No. Description Registrant's
- ------- ----------- --------------
<S> <C> <C>
3.1 Restated Certificate of Incorporation, as amended 1989 Form 10-K
3.2 Certificate of Amendment to Restated Certificate of Incorporation Form S-4 dated 12-24-92
dated June 4, 1992
3.3 Amended and Restated Bylaws dated February 28, 1995 1994 Form 10-K
10.1 Sublease dated February 26, 1976, between the State of Washington, Form 10 filed 3-8-84
the United States Dept. of Commerce and Economic Development, and
Nuclear Engineering Company with Amendments dated January 11, 1980,
and January 14, 1982.
10.2 Lease dated May 1, 1977 ("Nevada Lease"), between the state of Form 10 filed 3-8-84
Nevada, Dept. of Human Resources and Nuclear Engineering Company,
with Addendum thereto, dated December 7, 1982
10.3 Addendum to Nevada Lease dated March 28, 1988 1989 Form 10-K
10.4 Nevada State Health Division, Radioactive Material License issued to 1989 Form 10-K
US Ecology, Inc. dated December 29, 1989
10.5 Administrative Order by Consent between the United States 1985 Form 10-K
Environmental Protection Agency and US Ecology, Inc. ("USE") dated
September 30, 1985
10.6 State of Washington Radioactive Materials License issued to US 1986 Form 10-K
Ecology, Inc. dated January 21, 1987
</TABLE>
61
<PAGE> 62
<TABLE>
<CAPTION>
Exhibit Reference from
No. Description Registrant's
- ------- ----------- --------------
<S> <C> <C>
10.11 Agreement between the Central Interstate Low-Level Radioactive Waste 2nd Quarter 1988 10-Q
Compact Commission and US Ecology, Inc. for the development of a
facility for the disposal of low-level radioactive waste dated
January 28, 1988 ("Central Interstate Compact Agreement")
10.12 Amendment to Central Interstate Compact Agreement dated May 1, 1990 1994 Form 10-K
10.13 Second Amendment to Central Interstate Compact Agreement dated June 1994 Form 10-K
24, 1991
10.14 Third Amendment to Central Interstate Compact Agreement dated July 1, 1994 Form 10-K
1994
10.15 Settlement agreement dated May 25, 1988 among the Illinois Department Form 8-K dated 6-7-88
of Nuclear Safety, US Ecology, Inc. and American Ecology Corporation
of a December 1978 action related to the closure, care and
maintenance of the Sheffield, Illinois LLRW disposal site
10.16 Nevada Division of Environmental Protection Permit for Hazardous 1988 Form 10-K
Waste Treatment, Storage and Disposal (Part B) issued to US Ecology,
Inc. dated June 24, 1988
10.17 Texas Water Commission Permit for Industrial Solid Waste Management 1988 Form 10-K
Site (Part B) issued to Texas Ecologists, Inc. dated December 5, 1988
10.18 Memorandum of Understanding between American Ecology Corporation and
1989 Form 10-K the State of California dated August 15, 1988
10.19 United States Environmental Protection Agency approval to dispose of 1989 Form 10-K
non-liquid polychlorinated biphenyl (PCB) wastes at the Beatty,
Nevada chemical waste disposal facility
10.20 Employment Agreement between American Ecology Corporation and C. 1993 Form 10-K
Clifford Wright, Jr. dated April 1, 1994 * (terminated in 1995)
10.21 Employment Agreement between American Ecology Corporation and William 1993 Form 10-K
P. McCaughey dated April 1, 1994 * (terminated in 1995)
10.22 Employment Agreement between American Ecology Corporation and Stephen 1993 Form 10-K
W. Travers dated April 1, 1994 * (terminated in 1995)
10.23 Employment Agreement between American Ecology Corporation and Harry 1993 Form 10-K
O. Nicodemus, IV dated April 1, 1994 * (terminated in 1995)
10.24 Employment Agreement between American Ecology Corporation and Ronald 1993 Form 10-K
K. Gaynor dated April 1, 1994 * (terminated in 1995)
10.26 Amended and Restated American Ecology Corporation 1992 Stock Option Proxy Statement dated 4-26-94
Plan *
10.27 Amended and Restated American Ecology Corporation 1992 Outside Proxy Statement dated 4-26-94
Director Stock Option Plan *
10.28 American Ecology Corporation 401 (k) Savings Plan * 1994 Form 10-K
10.29 American Ecology Corporation Retirement Plan * 1994 Form 10-K
10.30 Credit Agreement between American Ecology Corporation, its 1994 Form 10-K
subsidiaries and Texas Commerce Bank National Association dated
December 1, 1994 (terminated by 10.41 below)
10.31 Security Agreement dated as of December 1, 1994 by American Ecology 1994 Form 10-K
Corporation in favor of Texas Commerce Bank, National Association
(terminated by 10.43 below)
</TABLE>
62
<PAGE> 63
<TABLE>
<CAPTION>
Incorporated by
Exhibit Reference from
No. Description Registrant's
- ------- ----------- --------------
<S> <C> <C>
10.32 Security Agreement by subsidiaries of American Ecology Corporation 1994 Form 10-K
dated as of December 1, 1994 in favor of Texas Commerce Bank,
National Association (terminated by 10.43 below)
10.33 Lease Agreement between American Ecology Corporation and VPM 1988-1,
Form S-4 filed 12-24-92 Ltd. dated October 14, 1992
10.34 Rights Agreement dated as of December 7, 1993 between American Form 8-K dated 12-7-93
Ecology Corporation and Chemical Shareholders Services Group, Inc. as
Rights Agent
10.35 Agreement and Plan of Merger by and between American Ecology Form S-4 dated 12-24-92
Corporation and Waste Processor Industries, Inc.
10.36 Settlement Agreement dated September 24, 1993 by US Ecology, Inc., 1993 Form 10-K
the State of Nevada, the Nevada State Environmental Commission, and
the Nevada Dept. of Human Resources
10.37 Settlement Agreement dated as of January 19, 1994 by and among US 1993 Form 10-K
Ecology, Inc., Staff of the Washington Utilities and Transportation
Commission, Precision Castparts Corp., Teledyne Wah Chang, Portland
General Electric Company, the Washington Public Power Supply System
and Public Service Company of Colorado.
10.38 Agreement dated January 28, 1994 between American Ecology Form 8-K dated 2-3-94
Corporation, Edward F. Heil, Edward F. Heil as trustee for Edward F.
Heil, Jr., Sandra Heil, and Karen Heil Irrevocable Trust Agreement
#2, Thomas W. McNamara and Thomas W. McNamara as a trustee of
the Jenner & Block Profit Sharing Trust No. 082.
10.39 Agreement of Purchase and Sale dated as of April 7, 1994 by and among 1st Quarter 1994 Form 10-Q, 3rd
American Ecology Corp., American Ecology Recycle Center, Inc., Quarter 1994 Form 10-Q
Quadrex Environmental Company and Quadrex Corporation, as amended by
Amendments dated June 14, 1994 and August 22, 1994.
10.40 Stock Purchase Agreement dated as of May 10, 1994 by and between 1st Quarter 1994 Form 10-Q, 3rd
American Ecology Corporation and Mobley Environmental Services, Inc.,
Quarter 1994 Form 10-Q as amended by Amendment dated September 21,
1994.
10.41 Second Amended Restated Credit Agreement between American Ecology 1995 Form 10-K
Corporation , its subsidiaries and Texas Commerce Bank National
Association dated June 30, 1995
10.42 Security Agreement dated June 30, 1995 by American Ecology 1995 Form
10-K Corporation in favor of Texas Commerce Bank National
Association.
10.43 Security Agreement dated June 30, 1995 by subsidiaries of American 1995 Form 10-K
Ecology Corporation in favor of Texas Commerce Bank National
Association.
10.46 Rights Offering and Prospectus with American Ecology Corporation and
Form S-3 dated 9-9-97 ChaseMellon Shareholder Services as Rights
Agent.
10.47 Amended Rights Offering and Prospectus with American Ecology Form
S-3/A dated 12-30-97 Corporation and ChaseMellon Shareholder Services
as Rights Agent.
21 List of Subsidiaries 1994 Form 10-K
23.1 Consent of Arthur Andersen LLP
23.2 Consent of Balukoff, Lindstrom & Co., P.A.
27 Financial Data Schedule
</TABLE>
- ----------------------
* Management contract or compensatory plan.
63
<PAGE> 64
(B) REPORTS ON FORM 8-K
<TABLE>
<CAPTION>
Incorporated by
Exhibit Reference from
No. Description Registrant's
- ------- ----------- --------------
<S> <C> <C>
16.1 Change of Auditors Letter - November 25, 1996 Form 8-K
10.44 Series E Redeemable Convertible Preferred Stock - November 27, 1996 Form 8-K
10.45 Third Amended & Restated Credit Agreement - February 18, 1997 Form 8-K
</TABLE>
64
<PAGE> 65
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, Registrant has duly caused this annual report to be signed
on its behalf by the undersigned, thereunto duly authorized.
AMERICAN ECOLOGY CORPORATION
Dated: March 30, 1998 By: /s/ Jack K. Lemley
------------------
Jack K. Lemley
Chairman of the Board, Chief
Executive Officer and President
SIGNATURE TITLE DATE
- --------- ----- ----
/s/ Jack K. Lemley Chairman of the Board, Chief March 30, 1998
- ------------------------- Executive Officer and President --------------
JACK K. LEMLEY
/s/ Robert S. Thorn Chief Accounting Officer March 30, 1998
- ------------------------- --------------
ROBERT S. THORN
/s/ Rotchford L. Barker Director March 30, 1998
- ------------------------- --------------
ROTCHFORD L. BARKER
/s/ Paul Bergson Director March 30, 1998
- ------------------------- --------------
PAUL BERGSON
/s/ Patricia M. Eckert Director March 30, 1998
- ------------------------- --------------
PATRICIA M. ECKERT
/s/ Edward F. Heil Director March 30, 1998
- ------------------------- --------------
EDWARD F. HEIL
<PAGE> 66
/s/ Paul F. Schutt Director March 30, 1998
- ------------------------- --------------
PAUL F. SCHUTT
/s/ John J. Scoville Director March 30, 1998
- ------------------------- --------------
JOHN J. SCOVILLE
/s/ Keith D. Bronstein Director March 30, 1998
- ------------------------- --------------
KEITH D. BRONSTEIN
<PAGE> 67
INDEX TO EXHIBITS
-----------------
<TABLE>
<CAPTION>
Incorporated by
Exhibit Reference from
No. Description Registrant's
- ------- ----------- --------------
<S> <C> <C>
3.1 Restated Certificate of Incorporation, as amended 1989 Form 10-K
3.2 Certificate of Amendment to Restated Certificate of Incorporation Form S-4 dated 12-24-92
dated June 4, 1992
3.3 Amended and Restated Bylaws dated February 28, 1995 1994 Form 10-K
10.1 Sublease dated February 26, 1976, between the State of Washington, Form 10 filed 3-8-84
the United States Dept. of Commerce and Economic Development, and
Nuclear Engineering Company with Amendments dated January 11, 1980,
and January 14, 1982.
10.2 Lease dated May 1, 1977 ("Nevada Lease"), between the state of Form 10 filed 3-8-84
Nevada, Dept. of Human Resources and Nuclear Engineering Company,
with Addendum thereto, dated December 7, 1982
10.3 Addendum to Nevada Lease dated March 28, 1988 1989 Form 10-K
10.4 Nevada State Health Division, Radioactive Material License issued to 1989 Form 10-K
US Ecology, Inc. dated December 29, 1989
10.5 Administrative Order by Consent between the United States 1985 Form 10-K
Environmental Protection Agency and US Ecology, Inc. ("USE") dated
September 30, 1985
10.6 State of Washington Radioactive Materials License issued to US 1986 Form 10-K
Ecology, Inc. dated January 21, 1987
10.11 Agreement between the Central Interstate Low-Level Radioactive Waste 2nd Quarter 1988 10-Q
Compact Commission and US Ecology, Inc. for the development of a
facility for the disposal of low-level radioactive waste dated
January 28, 1988 ("Central Interstate Compact Agreement")
10.12 Amendment to Central Interstate Compact Agreement dated May 1, 1990 1994 Form 10-K
10.13 Second Amendment to Central Interstate Compact Agreement dated June 1994 Form 10-K
24, 1991
10.14 Third Amendment to Central Interstate Compact Agreement dated July 1, 1994 Form 10-K
1994
10.15 Settlement agreement dated May 25, 1988 among the Illinois Department Form 8-K dated 6-7-88
of Nuclear Safety, US Ecology, Inc. and American Ecology Corporation
of a December 1978 action related to the closure, care and
maintenance of the Sheffield, Illinois LLRW disposal site
10.16 Nevada Division of Environmental Protection Permit for Hazardous 1988 Form 10-K
Waste Treatment, Storage and Disposal (Part B) issued to US Ecology,
Inc. dated June 24, 1988
10.17 Texas Water Commission Permit for Industrial Solid Waste Management 1988 Form 10-K
Site (Part B) issued to Texas Ecologists, Inc. dated December 5, 1988
10.18 Memorandum of Understanding between American Ecology Corporation and
1989 Form 10-K the State of California dated August 15, 1988
10.19 United States Environmental Protection Agency approval to dispose of 1989 Form 10-K
non-liquid polychlorinated biphenyl (PCB) wastes at the Beatty,
Nevada chemical waste disposal facility
10.20 Employment Agreement between American Ecology Corporation and C. 1993 Form 10-K
Clifford Wright, Jr. dated April 1, 1994 * (terminated in 1995)
10.21 Employment Agreement between American Ecology Corporation and William 1993 Form 10-K
P. McCaughey dated April 1, 1994 * (terminated in 1995)
10.22 Employment Agreement between American Ecology Corporation and Stephen 1993 Form 10-K
W. Travers dated April 1, 1994 * (terminated in 1995)
10.23 Employment Agreement between American Ecology Corporation and Harry 1993 Form 10-K
O. Nicodemus, IV dated April 1, 1994 * (terminated in 1995)
10.24 Employment Agreement between American Ecology Corporation and Ronald 1993 Form 10-K
K. Gaynor dated April 1, 1994 * (terminated in 1995)
10.26 Amended and Restated American Ecology Corporation 1992 Stock Option Proxy Statement dated 4-26-94
Plan *
10.27 Amended and Restated American Ecology Corporation 1992 Outside Proxy Statement dated 4-26-94
Director Stock Option Plan *
10.28 American Ecology Corporation 401 (k) Savings Plan * 1994 Form 10-K
10.29 American Ecology Corporation Retirement Plan * 1994 Form 10-K
10.30 Credit Agreement between American Ecology Corporation, its 1994 Form 10-K
subsidiaries and Texas Commerce Bank National Association dated
December 1, 1994 (terminated by 10.41 below)
10.31 Security Agreement dated as of December 1, 1994 by American Ecology 1994 Form 10-K
Corporation in favor of Texas Commerce Bank, National Association
(terminated by 10.43 below)
10.32 Security Agreement by subsidiaries of American Ecology Corporation 1994 Form 10-K
dated as of December 1, 1994 in favor of Texas Commerce Bank,
National Association (terminated by 10.43 below)
10.33 Lease Agreement between American Ecology Corporation and VPM 1988-1,
Form S-4 filed 12-24-92 Ltd. dated October 14, 1992
10.34 Rights Agreement dated as of December 7, 1993 between American Form 8-K dated 12-7-93
Ecology Corporation and Chemical Shareholders Services Group, Inc. as
Rights Agent
10.35 Agreement and Plan of Merger by and between American Ecology Form S-4 dated 12-24-92
Corporation and Waste Processor Industries, Inc.
10.36 Settlement Agreement dated September 24, 1993 by US Ecology, Inc., 1993 Form 10-K
the State of Nevada, the Nevada State Environmental Commission, and
the Nevada Dept. of Human Resources
10.37 Settlement Agreement dated as of January 19, 1994 by and among US 1993 Form 10-K
Ecology, Inc., Staff of the Washington Utilities and Transportation
Commission, Precision Castparts Corp., Teledyne Wah Chang, Portland
General Electric Company, the Washington Public Power Supply System
and Public Service Company of Colorado.
10.38 Agreement dated January 28, 1994 between American Ecology Form 8-K dated 2-3-94
Corporation, Edward F. Heil, Edward F. Heil as trustee for Edward F.
Heil, Jr., Sandra Heil, and Karen Heil Irrevocable Trust Agreement
#2, Thomas W. McNamara and Thomas W. McNamara as a trustee of
the Jenner & Block Profit Sharing Trust No. 082.
10.39 Agreement of Purchase and Sale dated as of April 7, 1994 by and among 1st Quarter 1994 Form 10-Q, 3rd
American Ecology Corp., American Ecology Recycle Center, Inc., Quarter 1994 Form 10-Q
Quadrex Environmental Company and Quadrex Corporation, as amended by
Amendments dated June 14, 1994 and August 22, 1994.
10.40 Stock Purchase Agreement dated as of May 10, 1994 by and between 1st Quarter 1994 Form 10-Q, 3rd
American Ecology Corporation and Mobley Environmental Services, Inc.,
Quarter 1994 Form 10-Q as amended by Amendment dated September 21,
1994.
10.41 Second Amended Restated Credit Agreement between American Ecology 1995 Form 10-K
Corporation , its subsidiaries and Texas Commerce Bank National
Association dated June 30, 1995
10.42 Security Agreement dated June 30, 1995 by American Ecology 1995 Form
10-K Corporation in favor of Texas Commerce Bank National
Association.
10.43 Security Agreement dated June 30, 1995 by subsidiaries of American 1995 Form 10-K
Ecology Corporation in favor of Texas Commerce Bank National
Association.
10.46 Rights Offering and Prospectus with American Ecology Corporation and
Form S-3 dated 9-9-97 ChaseMellon Shareholder Services as Rights
Agent.
10.47 Amended Rights Offering and Prospectus with American Ecology Form
S-3/A dated 12-30-97 Corporation and ChaseMellon Shareholder Services
as Rights Agent.
21 List of Subsidiaries 1994 Form 10-K
23.1 Consent of Arthur Andersen LLP
23.2 Consent of Balukoff, Lindstrom & Co., P.A.
27 Financial Data Schedule
</TABLE>
- ----------------------
* Management contract or compensatory plan.
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation by
reference of our report dated April 11, 1996, included in the 1997 Form 10-K
into the Company's previously filed Registration Statements on Form S-8 File
Nos. 33-55762, 33-58076, 33-11578, each as filed with the Securities and
Exchange Commission.
ARTHUR ANDERSEN LLP
Houston, Texas
March 30, 1998
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
To American Ecology Corporation:
As independent public accountants, we hereby consent to the incorporation by
reference of our report dated March 6, 1998, included in this Form 10K, into
the Company's previously filed Registration Statements on Form S-8 File Nos.
33-55782, 33-58076, and 33-11578, and Registration Statement on Form S-3 File
No. 333-35261 each as filed with the Securities and Exchange Commission.
Balukoff, Lindstrom & Co., P.A.
/s/ Balukoff, Linstrom, & Co., P.A.
Boise, Idaho
March 30, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C> <C>
<PERIOD-TYPE> YEAR YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1996 DEC-31-1995
<PERIOD-END> DEC-31-1997 DEC-31-1996 DEC-31-1995
<CASH> 366 185 229
<SECURITIES> 0 410 0
<RECEIVABLES> 9,546 11,136 18,260
<ALLOWANCES> 1,440 1,155 1,322
<INVENTORY> 0 0 0
<CURRENT-ASSETS> 9,912 12,680 27,242
<PP&E> 40,152 44,791 43,852
<DEPRECIATION> 27,148 24,628 22,088
<TOTAL-ASSETS> 98,431 99,027 114,125
<CURRENT-LIABILITIES> 26,842 29,373 43,357
<BONDS> 39,872 36,705 29,137
0 0 0
3,001 3,001 79
<COMMON> 85 80 0
<OTHER-SE> 10,294 10,523 21,945
<TOTAL-LIABILITY-AND-EQUITY> 98,431 99,027 114,125
<SALES> 41,522 49,972 67,895
<TOTAL-REVENUES> 41,522 49,972 67,895
<CGS> 23,219 33,571 53,823
<TOTAL-COSTS> 23,219 33,571 53,823
<OTHER-EXPENSES> 18,847 29,325 68,390
<LOSS-PROVISION> (544) (12,924) (54,318)
<INTEREST-EXPENSE> 0 0 0
<INCOME-PRETAX> 0 0 0
<INCOME-TAX> 132 (1,517) (5,415)
<INCOME-CONTINUING> 760 465 88
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> (1,436) (11,872) (48,991)
<EPS-PRIMARY> (.17) (1.47) (6.12)
<EPS-DILUTED> (.17) (1.47) (6.12)
</TABLE>
