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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, 1995 COMMISSION FILE NUMBER 0-11688
AMERICAN ECOLOGY CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 95-3889638
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
805 W. IDAHO, SUITE #200, BOISE, IDAHO 83702-8916
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (208) 331-0135
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 be not 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 1, 1996, Registrant had outstanding 7,825,628 shares of its Common
Stock. The aggregate market value of the Registrant's voting stock held by
non-affiliates at this date was approximately $7,233,000 based on the closing
price of $3.13 per share as reported on the National Association of Securities
Dealers Automated Quotations 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 1996 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 1995, 62% of the Company's revenues were derived from hazardous
waste services and 38% 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.
HAZARDOUS WASTE SERVICES
The Company provides a variety of hazardous waste management services to its
customers including stabilization, solid waste disposal, aqueous waste
disposal, fuels blending, transportation, brokerage and solvent recovery. 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.
Prior to performing services for a customer, the Company's specially trained
personnel review the waste profile sheet prepared by the customer which
contains information about the chemical composition of the waste. A sample of
the waste may be analyzed in a Company laboratory or in an independent
laboratory to enable the Company to recommend and approve the best method of
transportation, treatment and disposal. Upon arrival at one of the Company's
facilities, and prior to unloading, a sample of the delivered waste is analyzed
to confirm that it conforms to the customer's waste profile sheet.
STABILIZATION AND DISPOSAL SERVICES
The Company operates two of the eighteen commercial hazardous waste landfill
disposal sites in the United States. The facilities are located in Robstown,
Texas and Beatty, Nevada. In addition, the Company also operates one of the
nation's nine commercial deepwell disposal facilities, located in Winona,
Texas. These operations primarily serve the needs of hazardous waste
generators in the Gulf Coast and West Coast regions of the country.
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The Robstown and Beatty 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 acidic conditions. These facilities are
sited, designed, constructed, operated and monitored to provide long-term
containment of the waste in accordance with regulatory requirements. The
Winona deepwell disposal system accepts only liquid wastes. The Company also
maintains two closed landfills in Sheffield, Illinois. See "Closed Facilities"
for more detailed information about these closed facilities. The following
sections describe the Company's active hazardous waste disposal facilities.
Beatty, Nevada Facility. The Company's Beatty, Nevada 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
provides for an initial 20-year term, with a 10-year option for renewal. 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 and perpetual care and maintenance. These funds contained
approximately $11.2 million as of December 31, 1995.
The facility has approximately 1.5 million cubic yards of remaining capacity.
In 1995, 1994 and 1993, 131,000, 202,000 and 147,000 cubic yards of waste,
respectively, were disposed of at the facility. 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. 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. During 1988, the Beatty site received its RCRA Part B permit from the
EPA and the State of Nevada.
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 22% and 21% of the Beatty site's total volumes in
1995 and 1994, 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. 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. The landfill is currently developing a 100,000 cubic yard landfill to
dispose of non-hazardous waste which should greatly improve profit margins by
allowing disposal in less expensive cell space.
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.
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The facility is currently the only operating commercial landfill in Texas
with a RCRA Part B hazardous waste disposal permit. 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
840,000 cubic yards of hazardous waste and there are approximately 3 million
cubic yards of remaining capacity. In 1995, 1994 and 1993, 47,000, 68,000 and
47,000 cubic yards of waste, respectively, were disposed of at the facility.
Winona, Texas Facility. The Winona facility is a 620 acre fuels blending and
solvent recycling facility with two hazardous waste deepwells. The first
deepwell has been in operation since 1981 and currently can accept waste at a
rate of 70 gallons per minute. The deepwell accepts both hazardous and
non-hazardous liquid industrial wastes that are not suitable for recycling or
landfill disposal. The deepwell accepts aqueous wastestreams, including spent
acids, landfill leachates, rinse water, storm water from contaminated
containment areas, and wastewaters with heavy metal content. Wastes remaining
from the facility's fuels blending and solvent recycling processes are also
injected into its deepwell. The second deepwell, which was constructed in
1991, received final EPA approval and commenced operation on March 14, 1996.
The second deepwell has a capacity of 200 gallons per minute and will expand
the facility's capacity and increase its flexibility in handling wastestreams.
The facility's permits allow receipt of most categories of liquid wastes except
for PCBs, dioxins, radioactive materials, and biological wastes. Prior to the
injection of any wastes, the facility's laboratory conducts tests on the wastes
to ensure that the materials are compatible with the geological characteristics
of the formation surrounding the Company's two hazardous waste deepwells. In
1995, 1994 and 1993, 10 million, 11 million and 12 million gallons of waste,
respectively, were disposed of at the facility.
The Winona site was selected for its favorable geological characteristics for
deepwell injection and the absence of any nearby oil and gas production. Its
two wells are completed to a depth of approximately 5,500 feet in the Woodbine
formation, which is highly porous and permeable. The formation is separated
from sources of drinking water by impermeable layers of shale and limestone.
In order for the facility to commence deepwell operations without incurring the
added costs of treating the hazardous waste, it was required to obtain from the
EPA an exemption from the land disposal restrictions based on proof of
"no-migration". To obtain the exemption, the facility was required to
demonstrate to the satisfaction of the EPA that the wastes would not migrate
from the geological zone into which the wastes are injected for at least 10,000
years.
Competition. In the Gulf Coast market for solid hazardous waste disposal,
the Company primarily competes with a hazardous waste landfill in Oklahoma and
a landfill in Louisiana. Each of these facilities offers similar disposal
capabilities, and competition is based on the level of ongoing service provided
to the customer, distance from the waste site to the landfill and price. In
the Gulf Coast market for liquid hazardous waste disposal services, the Company
competes primarily with three other deepwell facilities, two facilities in
Houston, Texas; and a facility in Corpus Christi, Texas. In the West Coast
market for solid hazardous waste disposal, the Company competes with three
hazardous waste landfills in California, one in Utah, and one in Idaho.
TRANSPORTATION SERVICES
General. As a complement to its disposal operations, the Company also offers
hazardous waste transportation services to its 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 45 trucks or tractors, 318 roll-off containers and 82 trailers.
Liquid waste is frequently transported in bulk, but also may be transported in
drums. Heavier sludges and bulk solids are transported in sealed roll-off
boxes or bulk trailers.
The Company operates a scheduled, containerized hazardous waste collection
service in the Gulf Coast market called Surecycle(R), which provides small
quantity generators with comprehensive waste management services that includes
waste analysis, technical advice, labeling, manifesting, collecting,
transporting, treating and disposing of
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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.
Competition. The hazardous and non-hazardous waste transportation business
is highly fragmented, with no company having established itself as a national
competitor. There are numerous local and regional companies providing solid or
liquid hazardous waste transportation services. Many of the large
environmental services companies have transportation divisions; however, most
of these companies with fixed-based disposal landfills or incinerators
primarily use their transportation divisions to provide services to customers
where the contract stipulates disposal or treatment at their own facilities.
REMEDIATION SERVICES
The Company also performs site remediation services and specialized hazardous
waste services to a limited extent, using a variety of equipment and
technologies to implement specific waste removal and clean-up plans. Most site
remediation projects are bid by the Company based on the customer's project
specifications, with the contract awarded to the lowest qualified bidder on a
unit price basis. Remediation services are generally provided in conjunction
with disposal services by the Company. The remediation market is highly
competitive and the Company does not have a significant presence in the market.
FUELS BLENDING AND SOLVENT RECYCLING SERVICES
As a result of its acquisition of the Winona facility in December 1994, the
Company expanded its hazardous waste services in the Gulf Coast Region to
include two important new services: fuels blending and solvent recycling.
These two new services have enabled the Company to substantially increase the
range of waste services that it provides to its existing transportation and
disposal customers and have added new customers to the Company's client base.
A substantial portion of the organic wastes received at the Winona facility
is placed into its fuels blending operations. The Company blends these wastes
into fuels to meet specifications prescribed for use in cement kilns. The
Company also employs a thinfilm evaporator for reclaiming limited quantities of
certain waste solvents. In this process, a solvent is mechanically wiped onto
a steam-heated metal surface in extremely thin layers, causing most of the
solvent to evaporate and be condensed as a liquid. Reclaimed solvents, which
include metal cleaning and paint solvents and freon, are sold to end-users or
returned to the customer who generated them. Wastes that are separated from
the reclaimed solvent are used in the fuels blending process or injected into
the Company's deepwell.
The Company receives waste in bulk shipments through specialized containers
that are picked up at the customer's site, placed on rail for shipment to the
railroad's transfer facility and then delivered to the Winona facility. This
method of transportation is more efficient for long-distance shipments than
truck transportation. The Winona facility maintains a rail spur transhipment
facility nearby that provides the capability of transferring certain wastes
from railcar to the facility.
Competition. In fuels blending services, the Company primarily competes with
several Texas competitors. Competition is generally based upon overall
services provided to the customer, distance from the customer, price and
off-site disposal fees.
LOW-LEVEL RADIOACTIVE WASTE SERVICES
Radioactive waste is generally classified as either high-level or low-level.
High-level radioactive wastes, such as spent nuclear fuel and waste generated
during the reprocessing of spent fuel from nuclear reactors, contain
substantial quantities of long-lived radioactive isotopes and require hundreds
or thousands of years to decay to safe levels.
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Low-level radioactive waste consists primarily of solid materials containing
far less 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 packaging for the protection
of the public or employees and is usually packed in metal boxes or 55-gallon
drums for transport and disposal.
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 Company's LLRW commercial processing and volume
reduction services include both fixed base processing facilities and service
capabilities located at the Oak Ridge, Tennessee Recycle Center. 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 provides these services 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, each
containing a designated landfill for use by member states. One state within
each compact is required to site and build a permitted disposal facility on a
rotating basis so that continuous disposal capacity for that compact can be
maintained.
The Low-Level Act also provides that any compact approved by Congress may
restrict the use of its disposal facility to low-level waste generated within
the member states, and may limit the export of waste from that compact as of
January 1, 1993. As a result, in 1992 the Company saw a marked increase in
LLRW volumes disposed because of this pending limitation of disposal space
availability. Since January 1, 1993, the state of Washington, through the
Northwest Compact (Washington, Oregon, Idaho, Montana, Utah, Wyoming, Alaska,
and Hawaii), has prohibited disposal of LLRW generated from outside the
Northwest Compact at the Company's Richland, Washington facility with the
following exception. The Northwest Compact entered into an inter-regional
contract with the Rocky Mountain Compact to accept waste generated by the Rocky
Mountain Compact (Nevada, Colorado, and New Mexico). As a result, the
implementation of the Low-Level Act has resulted in a reduction of waste
receipts at the Company's low-level waste disposal site in Richland,
Washington. This restriction is expected to continue in the foreseeable
future.
It is also possible that, pending the full implementation of the Low-Level
Act and the final alignment of compacts, other actions could be taken which
would further restrict the ability of LLRW facilities nationwide to continue to
receive low-level waste. Such actions could include the implementation of
additional state-imposed fees, which could further restrict volumes, or the
imposition of higher insurance or bonding requirements.
DISPOSAL SERVICES
The Company operates the only licensed LLRW disposal facility within the
regional compact system, located near Richland, Washington. This facility
serves the LLRW disposal needs of the states in the Northwest Compact and the
Rocky Mountain Compact. The Company is in the process of developing two
additional LLRW disposal facilities for the Southwest and Central states
compacts. The Company also maintains two closed LLRW landfills in Sheffield,
Illinois and Beatty, Nevada. (See "Closed Facilities" for more detailed
information about each of
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these closed facilities' operations.) The following sections describe the
Company's active and proposed LLRW disposal operations.
Richland, Washington Facility. This facility is located on 100 acres, 25
miles northwest of Richland, Washington on the DOE's Hanford Nuclear
Reservation ("Hanford") and is operated by the Company. The State of
Washington leases the land from the federal government and the Company
subleases the land from the State of Washington. In 1990, the Company
exercised its option to renew its sublease for another 15-year period. Under
the terms of the lease, the site is to be used for LLRW burial and related
activities. The primary disposal operations at the site are conducted under a
license issued by the State of Washington. The Company's license was renewed
for a five-year period in May 1992. The Company also holds a special nuclear
materials permit license, reissued in December 1988 by the NRC, which permits
burial of materials containing certain radioactive elements in amounts greater
than those permitted under the license issued by the State of Washington. The
Company applied for renewal of this special nuclear materials permit in 1993
and continues to operate under the license pending renewal by the NRC, which is
expected in 1996 or 1997. "Special nuclear material" is not classified as LLRW
and consists primarily of reactor-produced materials which contain plutonium,
uranium 235 and any material artificially enriched by these isotopes.
The disposal rates charged at the Richland facility are regulated by the
Washington Utilities and Transportation Commission (WUTC). Rate regulation is
designed to set disposal rates sufficient to cover the costs of operation and
provide the Company with a reasonable profit margin. In May 1995 the Company
filed a rate setting case to implement a new rate design and revenue
requirement effective between 1996 and 2001. The Company's filing, after
amendment by a settlement agreement with major site users, was approved by WUTC
to establish a $5.6 million annual revenue requirement and a rate design to
collect this revenue from site availability, a per container, a per shipment, a
dose at container surface and volume charges. The approved revenue requirement
is exclusive of taxes and fees. The State of Washington charges and collect
fees for burial, site surveillance, local economic development, rate regulation
and site use from low-level waste generators using the Richland facility.
Revenues are also contributed by generators to fund dedicated trust accounts,
administrated by the Washington Treasurer for closure and long term maintenance
of the Richland site. As of December 31, 1995, $22.8 million was retained in a
site closure account and $23 million in a perpetual maintenance account.
The Richland facility is permitted to accept naturally occurring and
accelerator produced radioactive materials (NARM) waste from throughout the
nation. During 1995 approximately 77,000 cubic feet of NARM waste supplemented
company revenues collected from the disposal of over 200,000 cubic feet of
low-level waste generated from Northwest and Rocky Mountain Compact states.
Due to political pressure, the State of Washington recently implemented
regulations to limit NARM volume to 8,600 cubic feet annually and any single
generator to no more than 1,000 cubic feet. The Company filed litigation
on this issue and executed a Settlement Agreement on May 15, 1996. The
Agreement provides that the Washington State Department of Health initiate
rule-making procedures for the purpose of promulgating revised regulations with
a 100,000 cubic feet cap on annual NARM waste disposal. Also on May 15, 1996,
the Court stayed application of the disputed regulation for the duration of the
amendment process. During this stay, the 100,000 cubic feet limit will apply.
Although NARM waste disposal rates are not regulated by WUTC, a portion of NARM
revenues can be applied to reduce the Company's annual revenue requirement.
Proposed Ward Valley, California Facility. In December 1985, the Company was
selected as the State of California's license designee to site, develop and
operate a LLRW disposal facility ("Ward Valley") in that state to serve the
Southwestern Compact (California, Arizona, North Dakota and South Dakota). In
September 1993, the California Department of Health Services ("DHS") certified
its final environmental impact report, issued its Record of Decision on the
project, issued a license to the Company to construct and operate the facility
and executed a lease of the site with the Company. The license and lease
become effective and construction can only begin once the land for the site is
conveyed from the U.S. to the State of California. In connection with the
development of this LLRW facility, the Company has expended and capitalized
$40.7 million, including pre-operational interest, as of December 31, 1995.
Construction and operation of the facility has been delayed in large measure
because the federal government has not yet conveyed the land for the facility,
located in California's Ward Valley, to the State of California. In January
1993, former Secretary of the Interior in the Bush Administration, Manuel
Lujan, decided to sell the
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Ward Valley site to the State of California. That sale was enjoined, however,
as a result of the lawsuits described below. Subsequently, the new Secretary of
Interior in the Clinton administration, Bruce Babbitt, rescinded Secretary
Lujan's land sale decision and decided to conduct additional federal hearings
before determining whether to convey the land. In August 1993, Secretary
Babbitt requested that California Governor Pete Wilson hold an adjudicatory
hearing on behalf of the U.S. Department of the Interior to provide information
that might be relevant to the Secretary's decision on the land transfer, and in
September 1993, the Governor agreed to hold such a hearing. In November 1993,
Secretary Babbitt sent a letter to Governor Wilson stating that he was
postponing further action on his proposed hearing in order to await the final
outcome of two state court litigations that had been filed against the project
in October 1993. In 1994, Secretary Babbitt asked the National Academy of
Sciences ("NAS") to conduct an independent review of certain geological issues
related to the suitability of the Ward Valley site. The NAS convened a panel in
1994, conducted hearings on the project in June and September 1994. The NAS
panel issued a May 1995 report which concluded that the project would pose no
significant threat to groundwater quality and no credible threat to the quality
of water in the Colorado River which is about twenty miles and a mountain range
away. Subsequently, Secretary Babbitt announced his intention to transfer the
land, subject to several specific conditions, to DHS. Interior and DHS
negotiated transfer conditions through the summer and fall of 1995. In the fall
of 1995, these negotiations were put on hold and the State of California
petitioned Congress for statutory transfer of the land. Accordingly, legislation
was introduced and attached to the Omnibus Budget Reconciliation Act of 1995.
This measure was vetoed by the President, in part because of its provisions
regarding the Ward Valley land transfer. Since then, new Ward Valley land
transfer legislation has been introduced in both the House and Senate. It
therefore is possible that the Ward Valley site could be transferred to the
State of California during 1996 through Congressional action.
In February 1996, John Garamendi, Deputy Secretary of the Department of
Interior, announced that Interior would not make a decision on California's
pending application for the purchase of the Ward Valley site until after
additional on-site testing is conducted. Mr. Garamendi also stated that the
results of this testing as well as several other issues would be presented in a
supplement to the project's Environmental Impact Statement, and that Interior's
decision on the sale probably would not be made for another year. The testing
at issue is that which the National Academy of Sciences recommended in its May
1995 report be performed during facility construction. The Academy stated that
the land transfer should be delayed to conduct these tests, and the State of
California has already stated that the recommended tests would be conducted
after the land is transferred. Mr. Garamendi's decision is therefore widely
regarded as a politically motivated effort to postpone the land transfer
decision until after the 1996 Presidential election.
Two lawsuits challenging the 1993 decisions by DHS to issue a license and a
lease to the Company for the construction and operation of the Ward Valley
disposal site were filed in the California Superior Court for the County of Los
Angeles (the "License Litigation") in October 1993. The Company was named as a
real party in interest in both lawsuits. In general, the plaintiffs in the
license litigation alleged that the DHS violated various procedural and
substantive requirements of the California Radiation Control Law and the
California Environmental Quality Act in reaching its license decision and sought
to have the facility's license invalidated. In July 1994, one of the plaintiffs
in the License Litigation voluntarily dismissed its lawsuit. In June 1994, the
judge ruled in favor of the DHS and the Company on all issues with the exception
of one. In December 1993, nearly three months after the license had been
issued, three geologists from the US Geological Survey issued an unofficial
report ("Wilshire report") which suggested that groundwater protection and
protection of the Colorado River had not been adequately evaluated by DHS. The
trial court concluded this report should be considered by the DHS in a
"pre-approval setting", and remanded the case to the DHS for reconsideration.
Because the DHS determined that the report contained no significant new
information, DHS asked the court to reconsider its decision concerning this
report. The trial court refused to do so, and cross-appeals of the judge's
several rulings were taken by the plaintiffs, DHS and the Company, among others.
In August 1995, the California Appeals Court ruled in favor of DHS on all
counts, overturning the trial court's determination regarding the Wilshire
report. In January 1996, the California Supreme Court refused to entertain
project opponents' further appeals. Therefore, all legal challenges to the
license and the EIR at the state level have been successfully resolved.
In January 1993, a lawsuit was filed against the Secretary of the Interior,
Manuel Lujan, in federal district court for the Northern District of California
to enjoin the intended sale of the land for the Ward Valley site to the State of
California on the grounds that the Secretary could not sell the land until he
had designated critical habitat for the desert tortoise, a threatened species
under the Federal Endangered Species Act, and that the 1990 U.S. Fish and
Wildlife Service's ("FWS") biologic opinion, which concluded that the project
would not jeopardize the continued existence of the desert tortoise,
impermissibly failed to analyze the project's potential radiological impacts on
the desert tortoise. In February 1994, the U.S. Department of Interior
designated approximately 6,400,000 acres in the states of California, Nevada,
Utah and Arizona as critical habitat for the desert tortoise. The designation
includes the proposed Ward Valley site. Based on these developments, the
lawsuit was dismissed without prejudice. Inclusion of the Ward Valley as
critical habitat requires the Bureau of Land Management, the EPA and the FWS to
consider and weigh several factors, including whether the project would result
in the destruction or adverse modification of critical habitat. These
deliberations are ongoing. Nevertheless, the Company does not believe that the
decision concerning the project's impact on the desert tortoise and its critical
habitat will prevent
- 8 -
9
conveyance of the land to the State of California since, in August 1995, the
U.S. Fish & Wildlife Service issued an updated Biological Opinion which
reaffirmed an opinion of "No Jeopardy" to the desert tortoise, and further
concluded that the project would not result in the destruction or adverse
modification of desert tortoise critical habitat.
A second lawsuit was also filed in 1993 against the Secretary of Interior
which alleged violations of the National Environmental Policy Act by Secretary
Lujan in his decision to transfer the land to the State of California. Based
on Secretary Babbitt's decisions later in 1993 to rescind the land transfer and
supplement the project's Final Environmental Impact Statement, this action was
stayed by agreement of the parties, but technically is still pending in federal
district court and may be amended. The Company is not a defendant in this
matter.
In October 1995, the San Bernardino County Board of Supervisors passed an
emergency ordinance which prohibited the disposal in San Bernardina County of
LLRW not generated within its borders, and which imposed facility location and
design standards on any LLRW disposal facility established in the County which,
if valid, would have had the practical effect of prohibiting the establishment
of the Ward Valley facility as licensed by DHS. Several parties, including US
Ecology, brought suit in U.S. District Court for the Central district of
California to have the ordinance invalidated. In February 1996, the County
rescinded the Ordinance and the litigation has been stayed by agreement of the
parties. Technical discussions regarding the Ward Valley project are
continuing between the County and DHS.
Additional legal challenges and political delays could delay the opening of
the facility to between 1997 and 1999 or beyond. 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 be any assurance that the land will be transferred. If
the land is not transferred or the facility is not established for any reason,
the Company may proceed with legal action to protect its rights. Because the
reasons for not transferring the land or otherwise preventing the establishment
of the facility are not known, the ultimate outcome of any such legal action is
uncertain, and there is no assurance that the Company will recover monetary
damages or restitution of its past expenditures. The Company expects to incur
expenses of approximately $200,000 per month, excluding interest, until
construction begins. These expenses are not currently reimbursable from the
Southwestern Compact or any other party. Once the construction period
commences, expenditures are expected to be approximately $16 million, excluding
interest, including payment for the lease of the land.
If the California LLRW facility cannot be established and if the Company is
unable to recoup its investment through legal recourse, the Company would
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"). The facility is on
schedule to be completed by 2000 and will cost an estimated $152 million to
license, design and construct. Project costs through 1995 totaled $74.2
million. Additional funding of approximately $12 million in the pre-licensing
phase of the contract has been authorized by the major generators of the waste
in the CIC (Nebraska, Kansas, Oklahoma, Arkansas and Louisiana); however, if
the proposed management plan of the licensing agency is followed, then this
amount may not be sufficient to carry the project through the initial licensing
decision. The Company and the CIC are attempting to speed-up the license
review process which will reduce project costs, but there is no assurance that
they will be successful. If the time taken to review the license is not
reduced, the Company will attempt to negotiate an amendment to its contract to
cover any additional prelicensing costs in excess of $12 million.
The Company's portion of the project costs through 1995, which have been
capitalized, totaled $6.7 million including pre-operational interest, and,
except for pre-operational interest, the Company anticipates no additional
investment in the project prior to construction. Under the terms of the
Company's contract with the CIC, interest is earned on the Company's
contribution to the project costs at the rate of 20% from the date of
contribution until a final license decision is made, or until January 1, 1997,
whichever occurs first. Following a final license decision or after January 1,
1997, whichever occurs first, and prior to commencement of facility operations,
interest is earned on the Company's contribution at prime rate plus 3%. The
rate would be reduced to prime if all currently authorized pre-licensing
funding is expended prior to a final licensing decision.
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10
In December 1993, the County of Boyd, Nebraska and the Boyd County Local
Monitoring Committee sued the Company asserting fraud and misrepresentation
regarding the community consent requirement for the disposal facility. In July
1994 the federal district court granted the Company's motion for summary
judgment and dismissed the lawsuit. In February 1995, the U.S. Court of
Appeals for the Eighth Circuit upheld the lower court's decision and in October
1995 the U.S. Supreme Court declined to consider the case.
In January 1993, the directors of the Nebraska Department of Environmental
Quality and the Department of Health issued a Notice of Intent to Deny the
Company's license application based on their interpretation of a regulatory
requirement. The two agencies took the position that the presence of wetlands
within the proposed site boundaries, even though not in the area to be used for
waste disposal, precluded the issuance of a license. Subsequently, the
proposed site boundaries were reconfigured to eliminate the presence of
wetlands and the two agencies withdrew the Intent to Deny.
In August 1994, the U.S. Army Corps of Engineers determined that a small
wetland, less than one acre in size, exists on the reconfigured site. The
disposal of waste will not take place in the area determined to be a wetland by
the Corps. The Company does not agree with the Corps' wetland determination.
The State of Nebraska has taken no action against the Company's license
application as the result of the Corps' wetland determination. However, there
can be no assurance that some action will not be taken.
It is not presently possible to assess the length of delay that may be
experienced prior to the construction of the facility. According to the
licensing agency's proposed licensing management plan, the facility is expected
to receive an initial licensing decision in late 1997. However, there can be
no assurance that a license will be issued. The Company expects to incur
expenses of approximately $500,000 per month until the license is received.
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 the CIC, this
construction expense will be the Company's responsibility.
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.
A disposal facility located near Clive, Utah is licensed by the State of Utah
to accept NORM and certain types of LLRW. This facility has not been
designated as a regional facility under the Low-Level Act. The Clive, Utah
facility accepts principally low-level radioactive contaminated soil from
clean-up sites.
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.
The Company acquired the Recycle Center from Quadrex 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, the Recycle Center's customers have
included a substantial number of public utilities. The Recycle Center's
principal services include the following:
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11
NUCLEAR MATERIAL MANAGEMENT CENTER
LLRW Packaging and Transportation 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 the Company does not have a
significant presence in the market.
Metal Waste Decontamination. Radioactive contaminated metals exist primarily
in the form of large components such as pumps, valves, fuel racks, stream
generators, and smaller items such as condensers, heat exchangers, racks,
stands, pumps and valves. The Recycle Center can decontaminate these metals
through an abrasive process, or an acid dip process.
Dry Active Waste ("DAW") Processing. DAW processing services include volume
reduction and free release programs. This waste is primarily in the form of
wood, glass, 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 compacting
and/or baling waste prior to supercompaction. The combination of compacting,
binding and super-compacting accomplishes superior volume reduction by reducing
the resiliency of the waste material. 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 waste believed to be
non-contaminated in green bags. The bags are then shipped to the Recycle
Center for radioactivity scanning. Waste certified as non-radioactive is
disposed of in an industrial waste landfill. Radioactive material that cannot
be decontaminated is packaged for disposal in a LLRW facility. This packaging
includes super compaction to produce significant volume reduction.
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 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 facilities in the
United States require periodic maintenance which requires them to be
decontaminated before they can be refurbished. The Company can remove
radioactive contaminated insulation, decontaminate the motor and 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 combining all of
these services.
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 for release and then rented to the
customer.
Competition. The Company's competitors in the commercial LLRW processing and
recycling market include Scientific Ecology Group (a division of Westinghouse),
Chem-Nuclear Systems, Inc., Allied Technology Group, Inc., Frank Hake and
Associates, Inc. and Alaron, Inc.
- 11 -
12
LLRW DISPOSAL OPERATIONS
The Company has operated the Richland low-level waste disposal facility since
1963 under a lease with the State of Washington for 100 acres of disposal site
area. Approximately 40 acres of the site have been used to date. 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 from
the Rocky Mountain Compact and has entered into a contract agreement to provide
disposal for the Rocky Mountain Compact. Together, this 11-state region
generates approximately 125,000 cubic feet of low-level radioactive waste per
year which must be disposed of at the Richland facility. The Company's prices
and costs are regulated by the Washington Utilities and Tariffs Commission
(WUTC) as a legal monopoly providing LLRW services.
Under a rate settlement agreement reached in 1995 with the generators and
approved by the WUTC, the Company's annual revenue requirement of $5.6 million
plus its allowable profit of $1.6 million can be recovered in each of the next
five years. The Company can adjust unit prices to recover the costs and
allowed profit in six-month intervals. At Richland, the Company also provides
disposal of naturally-occurring and accelerator produced radioactive material
(NARM) under the licenses issued by the State of Washington. In 1995 the
Company disposed of approximately 77,000 cubic feet of NARM, largely from
industrial and institutional customers. In mid 1995, the State of Washington
significantly reduced the volume of waste allowed for disposal by implementing
a new state rule. This new rule retricts the annual volume of NARM waste to
8,600 cubic feet per year. The Company has vigorously opposed this new rule
and as of March 1996, expects that a new limit of 100,000 cubic feet per year
will be applied to the NARM disposal business at Richland. This service
generates additional revenues for the Richland facility which are outside the
scope of the rate regulations imposed by the WUTC. During 1996, under the new
rate agreement, expenses assigned by site operations and administrative
personnel to NARM disposal will be credited back to regulated waste generators.
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. 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
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13
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.
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 able to be maintained for the Sheffield, Illinois site due to
the history of the facility as described above.
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. The Company and the Commonwealth also agreed to
cooperate in the resolution of any third party indemnification claims against
the Company from potentially responsible parties involved with the facility.
The Company estimates that the maximum amount of the Company's share of these
third party claims is less than $1.1 million, and the Company recognized this
liability in its 1994 financial statements.
LLRW Portion of Beatty, Nevada Facility. In December 1992, the Governor of
Nevada, citing the federal Low-Level Act as authority, issued an executive
order for the Company's Beatty, Nevada LLRW disposal site to cease accepting
LLRW for disposal. In January 1993, the Company filed a lawsuit challenging
that order. In September 1993, the Company and the State of Nevada executed a
settlement agreement disposing of all pending litigation between the parties.
The settlement resulted in the dismissal of three lawsuits. Two of the
lawsuits had been filed by the Company challenging the authority of the Nevada
Environmental Commission to establish two new fees on disposal of waste at the
Beatty facility. The other suit dismissed was filed by Nevada seeking to
obtain a declaration from the court that it had the right to terminate the
lease agreement with the Company for the Beatty facility. The Company also
dismissed its claims against Nevada for damages associated with the Governor's
executive order closing the LLRW facility. Pursuant to the settlement
agreement, the parties also agreed that until December 31, 1996, regulatory,
statutory and lease fees for hazardous waste disposal would not exceed $40.20
per ton in the aggregate, though subject to decrease in certain events. The
settlement agreement also provides for the permanent closure of the Company's
LLRW disposal facility at Beatty, Nevada. The State of Nevada has agreed to
accelerate the licensing process of the unused disposal acreage from the LLRW
site for use in the Company's hazardous waste disposal operations at Beatty.
If the additional capacity is licensed, the capacity of the Company's Beatty
hazardous waste disposal facility will approximately double. As a result of
the above order and settlement agreement, the Beatty facility accepted no LLRW
for disposal after January 1, 1993. The State of Nevada maintains a perpetual
care and maintenance trust fund for the Beatty, Nevada LLRW and hazardous waste
facilities which is funded by the Company. Recently, analysis results by USGS
indicating small amounts of tritium and carbon-14 at this facility have been
cited by opponents of Ward Valley as evidence that the Ward Valley site is not
suitable. The USGS in their recent review of the Beatty data determined that
"extrapolation of results from Beatty to Ward Valley are too tenuous to have
much scientific value". These trace amounts are the result of operations or
practices that occurred in the early 1970's. This issue was thoroughly
reviewed by the State of Nevada and the USNRC in 1976. Actions were
implemented by the Company to correct and upgrade disposal practices. Both
California DHS and USGS have stated that past disposal practices, not site
characteristics contributed to the results at Beatty. Furthermore, the results
are not indicative of likely Ward Valley performance.
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14
The USGS data are noteworthy from a research perspective, but have no health
and safety or regulatory significance. USGS has stated, however, that the
agency will propose and perform additional studies near Beatty. See "Business
- - Hazardous Waste Services - Stabilization and Disposal Services - Beatty,
Nevada Facility".
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 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.
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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. Under RCRA and the implementing
regulations, facilities which have obtained interim status are allowed to
continue operating by complying with certain minimum standards pending issuance
of a 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 at an early stage of development, the Company cannot
predict the final decisions that the EPA might make 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 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.
- 15 -
16
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 $13.8 million and $13.2 million at December 31, 1995 and 1994,
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 the Beatty, Nevada LLRW 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 nature of the Company's business exposes it to a risk of accidental
release of harmful substances into the environment resulting in contamination,
the cost of which could be substantial. The Company currently has liability
insurance coverage for non-nuclear related occurrences under environmental
impairment liability, primary casualty and excess liability policies. Pursuant
to RCRA, the Company is required to maintain environmental impairment liability
insurance coverage with specified minimum policy limits for sudden and
non-sudden accidental occurrences. The Company is in compliance with required
limits and coverage.
The Company has organized and funded a wholly-owned corporation, American
Liability and Excess Insurance Company, to provide for financial assurance for
the Company's site closure and post-closure responsibilities in certain
instances and to provide a source of insurance for the Company in the event
that traditional third party insurance becomes unavailable. The Company is not
currently utilizing its insurance subsidiary because traditional third party
insurance is available. The Company has funded insurance policies issued by
this insurance subsidiary with cash representing the present value of the
closure or post-closure obligation being insured. As of January 1, 1996, the
Company's insurance subsidiary had pledged $7.1 million of collateral for
policies issued to insure site closing or post-closing obligations of the
Company.
CUSTOMERS
No single customer accounted for 10% of the Company's consolidated revenues
for 1995. Revenues resulting from the cost reimbursement contract with the
Central Interstate Low-Level Radioactive Waste Commission were approximately
$8,100,000 in 1995, or 12% of the Company's consolidated revenues.
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PERSONNEL
The Company had a total of 413 employees as of March 12, 1996. The Company
has collective bargaining agreements which cover 12 employees at its Richland,
Washington facility, 31 employees at its Winona, Texas facility, and 76
employees at its Oak Ridge, Tennessee facility. The Company believes that its
relationship with its employees is good.
A settlement has been reached regarding unfair labor practice charges filed
by the Oil, Chemical and Atomic Workers Union with the National Labor Relations
Board ("NLRB") relating to the union's contention that a subsidiary of the
Company should be held to the terms of a collective bargaining agreement
negotiated by the union and Quadrex, the previous owner of the Oak Ridge,
Tennessee facility purchased by the Company in September 1994. The Company has
recognized the union as the collective bargaining agent of its employees and
has negotiated a new collective bargaining agreement with the union.
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.
LOCATION FUNCTION ACREAGE OWN/LEASE
----------------- ------------------------------ ------- ---------
Richland, Washington LLRW Disposal Facility 100 acres Lease
Robstown, Texas Hazardous Waste Disposal Facility 400 acres Own
Beatty, Nevada Hazardous Waste Disposal Facility 80 acres Lease
Oak Ridge, Tennessee LLRW Processing Facility 16 acres Own
Winona, Texas Fuels Blending, Solvent Recycling 620 acres Own
and Deepwell Disposal Facility
Pasadena, Texas Transportation Facility 3 acres Own
Robstown, Texas Transportation Facility 1 acre Own
The Company leases transfer facilities in El Paso and Laredo, Texas for the
transfer of wastes collected from maquiladora plants in Mexico and a facility
in Dallas, Texas to support its Surecycle(R) operations.
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 (including, in certain instances, proceedings
instituted by citizens or local governmental authorities seeking to overturn
governmental action where governmental officials or agencies are named as
defendants together with the Company or one or more of its subsidiaries, or
both). In the majority of the situations where regulatory
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enforcement proceedings are commenced by governmental authorities the matters
involved relate to alleged technical violations of licenses or permits pursuant
to which the Company operates or of laws or regulations to which its operations
are subject, or are the result of different interpretations of the applicable
requirements.
In addition, the Company and certain of its subsidiaries are involved in
civil litigation relating to the conduct of their business. While the outcome
of any particular lawsuit or governmental investigation cannot be predicted
with certainty, the Company believes that the ultimate disposition of these
matters will not have a material adverse effect upon the consolidated financial
position of the Company.
Richland, Washington Facility. In 1964, the Washington Department of Ecology
("WDOE") leased from the DOE a 1,000 acre portion of the Hanford Reservation.
In 1965, the WDOE subleased 100 acres of that property to the Company for use
as a Low-Level Radioactive Waste ("LLRW") disposal facility under the
regulation of the Washington Department of Health pursuant to the Atomic Energy
Act. In 1990, the DOE applied to the EPA for a permit under the Resource
Conservation and Recovery Act of 1976, as amended ("RCRA") and other laws and
regulations to obtain the appropriate regulatory approvals needed to proceed
with the environmental cleanup of the Hanford Reservation. In 1994, the EPA
issued a corrective action permit that includes most of the land owned by the
DOE at the Hanford Reservation, including that portion leased to WDOE, which
includes the 100 acres subleased to the Company for its LLRW disposal facility.
Since the Company's Richland, Washington facility is located on land owned by
the DOE, the EPA considered the Company's disposal site to be part of the
"Facility" covered by the RCRA permit. Thirteen trenches at the Company's LLRW
disposal facility have been included in the final permit as "solid waste
management units" which may require further investigation to determine whether
releases of any hazardous wastes have occurred. Because portions of the
Company's facility remain included in the final permit issued to the DOE, the
Company is potentially subject to proposed permit conditions for site
investigation and possible cleanup should any releases be discovered even
though the Company is not a permittee and though it was not involved in the
activities contributing to the DOE Hanford facility contamination that are the
subject of the DOE Hanford consent order. It is the Company's opinion that it
has legal defenses that may preclude the inclusion of its Hanford site in the
DOE permit and to any corrective action relating to the LLRW disposal facility
that may be proposed pursuant to the DOE permit. Both the Company and the DOE
have appealed to the Environmental Appeals Board ("EAB") of the EPA those terms
of the permit that may potentially apply to any of the Company's facilities.
That appeal has been stayed during protracted negotiations with the EPA, DOE,
Washington Department of Ecology and Washington Department of Health. The
purpose of the negotiations is to determine whether an agreeable process for
site investigation can be negotiated. It appears at this time that all parties
will agree upon a method of sampling below certain trenches and testing for
hazardous constituents under RCRA. All parties to the appeal before the EAB
have requested a two-year stay while the negotiations are completed and the
Company conducts the site investigation. The EAB recently issued an order
dismissing the Company's appeal without prejudice to raising the identical
issues in any subsequent appeal and remanding the matter to the EPA to modify
the permit if necessary. The order specifically allows any party to resume the
appeal if negotiations fail. The EPA does not believe a modification is
necessary (thereby obviating the need for the Company to file another appeal at
this time). The Company is presently negotiating an agreement with state
agencies for a Company investigation of the site. Depending on the results of
the site investigation, the cost of conducting the site investigation and any
corrective action, if any, could be material. As part of its negotiations, the
Company is seeking to have all the costs of investigations and any resultant
corrective actions included in its rate base. As of December 31, 1995, the
Company had not recognized any liability in its financial statements for any
costs associated with the site investigation because the site investigation
terms have not been determined and the costs of any site investigation may be
recovered in the rate base.
In 1992, the Benton County assessor issued property tax assessments on
improvements owned by the Company and located on the Company's leasehold at the
Hanford Reservation. The increased property taxes totaled $1.7 million for the
years 1989, 1990 and 1991. Prior to 1989, the annual taxes had been about
$5,400. The Company sued Benton County and the Assessor and Treasurer to enjoin
them from collecting these taxes. An injunction was granted by the Benton
County Superior Court but overturned by the State Court of Appeals which ruled
that the Company should first pursue all of its administrative remedies.
Accordingly, the Company has prosecuted its
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appeal to the State Board of Tax Appeals. A hearing was held in November 1995.
A decision is expected in 1996. The Company has recently been assessed an
additional $1.9 million in taxes for 1992, 1993 and 1994. Management believes
that Benton County's assessments were improper and intends to vigorously defend
this matter in the courts and through any appropriate administrative process,
if necessary. The Company has not recognized any liability in its financial
statements for any of the tax assessments discussed above.
Winona, Texas Facility - The Company purchased the stock of Gibraltar
Chemical Resources, Inc. ("Gibraltar"), since renamed American Ecology
Environmental Services Corporation, from Mobley Environmental Services, Inc.
("Mobley") on December 31, 1994. The Company's stock purchase agreement with
Mobley provides that Mobley will indemnify the Company, without limitation as
to amount, for any damages or costs, including legal fees, associated with
certain pre-closing liabilities, including the claims set forth hereunder.
Pursuant to its stock purchase agreement with Mobley, the Company was also
named as an additional insured for a one year period (1995) for pre-closing
claims under Mobley's pollution liability insurance policy. The policy has a
$10 million aggregate limit and a $5 million per loss limit.
Permit renewal filings were made for the Winona, Texas facility in November
1994 and a hearing on the renewal was held November 28, 1995. The renewal of
the Permits is required under Part B of RCRA and other environmental regulatory
laws. There is active opposition in the local area to the renewal of these
permits. This matter will be determined by the TNRCC, and the Company expects
a final determination in late 1996. If these permits are not ultimately
renewed, such result could have a material adverse effect on the Company's
consolidated financial position and results of operations.
A group called Mothers Organized to Stop Environmental Sins filed a lawsuit
in 1994 against the Company in the United States Eastern District Court for the
State of Texas alleging that the Winona facility violated certain permits and
regulations, and contributed to the handling, storage, treatment,
transportation and disposal of solid and hazardous waste that presents an
imminent and substantial endangerment to health and the environment. The
plaintiffs have requested that the facility be shut down and civil penalties
imposed on the Company. The Company has filed a Motion for Summary Judgment in
this matter and the Court has granted a partial summary judgment but has yet to
rule on all issues presented in the Motion. In December 1995, legal counsel
was retained by the Company in connection with a potential conflict of interest
which arose from the October merger of a law firm retained by the Company in
other matters with the law firm representing the plaintiff's counsel. The
Company is in the process of preparing a motion to disqualify plaintiffs'
counsel in this matter. The case is in its initial phases of discovery and it
is too early to accurately evaluate this case. The Company believes there is
no factual background to support this claim and intends to vigorously defend
this case.
Four lawsuits, including one purported class action, were filed against
Gibraltar in 1992 and 1993 which are pending in State District Court in Smith
County, Texas, by certain persons in Winona, Texas. In August 1995, another
lawsuit was filed in Dallas County, Texas by other Winona citizens. The suits
assert various theories of liability, including subsurface trespass, nuisance
per se, negligence, gross negligence, and fraudulent concealment for alleged
air emissions. The suits also allege that the plaintiffs have experienced
personal injuries, diminution in property values, and other economic losses
which are alleged to have been caused by operation of the Winona facility. The
plaintiffs assert various grounds for recovery, and seek unspecified altered
and punitive damages. On August 4, 1995, a jury in one of the lawsuits found
that the Company's Winona facility did not use or possess the plaintiffs'
property and awarded nothing in damage. To date, the Company and Mobley have
settled certain of the plaintiffs' claims in these actions for amounts that
were not material and which were funded by the Mobley insurance policy referred
to above.
In 1992, a citizens group filed a petition with the TNRCC for revocation of
the Winona facility's deepwell permits alleging that a geological fault exists
in the vicinity of the Winona facility's deepwells and other alleged grounds.
The EPA has previously concluded in its proceedings relating to the Winona
facility's second injection well that no such fault exists. There has been a
recent filing with TNRCC by the opponents asking that there be a
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decision made on the revocation request. At this time we know of no response
by the agency to that filing. The Company believes the petition is without
merit.
Compact Related Disputes. The Company is involved in numerous challenges and
legal proceedings in connection with its siting efforts for LLRW facilities for
the Southwest Compact and Central Interstate Compact. For a description of
these proceedings, see "Business - Low-Level Radioactive Waste Services -
Disposal Services - Proposed Ward Valley, California Facility" and "- Proposed
Butte, Nebraska Facility".
A claim has been made by the Central Interstate Low-Level Radioactive Waste
Commission ("Commission") against the Company in a letter dated May 1, 1995, in
the amount $195,000, resulting from bonuses paid by the Company to certain of
its employees for the period July 1987 through December 1993. The Commission
apparently reimbursed the Company for the payment of these bonuses and now is
claiming that the reimbursement was not authorized under the contract between
the Company and the Commission. The Company has disputed the claim and
believes such reimbursement was proper. The parties have attempted to
negotiate a settlement but as of this time none has been reached. The Company
believes that a settlement can be reached. There has been no threat of suit as
of this time.
In August 1995, the Company and the Southeast Compact Commission reached a
mutually acceptable agreement on past access fee assessments incurred by
Quadrex Corporation, the previous parent company of the Recycle Center. The
Company had received and objected to invoices from the Southeast Compact for
approximately $1.5 million and a notice that an additional $1.5 million could
also be subsequently invoiced. In disputing the assessment fees the Company
argued that the fees were calculated on abnormal past waste volumes shipped to
the Barnwell, South Carolina disposal facility. The assessment calculations
included extraordinary cleanup events at the Recycle Center that were not
indicative of normal operations. In August 1995, the Southeast Compact
Commission agreed to recalculate the fee assessment on an average of normal
historical waste disposal volumes. This action resulted in a total access fee
liability of $206,156 which the Company paid during 1996. The Company had
previously recognized this liability in its consolidated financial statements.
Other Litigation. The City of San Antonio filed suit against several parties
related to environmental issues in connection with the acquisition, development
and construction of a bus transit station and multi-purpose dome stadium and
sports complex, commonly known as the Alamodome. The City named as the
defendants: the former owner of the property, various consultants involved in
the project, the project manager, and a subsidiary of the Company which served
as the construction contractor for the project. The City alleged that its
consultants failed to advise the City that the site selected for construction
of the Alamodome was environmentally contaminated, thereby breaching their
contracts and committing torts. The City also alleged that following the
discovery of actual or potential environmental problems, that the consultants
and project manager failed to act properly in handling allegedly contaminated
soil and groundwater. Various citizen groups raised concerns over the on-site
landfill and lobbied the TNRCC to force the City to move the landfill off-site.
In June 1994, the TNRCC wrote a letter to the City stating that the agency
believed that the on-site landfill should be removed. During the summer and
fall of 1995, the on-site landfill was removed. In January 1996, the Company's
insurance carrier and the City of San Antonio reached an agreement to settle
the City's claim against the Company. Prior to such settlement, however, one
of the defendants filed a cross claim against the Company. The Company has
filed two motions for Summary Judgment and a hearing was held March 29, 1996 on
one such motion. The Company is unable to predict the outcome of this cross
claim.
In November 1994, the Company was named as a defendant in a purported class
action lawsuit by former employees of Quadrex that relates to unpaid medical
benefits and an underfunded pension plan of Quadrex. Based on information
available to it, the Company believes that the aggregate amount of these claims
are less than $1 million. The Company purchased the assets of the Quadrex
Recycle Center from Quadrex on September 19, 1994. However, the asserted
claims in the purported class action were specifically excluded by the purchase
agreement pursuant to which the Company purchased the assets of the Quadrex
Recycle Center. Some of the former Quadrex employees on whose behalf the suit
was brought are now employees of the Company. The
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Company does not believe it has any liability in this matter and as such has
not recognized any liability in its financial statements. The Company intends
to contest the matter vigorously. The Company's purchase agreement with
Quadrex provides that Quadrex will indemnify the Company for any damages or
costs, including legal fees, associated with a claim of this sort. However,
because Quadrex filed for bankruptcy protection in February 1995, it is very
likely that the Company will not realize the benefits of such indemnification.
In September 1994, an unfair labor practice charge was filed against the
Company by the Oil, Chemical and Atomic Workers International Union ("Union").
The Complaint alleges that the Company and Quadrex have operated as joint
employers at the Oak Ridge, Tennessee facility during the period April 8, 1994
to September 1, 1994. As a result of this contention, the National Labor
Relations Board ("NLRB") asserts that the Company was obligated at all times
since April 8, 1994 to assume and abide by the collective bargaining agreement
negotiated by the Union and Quadrex. A hearing was held on December 12, 1995
before an administrative law judge of the NLRB. If the NLRB prevails in this
action, the Company will be liable for any and all variances for the collective
bargaining agreements since April 8, 1994. The Company recognized a liability
of $447,000 in its consolidated financial statements during 1995 for the
estimated settlement of this claim.
The Company has received a notice from an individual purporting to own debt
secured by certain real property in Midlothian, Texas. The individual alleges
that a predecessor of the Company's subsidiary, Texas Ecologists, caused
environmental contamination of the property in the early 1970's. The Company
believes it has no liability in connection with the matter and intends to
contest the matter vigorously. In connection with its investigation of the
matter, the Company also conducted its own assessment of the property with an
independent environmental consultant and concluded that any contamination on
the property falls below material levels.
In April 1995, management learned that one of its subsidiaries had not
always complied with the transit time limitations allowed for hazardous waste
being transferred from generators to final disposal sites. These requirements
are under the regulatory supervision of the TNRCC and the Company promptly
reported the situation to the TNRCC. As a result of an internal review of this
matter, the Company determined that there was a substantial number of instances
where the transit time limitations were exceeded over approximately eight
months from June 1994 through February 1995. As a direct result of this
circumstance, the Company has reorganized the operations of the subsidiary,
including the replacement of a number of personnel, and the adoption of
stronger internal systems for monitoring the movement of boxes and
transportation vehicles. At this time, the Company does not know whether the
TNRCC will ultimately assess any fines against the Company for exceeding
transit time limitations. While the Company believes the steps that it has
taken are appropriate and responsible, it is possible that the TNRCC may seek
to impose a fine on the Company in connection with the matter. The Company is
not in a position to assess the amount of such a fine. However, a fine of
sufficient magnitude could have a material adverse effect upon the consolidated
financial position of the Company.
In 1990, the Company was sued by certain landowners owning property adjacent
to the Robstown, Texas facility. The landowners have alleged that there has
been migration of pollutants through groundwater which has contaminated the
subterranean reservoir and other water resources on their respective
properties. These landowners have alleged theories including nuisance per se,
negligence and trespass. The case had a trial date in September 1995.
However, the landowners' counsel withdrew prior to the trial date and to our
knowledge, they have yet to obtain new counsel. The case has been continued.
The Company's investigation has found no migration of pollutants onto the
adjacent landowners' properties and the Company intends to contest this matter
vigorously.
In 1992, the U.S. EPA initiated an administrative enforcement action against
US Ecology and alleged in its complaint that the Company had failed to comply
with certain regulatory requirements to provide financial assurances for
closure and post-closure costs as well as liability insurance relating to its
hazardous waste management facility in Sheffield, Illinois. The EPA is seeking
a penalty of approximately $1 million and ordering compliance. The Company
ceased operating that facility in 1983 and it has been undergoing closure and
corrective action pursuant to regulatory requirements and a RCRA 3008(h)
Consent Order since that time.
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Because the Sheffield facility has not been an interim status facility under
the RCRA regulations since November of 1985, the Company has responded that the
interim status regulatory requirements for financial assurance and liability
insurance do not apply to the facility. Moreover, the Company has objected to
the penalties demanded by U.S. EPA in its complaint as entirely unwarranted.
Recently, the administrative law judge has ruled that the Sheffield facility is
subject to the RCRA regulatory requirements for financial assurance and
liability insurance, notwithstanding its loss of interim status in 1985. The
Company has appealed that decision to the Environmental Appeals board. The
penalty amount, if any, has yet to be litigated or decided. Though the outcome
of this matter is uncertain, the Company believes these insurance requirements
are not applicable to this closed site and intends to vigorously contest this
matter. As of December 31, 1995, the Company had not recognized any liability
in its financial statements for the penalty.
Since 1987, the Company has been engaged in litigation with many of its
former insurers regarding coverage for environmental damages at two facilities
formerly operated by the company. The Company has been seeking coverage for
costs arising from its Sheffield, Illinois waste facility which ceased
receiving waste in 1983. Most of the defendant-insurers entered into
settlement agreements with the Company. Several of the insurers continued to
litigate, however, and moved for summary judgment on the grounds that the
Company either knew of its loss at the Sheffield facility before the subject
insurance policies were issued or failed to notify the insurers of the
occurrences at the Sheffield facility as soon as practicable. In September
1995, the Bureau County Circuit Court granted summary judgment in favor of the
remaining insurers on grounds of both known loss and late notice. The Company
has filed a notice of appeal from that ruling with respect to certain of those
insurers.
The Company has been litigating against the same insurers with respect to the
Maxey Flats waste disposal facility which the Company operated in Kentucky
through the mid-1970's. All but two of the insurers have entered into
settlement agreements with the Company regarding that dispute. The Circuit
Court of Jefferson County, Kentucky has denied several major motions of the
insurers for summary judgment and discovery is now proceeding with respect to
the remaining issues in the litigation.
In October 1995, Boston Edison Company ("Boston Edison") filed a complaint
against U.S. Ecology, Inc. (the "Company") in the United States District Court
of Massachusetts alleging claims related to the Company's alleged failure to
indemnify Boston Edison for various costs arising out of the shipping and
burial of waste materials at the Maxey Flats Nuclear Disposal Site. The
Company had entered into a series of contracts with Boston Edison to provide
radioactive waste disposal services at this site. Boston Edison alleges that
the Company breached these contracts because the Company failed to indemnify
Boston Edison for its costs. Boston Edison also alleges that the Company
committed an unfair and deceptive trade practice in the State of Massachusetts
because of its failure to indemnify Boston Edison as required by these
contracts. Finally, Boston Edison seeks a declatory judgment that would set
forth the contractual rights and liabilities of the parties. Boston Edison
claims $600,000 in past and future costs for the alleged breach of the
contracts. It also seeks treble damages equal to three times the actual
damages caused by the Company's alleged violation of the Massachusetts
Deceptive Trade Practices Act. At this time, the Company is not in a position
to predict a favorable or unfavorable outcome of this case or the amount of
potential loss, if any, which might result to the Company if the outcome in
this matter was unfavorable. The Company intends to answer the complaint and
defend this action vigorously.
In addition to the above described litigation, the Company and its
subsidiaries are involved in various other administrative matters of
litigation, including personal injury and other civil actions, as well as other
claims, disputes and assessments that could result in additional litigation or
other proceedings. The Company and its subsidiaries are also involved in
various other environmental matters or proceedings, including permit
application proceedings in connection with the established operation, closure
and post-closure activities of certain sites, as well as other matters or
claims that could result in additional environmental proceedings.
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Management has established reserves as deemed necessary for the matters
discussed above based on management's estimates of the outcome. It is
reasonably possible that the Company's estimates for such matters will change
in the near term. Due to the Company's current financial condition and
liquidity issues, management is unable to conclude that the outcome of these
claims, disputes and other matters described above and adjustments, if any,
which may result from these matters will not have a material adverse effect on
the operations or financial position of the Company.
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 1995.
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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 1, 1996, 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:
1995 1994 Dividends Per Share
--------------------- ------------------------- ---------------------------
PERIOD High Low High Low 1995 1994
-------- ------- -------- ------- ---------- ----------
1st Quarter 7-1/4 5-3/4 12-1/2 8-1/4 $ .025 $ .025
2nd Quarter 7 3-1/2 10-3/4 7-3/4 -- .025
3rd Quarter 7 3 9 7-3/4 -- .025
4th Quarter 4-3/4 2-7/8 8-1/2 5-7/8 -- .025
The Company's amended credit facility with its bank lender prohibits cash
dividends on common stock.
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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)
YEARS ENDED DECEMBER 31, 1995 1994 1993 1992 1991
Revenues $ 67,895 $71,891 $60,312 $ 70,940 $55,811
% Increase (decrease) in revenue from prior year (5.6)% 19.2% (15.0)% 27.1% 14.6%
Net income (loss) (1) (48,903) $ 3,850 $ 4,744 $ 12,556 $ 7,407
Net income (loss) per share (2) $ (6.26) $ .49 $ .60 $ 1.51 $ 1.27
Shares used to compute income (loss) per
share (000's) (2) 7,822 7,851 8,097 8,568 6,624
Working capital (deficit) $(16,115) $ 1,563 $ 4,771 $ 14,078 $ 7,773
Current ratio (current assets divided by current
liabilities) 0.6:1 1.0:1 1.2:1 1.7:1 1.5:1
Total assets $ 114,125 $155,439 108,122 $104,166 $84,691
Long-term debt, net of current portion $ 28,357 $33,493 $ -- $ -- $ 543
Shareholders' equity $ 22,024 $67,045 $63,564 $ 54,730 $40,470
Long-term debt to total capitalization as a percentage 56.3% 33.3% --% --% 1.3%
Return on average equity (109.8)% 5.9% 8.0% 26.4% 30.1%
Dividends declared per common share $ .025 $ .10 $ -- $ -- $ --
Capital spending, including capital expenditures and
site development costs $ 8,445 $ 8,035 $12,558 $ 9,582 $ 9,453
Depletion, depreciation and amortization expense $ 7,319 $ 6,279 $ 4,356 $ 4,173 $ 4,973
(1) 1995 expenses include $33,048 in impairment losses on long-lived assets.
See Note 4 to the Financial Statements.
(2) Adjusted for July 1992 three-for-two stock split.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
CAPITAL RESOURCES AND LIQUIDITY
The Company has incurred recurring losses from operations, had a working
capital deficit of $16,115,000 as of December 31, 1995, and is currently
experiencing difficulty paying its on-going obligations as they become due. The
Company cannot be certain about its ability to improve short-term operating
results. The Company's financial statements as of December 31, 1995, do not
contain any adjustments to asset carrying amounts or for the amount of
liabilities that might result from asset liquidations or discontinued
operations. Management's actions and plans to address these issues are as
follows:
Credit Agreement
Effective June 30, 1995, the Company and its bank lender amended the existing
Credit Agreement to extend the maturity of the Credit Agreement to December 31,
1998, and to modify certain other terms. A description of the Credit Agreement
as so amended is set forth in Note 7 to the Consolidated Financial Statements.
As of December 31, 1995, the Company had available borrowings of $1,584,000
under its Credit Agreement.
Equity Investments
In September 1995, the Company completed a definitive agreement for
$5,000,000 in equity investments to be made by a group of investors comprised
principally of members of the Company's directors. A description of the
preferred stock and warrants issued is set forth in Note 8 to the Consolidated
Financial Statements. From these equity investments, the Company received net
cash proceeds of approximately $4,759,000 which have been used for general
working capital needs.
Strategic Plan
The Company has adopted a strategic plan focusing on its low-level
radioactive waste disposal and processing operations and its hazardous waste
disposal and processing operations as separate operations. The Company is
being reorganized under those respective divisions. One purpose of the
reorganization is to facilitate potential strategic alliances with other
companies which may provide additional sources of capital and open greater
opportunities.
Senior Management Changes
The Company has made substantial senior management changes. These include
installation of a new Chief Executive Officer, a new President and Chief
Operating Officer, and a new General Counsel, as well as new managers to head
the LLRW and hazardous waste operations.
Measures to Reduce Costs
Management has implemented a business plan and long term strategy which
success is dependent upon the Company's ability to substantially reduce
operating expenses and enhance revenues from low-level radioactive waste
disposal and processing. Management has taken steps during 1995 to reduce
costs and will continue this effort in the future. These steps include
reducing personnel, among them certain members of senior management, and
various sales, operating, and administrative personnel. The Company plans to
decentralize responsibility to the LLRW and hazardous waste operating groups
and transfer most of the functions currently performed at the corporate office
to the operating divisions to drastically reduce corporate overhead. Other
than the capital required for developing the Ward Valley facility and for
regulatory compliance at the Winona facility, the
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Company has deferred almost all other capital expenditures planned for 1996.
In addition, the Company discontinued certain unprofitable operations including
a transportation terminal in Ohio and its related sales offices and the
remediation services division in Texas. The Company is also evaluating the
viability of certain other operations and their current potential to perform at
an acceptable level. As a consequence of the personnel reductions and the
reorganization, effective March 1, 1996, the corporate office has been
relocated to smaller space in Boise, Idaho and negotiations are in progress to
sublease the corporate office space in Houston, Texas.
The Company believes that it has a viable plan to improve its cost structure
and operating results. However, considering the Company's recent losses and
insufficient cash flow from operations, there can be no assurance that this
plan will resolve the Company's liquidity problem in a timely fashion. The
Company will more likely than not need to raise additional financing or sell
assets. There can be no assurance, however, that any such financing or asset
sales will be consummated. In either event, the Company may experience
increasing cash flow problems which could cause the Company to materially
reduce the current level of its operating activities.
For the year ended December 31, 1995, the Company raised $4,759,000 in cash
from the sale of preferred stock, generated cash from operations of $2,596,000,
spent $2,320,000 for capital expenditures, invested $2,844,000 in site
development costs for the Ward Valley facility and incurred capitalized
interest of $3,281,000 related to the Ward Valley and Butte facilities. The
Company realized net proceeds of $1,080,000 from the sales of excess site
equipment at various facilities and sales of transportation equipment primarily
from the discontinued transportation business in Ohio.
FUTURE CONSIDERATIONS
As a result of the changes to its management and operations in 1995, the
Company believes that the future operating results of its existing businesses
will improve, although no assurances can be given that such improvements will
occur. In addition, the Company expects to receive federal income tax refunds
of approximately $6,700,000 during the second quarter of 1996. In April 1996,
$5,947,000 of such tax refunds were received and $4,000,000 of the proceeds was
used to pay down a short-term bank loan entered into in February 1996.
The Company is currently negotiating insurance claims relating to the July
1994 fire at the Recycle Center and expects to settle such claims in the near
future. The Company has a $2,538,000 receivable recorded for these claims at
December 31, 1995. In May 1996, the Company received a $1,800,000 portion of
the claim, which will be used to replace property and equipment damaged in
the fire.
The estimated unaudited results for the first quarter of 1996 is a net loss
of approximately $3,000,000.
The Company offered an unsolicited proposal in the second quarter of 1995 to
the Department of Energy ("DOE") to dispose of large volumes of LLRW from the
DOE's Hanford site into the Company's Richland, Washington, facility which is
located on the Hanford Reservation. Although the Company believed and still
believes the economics of its proposal should be very attractive to the DOE,
the DOE rejected the Company's proposal. The Company, however, will continue
to pursue this opportunity.
RESULTS OF OPERATIONS - 1995 VS. 1994
The Company reported a net loss of $48,903,000 for the year ended December
31, 1995 compared to net income of $3,850,000 for 1994. The 1995 results
included pretax charges totaling $40,988,000 for unusual events and
non-recurring adjustments of which $33,048,000 related to impairment losses on
long-lived assets. Exclusive of material unusual events and non-recurring
accounting adjustments in both periods, the Company had a pre-tax loss of
$13,330,000 in 1995 and a pre-tax income of $1,823,000 in 1994.
Approximately $9,586,000 of the increase in the adjusted loss from operations
for 1995, as compared to 1994, is attributable to the operating results of the
Recycle Center and Winona facility that were acquired in September and December
1994, respectively.
- 27 -
28
The following table sets forth items in the Statements of Operations for the
three years ended December 31, 1995, as a percentage of revenue:
Percentage of Revenues for the
Year Ended December 31,
--------------------------------------------
1995 1994 1993
---------- ---------- ----------
Revenues 100.0% 100.0% 100.0%
Operating costs 104.8 75.4 69.3
--------- --------- ---------
Gross profit (loss) (4.8) 24.6 30.7
Selling, general and administrative expenses 24.2 17.2 19.8
Impairment losses on long-lived assets 48.7 -- --
--------- --------- ---------
Income (loss) from operations (77.6) 7.4 10.9
Other (income) expense, net 2.4 (0.4) (1.7)
Interest expense 0.0 0.0 0.1
--------- --------- ---------
Income (loss) before income taxes (80.0) 7.8 12.5
Income tax expense (benefit) (8.0) 2.5 4.6
--------- --------- ---------
Net income (loss) (72.0)% 5.3% 7.9%
========== ========= =========
Revenues
Revenues for 1995 were $67,895,000, a 6% decrease from 1994 revenues of
$71,891,000.
Hazardous waste revenues for 1995 decreased $4,578,000, or 10%, compared to
1994. A $11,519,000 increase in revenues was attributable to the Winona
facility which was acquired on December 31, 1994. The discontinuation of
Midwest transportation operations and Gulf Coast remediation services during
the first quarter of 1995 resulted in decreased revenues of $6,077,000.
Disposal and related transportation and field services revenues at the Beatty,
Nevada, disposal facility, the Robstown, Texas, disposal facility, and Gulf
Coast transportation operations decreased $10,088,000 due to a 33% decline in
disposal volumes, offset in part by 15% higher average disposal prices.
LLRW revenues increased $582,000, or 2%, during 1995 as compared to 1994. A
$5,704,000 increase in revenues was attributable to the Recycle Center due to
recognizing a full year of operations in 1995 versus three and one-third months
during 1994. LLRW brokerage services decreased $2,696,000 due to the closing
of the Barnwell, South Carolina, disposal facility for the period from January
to June 1995. A decrease in revenues of $1,706,000 resulted from the Company's
completion of a contract milestone with the Central Interstate Low-Level
Radioactive Waste Commission in early 1995. When the Butte facility's license
is granted, facility development activities and associated revenues will
resume.
Revenues for 1994 were $71,891,000, a 19% increase over 1993 revenues of
$60,312,000. LLRW revenues increased 26% compared to 1993. Hazardous waste
revenues increased 16% compared to 1993. Disposal volumes increased
approximately 34% due to obtaining several large volume contracts for remedial
projects on the West Coast and in Texas. However, due to the high volume
nature of these contracts and the competitive remedial pricing environment,
average disposal prices for the Company's two hazardous landfills decreased by
approximately 23%. An increase in transportation revenues of 29% in 1994
resulted from a full year of results from the operations of Waste Processors
Industries, Inc. ("WPI") acquired in March 1993, and the successful integration
of marketing transportation and disposal services with the Robstown, Texas
facility. Remediation revenues increased 17% in 1994 due principally to the
large remediation and disposal contracts obtained in the West Coast region with
ultimate waste disposal occurring at the Company's Beatty, Nevada facility.
Stabilization
- 28 -
29
revenues nearly tripled in 1994 compared to 1993 due to state regulatory
requirements for debris treatment and to the large debris cleanup projects
requiring stabilization treatment prior to disposal.
LLRW disposal revenues decreased 8% in 1994 due principally to the
implementation of the Federal Low-Level Radioactive Waste Policy Amendments Act
of 1985 (the "Low-Level Act") on January 1, 1993. The Low-Level Act together
with state regulatory initiatives resulted in the inactivity of the Beatty,
Nevada LLRW facility and the regulatory restrictions placed on the Richland,
Washington facility and caused unusually large volumes of waste receipts at the
end of 1992 which were not buried and recognized as revenues until the first
quarter of 1993. Exclusive of the carryover effect of volumes received in
1992, 1994 disposal revenues increased by approximately 37% compared to 1993
due to penetration of the NORM waste disposal market. In 1994, the Company
entered the LLRW on-site remediation business generating approximately
$1,900,000 of revenues by providing technical and remedial services for several
projects in various regions of the country. Additionally, the acquisition of
the Recycle Center in September 1994, contributed approximately $2,800,000 in
treatment, processing, and recycling revenues.
Revenues resulting from the cost reimbursement contract with the Central
Interstate Low-Level Radioactive Waste Commission were $8,100,000, $9,800,000,
and $9,300,000, in 1995, 1994, and 1993, respectively.
- 29 -
30
Operating Costs
Operating costs in fiscal 1995 increased $16,948,000, or 31%, as compared to
1994. An increase in operating costs of $23,637,000 for 1995 as compared to
1994 was due to the acquisitions of the Recycle Center and the Winona facility
in September and December 1994, respectively. This was partially offset by a
reduction in operating costs of $5,499,000 due to the discontinuation of the
transportation and remediation services business during the first quarter of
1995. As a percentage of revenues, operating costs were 105%, 75% and 69% for
1995, 1994, and 1993, respectively. The following table sets forth unusual
events and non-recurring accounting adjustments which affected operating costs
for 1995, 1994 and 1993, respectively.
Increase (Decrease) in Operating Costs
(in thousands)
------------------------------------------------
1995 1994 1993
-------------- -------------- --------------
Deferred site maintenance accrual adjustments due to changes
in current cost estimates $ -- $ (3,202) $ (96)
Settlements of environmental insurance claims on closed sites -- (505) (2,275)
Deferred site maintenance accrual reversal, settlement with
the Commonwealth of Kentucky, and estimated PRP
settlements all regarding remedial liability and indemnity
for the closed Maxey Flats site -- (518) (1,768)
Writedowns of certain permitting costs and airspace costs 76 413 --
Deferred site maintenance accrual adjustment due to change
in the discount rate used to compute present value 1,396 -- (1,199)
Disposal fees and taxes payable and deferred site maintenance
accrual reversed due to settlement with the State of Nevada
regarding the Beatty, Nevada LLRW facility -- -- (2,792)
Writedowns of design fees/facility costs due to abandonments 320 -- --
Cell development cost amortization adjustment due to
changes in cell utilization 204 -- (768)
Settlement of variances from collective bargaining
agreement - Recycle Center 447 -- --
Remedial investigation costs - Beatty, Nevada site 491 -- --
-------- --------- ---------
Total unusual events and non-recurring adjustments
included in operating costs $ 2,934 $ (3,812) $ (8,898)
======== ======== ========
Exclusive of these unusual events and non-recurring adjustments, operating
costs for 1995, 1994 and 1993 would have been $68,195,000, $57,993,000 and
$50,688,000, or 100%, 81% and 84% of revenues, respectively. In 1995, exclusive
of these unusual events and non-recurring adjustments, the operating costs as a
percentage of revenues for the Recycle Center and the Winona facility were 126%
and 124%, respectively, and all other locations combined were 89%.
- 30 -
31
Selling, General and Administrative Expenses
Selling, general and administrative expenses ("SG&A") for 1995 were
$16,411,000 compared to $12,362,000 for 1994. Included in SG&A for the 1995
period are charges for several unusual events and non-recurring accounting
adjustments which increased SG&A by $5,006,000. These charges related
principally to severance for certain corporate executives and other corporate
personnel, recognition of a loss for a portion of the corporate office lease
and furniture which is in the process of being subleased, a writedown of
obsolete computer hardware and software and a writedown of deferred debt
issuance costs related to the bank credit facility which was amended effective
June 30, 1995. Exclusive of these charges, SG&A was $11,405,000, a decrease of
$957,000 as compared to 1994.
As a result of the impairment losses on long-lived assets recognized in 1995,
future goodwill amortization is expected to be reduced by approximately
$718,000 annually. As part of corporate overhead cost reduction efforts, the
Company has relocated the remaining corporate personnel effective March 1, 1996
and is in the process of negotiating a sublease of the prior corporate office
space. The estimated $1,100,000 loss on the lease obligation for the unused
portion of the office space and furniture was recognized in 1995.
Selling, general and administrative expenses for 1994 were $12,362,000, an
increase of $430,000 compared to 1993. The increase is attributable
principally to incremental selling costs and amortization of intangible assets
resulting from acquired businesses.
Investment Income
Net investment income is comprised of interest income earned on various debt
securities, certificates of deposit and other interest bearing deposits, and
dividend income and capital gains and losses earned on the Company's preferred
stock portfolio. This portfolio is principally the Company's captive insurance
investments reinsuring the present value of certain long-term closure and post
closure liabilities. The amount of investment income in 1995 increased from
1994 due principally to a higher weighted average of outstanding investments in
1995 as compared to 1994. Investment income recognized in 1994 decreased from
1993 due to lower preferred stock portfolio performance as a result of rising
interest rates and to the decrease in interest bearing investments outstanding.
Interest Expense
Interest expense is the total interest expense incurred by the Company on
outstanding indebtedness less capitalized amounts. In 1995 and 1994, the
Company incurred $3,281,000 and $968,000, respectively in interest cost, all of
which was capitalized for the development of the Company's LLRW facilities in
California and Nebraska in accordance with Statement of Financial Accounting
Standards No. 34, Capitalization of Interest Cost. Substantially all of the
interest cost incurred for 1995 and 1994 related to borrowings under the
Company's credit agreement with its bank lender.
Income Taxes
The Company's effective income tax (benefit) rates were (10)%, 32%, and 37%,
for the fiscal years 1995, 1994, and 1993, respectively. The effective benefit
rate of 10% in 1995 does not reflect any recognition of future tax benefits on
timing differences or net operating loss carryforwards.
- 31 -
32
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 $13,770,000 and $13,175,000
at December 31, 1995, and 1994, respectively, have been pledged as collateral
for the Company's closure/post-closure obligations, performance of a Remedial
Investigation and Feasibility Study ("RI/FS") and performance of corrective
action at the closed Sheffield, Illinois chemical waste facility, compliance
with the TNRCC requirements related to a deepwell at the Company's Robstown,
Texas hazardous disposal site, closure costs for the Beatty, Nevada LLRW 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 closed 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 1995,
the Company spent approximately $92,000 on remediation at the closed Sheffield
hazardous disposal site.
The nature of the hazardous material handled by the Company and its
subsidiaries could give rise to substantial damages if spills, accidents or
migration of hazardous material occurs. The occurrence of such events could
have a material adverse effect upon the Company's liquidity and operating
results.
Corporate Development Considerations
See "Business - Low-Level Radioactive Waste Services - Disposal Services -
Proposed Ward Valley, California Facility" and "Proposed Butte, Nebraska
Facility" for a description of the Company's and the impact of such facilities
and other future considerations on the Company's consolidated financial
condition and results of operations.
- 32 -
33
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To American Ecology Corporation:
We have audited the accompanying consolidated balance sheets of American
Ecology Corporation (a Delaware Corporation) and subsidiaries as of December
31, 1995 and 1994, and the related consolidated statements of operations,
shareholders' equity and cash flows for each of the three years in the period
ended December 31, 1995. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of American Ecology Corporation
and subsidiaries as of December 31, 1995 and 1994, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1995, in conformity with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 1 to
the consolidated financial statements, the Company has incurred significant
losses from operations and writedowns of assets. At December 31, 1995, the
Company had a working capital deficiency of $16.1 million. During 1995, the
Company obtained capital contributions from certain of its directors and others
and restructured its Credit Agreement with the bank; however, the Company
continues to have limited cash resources available and has substantial
obligations that are due in the future. Under the terms of the Credit
Agreement, the bank may accelerate the maturity of the debt in the event of
violation of any covenant of the Credit Agreement or if a material adverse event
is deemed by the bank to have occurred. If the Company is unable to remain in
compliance with the terms of the Credit Agreement or obtain waivers in the event
of a default and the bank accelerates maturity of the Credit Agreement, the
Company does not have adequate financial resources to extinguish the loan and
the Company's operations may be negatively impacted. As discussed in Note 13 to
the consolidated financial statements, the Company is involved in various
significant permitting efforts, claims, lawsuits and other administrative
matters which are uncertain at this time. The foregoing matters raise
substantial doubt about the Company's ability to continue as a going concern.
Management's plans in regard to these matters are also described in Note 1. The
accompanying consolidated financial statements do not include any adjustments
relating to the recoverability and classification of asset carrying amounts or
the amounts and classification of liabilities that might be necessary should the
Company be unable to continue as a going concern, or adjustments, if any, that
may be necessary as a result of the outcome of the matters discussed above.
ARTHUR ANDERSEN LLP
Houston, Texas
April 11, 1996
- 33 -
34
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
AMERICAN ECOLOGY CORPORATION
CONSOLIDATED BALANCE SHEETS
($ IN 000'S EXCEPT PER SHARE AMOUNTS)
As of December 31,
------------------------------------
1995 1994
----------------- -----------------
ASSETS
Current assets:
Cash and cash equivalents $ 229 $ 231
Investment securities 523 1,703
Receivables, net of allowance for doubtful
accounts of $1,322 and $1,749, respectively 16,938 29,043
Income taxes receivable 5,339 --
Insurance claim receivable 2,538 2,976
Deferred income taxes -- 991
Prepayments and other 1,675 2,854
------------ ------------
Total current assets 27,242 37,798
Cash and investment securities, pledged 13,770 13,175
Property and equipment, net 21,764 30,122
Deferred site development costs 47,364 41,239
Intangible assets relating to acquired businesses, net 486 31,313
Other assets 3,499 1,792
------------ ------------
Total Assets $ 114,125 $ 155,439
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Revolving credit loan $ 6,416 $ -
Current portion of long term debt 780 850
Accounts payable 13,376 12,464
Accrued liabilities 21,022 19,397
Deferred site maintenance, current portion 1,763 3,524
------------ ------------
Total current liabilities 43,357 36,235
Long term debt, excluding current portion 28,357 33,493
Deferred site maintenance, excluding current portion 20,387 18,666
Commitments and contingencies (Note 13)
Shareholders' equity:
Convertible preferred stock, $.01 par value,
1,000,000 shares authorized, none issued -- --
8 3/8% series D cumulative convertible preferred stock,
$.01 par value, 105,264 shares authorized, 105,264
and 0 shares issued and outstanding, respectively
(liquidation preference of $47.50 per share) 1 --
Common stock, $.01 par value,
20,000,000 shares authorized, 7,825,628
and 7,818,828 shares issued and
outstanding, respectively 78 78
Additional paid-in capital 46,762 41,837
Unrealized gain (loss) on securities available-for-sale (718) 43
Retained earnings (deficit) (24,099) 25,087
------------ ------------
Total shareholders' equity 22,024 67,045
------------ ------------
Total Liabilities and Shareholders' Equity $ 114,125 $ 155,439
============ ============
The accompanying notes are an integral part of these financial statements.
- 34 -
35
AMERICAN ECOLOGY CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
($ IN 000'S EXCEPT PER SHARE AMOUNTS)
Year Ended December 31,
---------------------------------------------
1995 1994 1993
---------- ---------- ----------
Revenues $ 67,895 $ 71,891 $ 60,312
Operating costs 71,129 54,181 41,790
--------- -------- --------
Gross profit (loss) (3,234) 17,710 18,522
Selling, general and administrative expenses 16,411 12,362 11,932
Impairment loss on long-lived assets 33,048 -- --
--------- -------- --------
Income (loss) from operations (52,693) 5,348 6,590
Investment income (582) (287) (973)
Loss on sale of assets 1,386 -- --
Other expense 821 -- --
Interest expense -- -- 31
--------- -------- --------
Income (loss) before income taxes (54,318) 5,635 7,532
Income tax expense (benefit) (5,415) 1,785 2,788
--------- -------- --------
Net income (loss) (48,903) 3,850 4,744
Preferred stock dividends 88 -- --
--------- -------- --------
Net income (loss) available to common shareholders $ (48,991) $ 3,850 $ 4,744
========= ======== ========
Net income (loss) per share, primary $ (6.26) $ .49 $ .60
========= ======== ========
Dividends paid per common share $ .025 $ .10 $ --
========= ======== ========
The accompanying notes are an integral part of these financial statements.
- 35 -
36
AMERICAN ECOLOGY CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
($ IN 000'S)
8 3/8%
SERIES D UNREALIZED
CUMULATIVE GAIN (LOSS) ON
CONVERTIBLE CONVERTIBLE ADDITIONAL SECURITIES RETAINED
PREFERRED PREFERRED COMMON PAID-IN AVAILABLE- EARNINGS
STOCK STOCK STOCK CAPITAL FOR-SALE (DEFICIT)
----------- ----------- ---------- ------------- ----------- ---------
Balance, December 31, 1992 $ -- $ -- $ 74 $ 37,383 $ -- $ 17,273
Net income -- -- -- -- -- 4,744
Common stock issued for
acquisition -- -- 3 3,464 -- --
Other common stock issuances,
net of repurchases -- -- 1 340 -- --
Income tax benefit of stock
options exercised -- -- -- 282 -- --
--------- -------- -------- --------- --------- --------
Balance, December 31, 1993 $ -- $ -- $ 78 $ 41,469 $ -- $ 22,017
Net income -- -- -- -- -- 3,850
Common stock issuances -- -- -- 301 -- --
Income tax benefit of stock
options exercised -- -- -- 67 -- --
Dividends - common stock -- -- -- -- -- (780)
Unrealized gain on securities
available-for-sale -- -- -- -- 43 --
--------- -------- -------- --------- --------- --------
Balance, December 31, 1994 $ -- $ -- $ 78 $ 41,837 $ 43 $ 25,087
Net loss - -- -- -- -- (48,903)
Preferred stock issuances -- 1 -- 4,898 -- --
Common stock issuances -- -- -- 98 -- --
Income tax benefit of
stock options exercised -- -- -- 7 -- --
Liquidation of shareholders'
rights -- -- -- (78) -- --
Dividends - common stock -- -- -- -- (195)
Dividends - preferred stock -- -- -- -- (88)
Unrealized loss on securities
available-for-sale -- -- -- -- (761) --
--------- -------- -------- --------- --------- --------
Balance, December 31, 1995 $ -- $ 1 $ 78 $ 46,762 $ (718) $(24,099)
========= ======== ======== ========= ========= ========
The accompanying notes are an integral part of these financial statements.
- 36 -
37
AMERICAN ECOLOGY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
($ IN 000'S)
Year Ended December 31,
------------------------------------------
1995 1994 1993
------------ ------------ ------------
Cash flows from operating activities:
Net income (loss) $ (48,903) $ 3,850 $ 4,744
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Impairment loss on long-lived assets 33,048 -- --
Depletion, depreciation and amortization 7,319 6,279 4,356
Deferred income taxes 816 3,044 2,232
(Gain) loss on sale of assets 1,386 (65) (24)
Realized loss on sales of securities available-for-sale 101 -- --
Changes in assets and liabilities, excluding effects of acquisitions:
Receivables 12,655 (4,534) 4,437
Income taxes receivable (5,339) -- --
Investment securities classified as trading (354) 472 --
Other assets (1,016) (411) (1,456)
Deferred site maintenance (40) (7,041) (5,249)
Other liabilities 2,923 (3,394) (2,341)
---------- --------- ---------
Total adjustments 51,499 (5,650) 1,955
---------- --------- ---------
Net cash provided by (used in) operating activities 2,596 (1,800) 6,699
---------- --------- ---------
Cash flows from investing activities:
Capital expenditures, excluding site development costs (2,320) (3,714) (8,943)
Site development costs, including capitalized interest (6,125) (4,321) (3,615)
Payments for businesses acquired -- (27,871) (3,305)
Proceeds from sales of assets 1,080 299 24
Proceeds from sales of investment securities 214 -- --
Transfers to (from) cash and investment
securities, pledged (241) 885 4,502
---------- --------- ---------
Net cash used in investing activities (7,392) (34,722) (11,337)
---------- --------- ---------
Cash flows from financing activities:
Proceeds from issuances of indebtedness 26,640 56,555 1,100
Payments of indebtedness (26,430) (23,739) (3,221)
Proceeds from common stock issued 98 301 341
Proceeds from preferred stock issued, net 4,759 -- --
Liquidation of shareholders' rights (78) -- --
Payment of cash dividends (195) (780) --
---------- --------- ---------
Net cash provided by (used in)
financing activities 4,794 32,337 (1,780)
---------- --------- ---------
Decrease in cash and cash equivalents (2) (4,185) (6,418)
Cash and cash equivalents at beginning of year 231 4,416 10,834
---------- --------- ---------
Cash and cash equivalents at end of year $ 229 $ 231 $ 4,416
========== ========= =========
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest, net of amounts capitalized $ -- $ -- $ 31
Income taxes -- 123 2,338
The accompanying notes are an integral part of these financial statements.
- 37 -
38
AMERICAN ECOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Business
American Ecology Corporation (a Delaware Corporation) and its subsidiaries
("the Company") provide processing, packaging, transportation, remediation and
disposal services for generators of hazardous waste and low-level radioactive
waste. The Company services the needs of hazardous waste generators in the
Gulf and West Coast regions of the country at its hazardous waste landfill
disposal sites in Robstown, Texas and Beatty, Nevada and commercial deepwell
disposal facility in Winona, Texas. The Company services the needs of
low-level radioactive waste (LLRW) generators in the Northwest region at its
rate regulated LLRW facility located near Richland, Washington and provides
LLRW processing and recycling services to LLRW waste generators in the Mid-West
and East Coast regions of the country at its Oak Ridge, Tennessee facility.
Business Conditions. The Company has incurred significant losses from
operations during 1995 and had a working capital deficit of $16.1 million as of
December 31, 1995. Furthermore, as a result of the above conditions and other
circumstances discussed in Note 4, the Company recorded a $33.0 million
impairment loss on long-lived assets during 1995. The estimated unaudited
results for the first quarter of 1996 is a net loss of approximately
$3.0 million.
Although the Company obtained capital contributions of approximately $4.9
million from certain of its directors and others, restructured its bank credit
agreement extending its maturity to December 1998, and received certain waivers
for financial and other covenant violations in the credit agreement from the
bank for 1995 and the first and second quarters of 1996, the Company continues
to have very limited cash resources available and is currently experiencing
difficulty paying its on-going obligations as they become due. As discussed in
Note 7, available borrowings under the Credit agreement were approximately $1.6
million as of December 31, 1995. 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.
Management has implemented a business plan and long term strategy which
success is dependent upon the Company's ability to substantially reduce
operating expenses and enhance revenues from low-level radioactive waste
disposal and processing. Management has taken steps during 1995 to reduce
costs and will continue this effort in the future. These steps include
reducing personnel and decentralizing responsibilities to the operating
divisions. Furthermore, the Company is limiting future capital expenditures.
The Company will more likely than not need to raise additional financing or
sell assets. There can be no assurance, however, that any such financing or
asset sales will be consummated. In the event the Company does not meet its
business plan or the Company is unable to obtain alternative financing, there
can be no assurance that the Company will be able to meet its obligations as
they become due or obtain further forbearance from the bank.
As discussed in Note 13 to the consolidated financial statements, the Company
is involved in various significant permitting efforts, claims, lawsuits and
other administrative matters which are uncertain at this time.
The accompanying consolidated financial statements do not include any
adjustments relating to the recoverability and classification of asset carrying
amounts or the amounts and classification of liabilities that might be
necessary should the Company be unable to continue as a going concern, or
adjustments, if any, that may be necessary as a result of the outcome of the
matters discussed above.
- 38 -
39
Principles of Consolidation. The accompanying financial statements present
the consolidated accounts of American Ecology Corporation and its subsidiaries.
All significant intercompany accounts and transactions have been eliminated.
Revenue Recognition. Generally, revenues are recognized as services are
performed and as waste materials are buried or processed.
Cash Equivalents. Cash equivalents consist of short-term, highly liquid
investments with original maturities of three months or less, which are readily
convertible into cash.
Investments in Debt and Equity Securities. The Company adopted Statement of
Financial Accounting Standards No. 115 (SFAS 115), "Accounting for Certain
Investments in Debt and Equity Securities", effective January 1, 1994. Debt
and equity securities that the Company has the intent and ability to hold to
maturity are classified as "securities held-to-maturity" and reported at
amortized cost. Debt and equity securities that are held for current resale
are classified as "trading securities" and reported at fair value with
unrealized holding gains and losses included in earnings. Debt and equity
securities not classified as either "securities held-to-maturity" or "trading
securities" are classified as "securities available-for-sale" and reported at
estimated fair value with net unrealized holding gains and losses reported as a
component of shareholders' equity. The adoption of SFAS 115 did not have a
material effect on the Company's financial position or results of operations.
The Company uses the specific identification method to determine the cost basis
used in computing realized gains or losses.
Property and Equipment. Property and equipment are recorded at cost and
depreciated on straight-line and declining balance methods over estimated
useful lives. Land is comprised of land owned at the processing and disposal
sites. Land owned at disposal sites is depleted over the estimated useful life
of the disposal site on a straight-line basis. Cell development costs
represent waste disposal site preparation costs which are capitalized and
charged to operating costs as disposal space is utilized. Cell development
costs include direct costs related to site preparation, including legal,
engineering, construction, and the direct cost of Company personnel dedicated
for these purposes. The estimated useful lives of buildings and improvements
is fifteen to thirty-one years. The estimated useful lives of vehicles,
decontamination, processing and other equipment is three to ten years. See
Note 3. for major categories of property and equipment. Expenditures for major
renewals and betterments are capitalized and expenditures for maintenance and
repairs are charged to expense as incurred. During 1995, 1994 and 1993,
maintenance and repairs expense was $603,000, $750,000, and $642,000,
respectively.
Deferred Site Development Costs. The Company has been selected to locate,
develop and operate the low-level radioactive waste ("LLRW") facilities for the
Southwestern Compact ("Ward Valley facility") and the Central Interstate
Compact ("Butte facility").
The license application for the Southwestern Compact was approved by the
California Department of Health Services ("DHS") in September 1993. All costs
related to the development of the Ward Valley facility have been paid and
capitalized by the Company. As of December 31, 1995, the Company had deferred
$40,673,000 (36% of total assets) of pre-operational facility development costs
of which $3,649,000 was capitalized interest. These deferred costs relating
to the development of the Ward Valley facility are expected to be recovered
during the facility's 20 year operating period from future waste disposal
revenues based upon disposal fees approved by the DHS in accordance with
existing state rate-base regulations. The disposal fee approval process is
expected to include an independent prudency review of all the pre-operational
costs incurred by the Company prior to their inclusion in the rate-base. The
Company expects all of the costs which it has deferred for this facility, plus
additional unrecognized project interest costs to be included as a component of
the rate-base; however, there can be no assurance that all of the costs will be
approved by the DHS.
Allowable costs incurred by the Company for the development of the Butte
facility are reimbursed under a contract with the Central Interstate LLRW
Compact Commission ("CIC") and are recognized as revenues. Such revenues
totaled $8,100,000, $9,800,000 and $9,300,000 in 1995, 1994 and 1993,
respectively. Substantially all funding to develop the Butte facility is being
provided by the major generators of the waste in the CIC. As of
- 39 -
40
December 31, 1995, the Company has contributed and deferred approximately
$6,691,000 (6% of total assets), of which $600,000 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 granting of the
license. 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
these amounts will be approved. In addition, the CIC has the option to
terminate the contract, upon ten (10) days written notice, in the event it has
expended an additional $31.1 million provided under the last contract amendment
and the State of Nebraska's licensing decision has not been made and the major
generators in the compact region have either ceased funding the project or
thereafter notified the CIC pursuant to amendment No. 5 of its contract with
the CIC that the major generators intend to cease funding of the project. If
the CIC elects to terminate the contract, then the Company has no further claim
or right to reimbursement of its contributions or accrued interest unless the
CIC and the Company agree to go forward with the facility, in which event the
Company retains its rights to recover its contribution together with any
accrued interest.
The construction and operation of the Ward Valley and Butte facilities are
currently being delayed by various political and environmental opposition
toward the development of the sites and by various legal proceedings as further
discussed under "Business - Low-Level Radioactive Waste Services - Disposal
Services - Proposed Ward Valley, California Facility" and "- Proposed Butte,
Nebraska Facility". At this time, it is not possible to assess the length of
these delays or when, or if, the Butte facility license will be granted, and
when, or if, the land for the Ward Valley facility will be obtained. Although
the timing and outcome of the proceedings referred to above are not presently
determinable, the Company continues to actively urge the conveyance of the land
from the federal government to the State of California so that construction may
begin, and to actively pursue licensing of the Butte facility. The Company
believes that the Butte facility license will be granted, operations of both
facilities will commence and that the deferred site development costs for both
facilities will be realized. In the event the Butte facility license is not
granted, operations of either facility do not commence or the Company is unable
to recoup its investments through legal recourse, the Company would suffer
losses that would have a material adverse effect on its financial position and
results of operations.
In 1994, the Company began to capitalize interest in accordance with
Statement of Financial Accounting Standards No. 34, Capitalization of Interest
Cost, on the site development projects while the facilities being developed are
undergoing activities to ready them for their intended use. Interest
capitalized was $3,281,000 in 1995 and $968,000 in 1994.
Intangible Assets. Intangible assets relating to acquired businesses consist
primarily of the cost of purchased businesses in excess of fair value of net
assets acquired ("goodwill"). Intangible assets are being amortized on the
straight-line method over periods not exceeding 40 years with the majority
being amortized over 25 years. The accumulated amortization of intangible
assets amounted to $314,000 and $962,000 at December 31, 1995 and 1994,
respectively. Amortization of intangible assets was $742,000, $520,000 and
$215,000 in 1995, 1994 and 1993, 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. In
1995, a $31,367,000 impairment of intangible assets was recorded, see Note 4.
Permitting Costs. Permitting costs, which are primarily comprised of outside
engineering and legal expenses, are capitalized and amortized over the life of
the applicable permits. At December 31, 1995 and 1994, there were $2,057,000
and $1,389,000, respectively, of such unamortized costs included in other
assets in the accompanying consolidated balance sheets.
The Company operates its various sites under the regulations of, and permits
issued by various state and federal agencies. Several of the Company's
existing sites are currently seeking permit renewals and/or expansion
- 40 -
41
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, 1995, management believes that assets which
could currently be affected by permitting efforts are recoverable at their
recorded values.
Deferred Site Maintenance. Deferred site maintenance includes the accruals
associated with obligations for closure and post-closure of the Company's
operating and closed disposal sites and for corrective actions and remediation.
The portion of these obligations expected to be spent within the following
twelve month period is classified as deferred site maintenance, current portion
in the accompanying consolidated balance sheets. The Company generally
provides accruals for the estimated costs of closures and post-closure
monitoring and maintenance as permitted airspace of such sites is consumed.
Liabilities are recorded when environmental assessments and/or remedial efforts
are probable, and the costs can be reasonably estimated. The Company performs
routine periodic reviews of closed operating sites and revises accruals for
estimated post-closure, remediation or other costs related to these locations
as deemed necessary. The Company's recorded liabilities are based on best
estimates of current costs and are updated periodically to include the effects
of existing technology, presently enacted laws and regulations, inflation and
other economic factors. The Company estimates its future cost requirements for
closure and post-closure monitoring and maintenance for operating chemical
disposal sites based on RCRA and the respective site permits. RCRA requires
that companies provide financial assurance for the closure and post-closure
care and maintenance of their chemical sites for at least thirty years
following closure. Where both the amount of a particular environmental
liability and the timing of the payments are reliably determinable, the cost is
discounted to present value at a discount rate of 2.5%, net of inflation. See
the discussion of Operating Costs included in Management's Discussion and
Analysis of Financial Condition and Results of Operations for information
concerning certain adjustments recorded in 1995, 1994 and 1993.
- 41 -
42
Net Income (Loss) Per Share. The calculation of net income (loss) per common
and common equivalent share is in accordance with the treasury stock method for
1995 and 1994 and the modified treasury stock method for 1993. The change in
methods relates to the reductions in common stock equivalents due to the
expiration of an outstanding warrant in 1993.
(000's except per share amounts)
Year Ended December 31,
-----------------------------------------------
1995 1994 1993
-------------- -------------- -------------
Net income (loss) $ (48,903) $ 3,850 $ 4,744
Adjustments to net income (loss):
Investment income on assumed investment
of excess proceeds from exercise of
common stock equivalents -- -- 137
Preferred stock dividends 88 -- --
--------- --------- ---------
Adjusted net income (loss) available to
common shareholders $ (48,991) $ 3,850 $ 4,881
Weighted average shares outstanding -
Common shares outstanding at year end 7,826 7,819 7,784
Effect of using weighted average common and
common equivalent shares outstanding (4) (6) (88)
Effect of shares issuable under stock option
plans based on the treasury stock method -- 38 632
Effect of shares issuable under warrant
based on the treasury stock method -- -- 1,327
Modified treasury stock, 20% repurchase limit -- -- (1,558)
--------- --------- ---------
Shares used in computing earnings (loss)
per share 7,822 7,851 8,097
--------- --------- ---------
Net income (loss) per common and common
equivalent share, primary $ (6.26) $ .49 $ .60
========= ========= =========
There was no difference between the primary and fully diluted earnings per
share calculations in 1995, 1994 and 1993.
New Accounting Principles. In October 1995, Statement of Financial
Accounting Standards No. 123 "Accounting for Stock-Based Compensation" was
issued. This statement establishes a fair value based method of accounting for
stock-based compensation plans. The Company currently accounts for its
stock-based compensation plans under Accounting Principles Board (APB) Opinion
No. 25, "Accounting for Stock Issued to Employees". The Company has decided
not to adopt this new standard in 1996, and alternatively will provide certain
pro forma disclosures in the notes to the financial statements in future
filings.
Effective December 31, 1994, the Company adopted Statement of Financial
Accounting Standards No. 107, "Disclosures about Fair Value of Financial
Instruments". This statement requires disclosure of fair market value
information for financial instruments. The book values of investment
securities, excluding investments in common and preferred stocks, receivables,
accounts payable and financial instruments included in other assets and accrued
liabilities approximate their fair values principally because of the short-term
nature of these instruments. Investments in common and preferred stocks are
stated at fair market values. The quoted market price was used to determine
the fair market value of the investment in common stock and estimated market
values were used to determine the fair market value of the investments in
preferred stocks. The carrying value of long-term debt approximates fair value
principally because of the variable interest rate terms set forth in the bank
credit facility agreement. See Note 2.
- 42 -
43
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 to waste
processing and burial, deferred site maintenance, and commitments and
contingencies as discussed in Notes 5, 6 and 13, respectively. Actual results
could materially differ from the Company's estimates.
Reclassification. Certain reclassifications have been made to prior year
financial statements to conform to the fiscal 1995 presentation.
NOTE 2. CASH AND INVESTMENT SECURITIES
Cash and investment securities at December 31, 1995 and 1994, were as follows
(in thousands):
1995 1994
---------- ----------
Cash and cash equivalents $ 1,246 $ 1,425
Trading securities 6,993 6,640
Securities held-to-maturity 5,760 5,341
Securities available-for-sale 523 1,703
---------- ----------
$ 14,522 $ 15,109
========== ==========
Investments in trading securities consist principally of preferred stocks,
which are held by a captive insurance company wholly-owned by the Company. The
change in net unrealized holding gains on trading securities was $114,000 in
1995 which has been included in earnings during this period. Investments in
securities available-for-sale consist of common stock of Perma-Fix, Inc. (see
Note 12) which has an original cost value of $1,320,000, fair value of $602,000
and a gross unrealized holding loss of 718,000 at December 31, 1995. The
change in net unrealized holding loss on securities available-for-sale was
$761,000 which has been included as a separate component of shareholders'
equity during the period. Proceeds of $214,000 received on sales of securities
available-for-sale during 1995 resulted in realized losses of $101,000. There
were no sales of securities available-for-sale during 1994. Investments in
securities held-to-maturity mature over various dates during 1996 and are
reported at their amortized cost basis, which approximates fair value at
December 31, 1995. Investments in securities held-to-maturity at December 31,
1995 and 1994, consisted of the following (in thousands):
1995 1994
---------- ----------
U.S. Government securities $ 5,547 $ 5,140
Certificates of deposit 138 43
Money market accounts and other 75 158
---------- ----------
$ 5,760 $ 5,341
========== ==========
Certain cash accounts and substantially all investments in securities
held-to-maturity and trading securities totaling $13,770,000 and $13,175,000 at
December 31, 1995 and 1994, respectively, have been classified as non-current
assets as cash and investment securities, pledged. The pledged cash and
investment securities represent collateral for the Company's closure/post
closure obligations, performance of a Remedial Investigation and Feasibility
Study ("RI/FS") and performance of corrective action at the closed Sheffield,
Illinois facility, compliance with Texas Natural Resource Conservation
Commission ("TNRCC") requirements related to the Company's non-commercial use
deepwell at the Company's Robstown, Texas, facility, closure costs for the
Beatty, Nevada LLRW site, test borings at the proposed LLRW facilities in
Nebraska and California, settlement with generators of waste at the Richland,
Washington facility, and various performance bonds. Also, a portion of
- 43 -
44
the pledged cash and investment securities at December 31, 1995 is pledged as
collateral for closure costs relating to the two facilities acquired in 1994
(see Note 12). The amounts pledged by the Company generally equal the present
value of its estimated future closure and post-closure obligations.
NOTE 3. PROPERTY AND EQUIPMENT
Property and equipment at December 31, 1995 and 1994, was as follows (in
thousands):
1995 1994
-------------- --------------
Land $ 1,484 $ 1,818
Cell development costs 10,452 10,172
Buildings and improvements 7,673 8,143
Decontamination and processing equipment 2,131 4,281
Vehicles and other equipment 22,112 24,732
---------- ----------
43,852 49,146
Less: Accumulated depletion, depreciation and amortization (22,088) (19,024)
---------- ----------
$ 21,764 $ 30,122
========== ==========
NOTE 4. ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of," which is
intended to establish more consistent accounting standards for measuring the
recoverability of long-lived assets.
The Company adopted this statement during 1995 in conjunction with recording
a substantial writedown of goodwill and certain property and equipment. The
impairment loss on long-lived assets of $33,048,000 was comprised of the
following (in thousands):
Writedown of the carrying amount of goodwill resulting from
the acquisition of the Recycle Center (Note 12) $ 22,165
Writedown of the carrying amount of goodwill resulting from
the acquisition of Waste Processor Industries, Inc. 5,744
Writedown of the carrying amount of goodwill resulting from
the acquisition of the Winona facility (Note 12) 3,458
Writedown of property and equipment at the Winona facility (Note 12) 1,681
-----------
Total impairment losses $ 33,048
===========
The circumstances leading to the impairment losses include an accumulation
of costs significantly in excess of the amount of acquisition costs originally
expected for the Recycle Center and to a lesser degree, the Winona facility.
Contributing factors include a current period operating and cash flow loss, a
recent history of operating losses, and the Company's inability to achieve the
operating results anticipated prior to the respective acquisitions.
Additionally, the transportation operations of Transtec, Inc., and the
chemical remediation services operations of American Ecology Services
Corporation, both acquired as part of the Waste Processor Industries, Inc.
acquisition in March 1993, have been discontinued. Changes in the marketplace
and competitive situations in certain service lines, particularly at the
Recycle Center and the Winona facility, have contributed to the Company's
inability to achieve anticipated operating results.
- 44 -
45
The impairment losses were calculated as the excess of carrying amounts of
long-lived assets as compared to estimated fair values of the respective
assets. Fair values were determined using the present value of management's
estimated expected future cash flows. Should estimated cash flows not be
attainable, further material writedowns of assets may be required in the near
term.
NOTE 5. ACCRUED LIABILITIES
Accrued liabilities at December 31, 1995 and 1994 were as follows (in
thousands):
1995 1994
-------------- --------------
Waste processing and burial $ 7,008 $ 10,063
State disposal fees and taxes 1,994 1,384
Regulated rate settlements 2,123 1,331
Compensation costs 1,778 1,541
Deferred revenue 1,064 --
Other 7,055 5,078
---------- ----------
$ 21,022 $ 19,397
========== ==========
The Company has recorded a liability of $7,008,000 for the waste processing
and burial of waste on-site at the Recycle Center. The liability is based on
management estimates of anticipated waste treatment methods, associated volume
reductions and burial fees. Should estimated volume reductions or proposed
disposal methods not be attainable, the costs for processing and burial could
increase materially in the near term.
NOTE 6. DEFERRED SITE MAINTENANCE
Deferred site maintenance accruals at December 31, 1995 and 1994 were as
follows (in thousands):
1995 1994
-------------- --------------
Accrued costs associated with open facilities $ 10,568 $ 10,108
Accrued costs associated with closed facilities 11,582 12,082
---------- ----------
Sub-total 22,150 22,190
Less: current portion (1,763) (3,524)
---------- ----------
Deferred site maintenance, excluding current portion $ 20,387 $ 18,666
========== ==========
Accrued costs associated with open facilities principally relate to closure
and post-closure for the permitted and developed portion of the Robstown, Texas
facility, groundwater contamination remediation at the Robstown and Winona,
Texas facilities, and to capping of active cells at the chemical waste disposal
facilities in Robstown, Texas and Beatty, Nevada and the LLRW facility in
Richland, Washington. The Company is in process of re-permitting the Robstown
facility to include development of an additional portion of the site. The
Company's current estimate of the Robstown site's closure and post-closure
costs of $5,199,000 does not include the incremental closure and post-closure
costs for this undeveloped portion of the site. The estimated additional cell
capping costs to be expensed over the remaining developed cell space at the
Company's disposal facilities was approximately $2,600,000 at December 31,
1995.
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 ($1,982,000 balance at December 31, 1995) 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 remediation results to
date, the reduction in contamination levels outlined in the compliance plan are
not being achieved. In 1993, the state's regulatory rules were amended to base
clean-
- 45 -
46
up requirements upon reasonable standards criteria. The Company believes that
the standards upon which the costs are estimated should be reduced and has
proposed an alternative plan to the State which could substantially mitigate
future groundwater remediation costs. If the Company's proposal is not
accepted, significant costs may be required to remediate the site to the
state's specifications in the current compliance plan.
The Winona facility, acquired on December 31, 1994, has on-site, underground
chemical contamination for which the facility has developed a corrective action
plan and is in process of remediating. Groundwater is recovered and disposed
of in the facility's deep-injection well. The current estimated cost of the
remediation of $838,000 is included in the Company's deferred site maintenance
accruals at December 31, 1995.
The State of Nevada and the State of Washington have responsibility for the
costs of closure and post-closure care and maintenance of the respective
Beatty, Nevada and Richland, Washington sites. The Company currently submits
waste volume-based fees to state maintained funds. Such fees are periodically
negotiated with, or established by, the states and are based upon engineering
cost estimates provided by the Company and approved by the state.
Accrued costs associated with closed facilities relate to remediation,
closure and post-closure of the Sheffield, Illinois chemical facility and
maintenance of the Sheffield LLRW facility.
The Company is in the process of remediating the closed chemical waste
disposal facility in Sheffield, Illinois under a final corrective measures
implementation plan issued by the U.S. EPA in 1990 pursuant to the Remedial
Investigation and Feasibility Study completed by the Company. The Company has
submitted for approval a closure/post-closure plan for the site to the Illinois
EPA and to the U.S. EPA. The plan has not been approved by the agencies
pending further implementation of the RI/FS. The estimated term of the closure
plan combined with the required thirty years post-closure monitoring is forty
years. As of December 31, 1995, the Company had accrued $10,800,000 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,
1995 were as follows (in thousands):
1996 $ 384
1997 400
1998 53
--------
Total estimated costs 837
Discount amount at 2.5% (37)
--------
Amount accrued, net of discount $ 800
========
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.
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47
NOTE 7. REVOLVING CREDIT LOAN AND LONG TERM DEBT
Long term debt at December 31, 1995 and 1994 consisted of the following (in
thousands):
1995 1994
-------------- --------------
Secured bank credit facility $ 28,079 $ 32,905
Acquisition note payable 550 550
Capital lease obligations and other 508 888
---------- ----------
29,137 34,343
Less: Current maturities (780) (850)
---------- ----------
Long term debt $ 28,357 $ 33,493
========== ==========
Aggregate maturities of long-term debt and the future minimum payments under
capital leases are as follows (in thousands):
Year Ended
December 31,
------------
1996 $ 780
1997 264
1998 28,093
--------
Total $ 29,137
========
On June 30, 1995, the Company refinanced its prior bank debt under the terms
of a Second Amended and Restated Credit Agreement ("Credit Agreement"). The
secured bank credit facility matures on December 31, 1998 and is comprised of a
$27,000,000 term loan ("Term Loan"), an $8,000,000 revolving credit loan
("Revolver"), and a $5,000,000 standby letter of credit facility. Accelerated
Term Loan principal repayments are due upon occurrence of certain contingent
events, including the opening of the Ward Valley Facility and sales of assets.
Upon closing of the Credit Agreement on June 30, 1995, the lender bank agreed
to accept a note, known as the Fee Capitalization Note, from the Company to
capitalize the fees associated with the Credit Agreement. The note, which
provides for borrowings up to $4,000,000, includes an initial amount of
$1,000,000 representing the fees (including previously deferred fees) to
compensate the bank for the restructured commitment. The Fee Capitalization
Note matures on December 31, 1998 and is entitled to the benefits of the Credit
Agreement. The bank has the option of requiring payment of the Fee
Capitalization Note with shares of the Company's common stock.
As of December 31, 1995, the outstanding balances under the Term Loan,
Revolver and Fee Capitalization Note were $26,923,000, $6,416,000 and
$1,156,000, respectively. The outstanding balance under the Revolver is
included as a component of current liabilities based on the terms of the Credit
Agreement. At December 31, 1995, the Company had $1,584,000
available for borrowing under the Revolver.
Interest on the Term Loan and Revolver is accrued daily at a rate equal to
the bank's prime rate, as it changes, plus 1% with that rate increasing by
0.25% each calendar quarter. As of December 31, 1995 the Company's actual
accrual interest rate was 9.75%. Each month, the Company pays interest at a
rate, known as the pay rate, which is equal to the bank's prime rate, as it
changes. As of December 31, 1995, the actual interest rate was 8.5%. The
incremental difference between the accrual rate and the pay rate calculated
each month is capitalized into the Fee Capitalization Note. Each month, the
Company accrues and pays interest on the Fee Capitalization Note at a rate
equal to the bank's prime rate, as it changes, which was 8.5% at December 31,
1995.
On February 7, 1996 the Company entered into an agreement (First Amendment to
Second Amended and Restated Credit Agreement) with its bank for the issuance of
a note, the Advance Note, in the amount of $4,000,000. This note was issued to
provide the Company working capital funds over and above the availability of
the Revolver and matures on the earlier of June 30, 1996 or upon obtaining the
tax refund attributable to
- 47 -
48
carrybacks of 1995 tax losses or other receipts, as defined. Interest on the
Advance Note accrues at a rate equal to the bank's prime rate, as it changes,
plus 1.5% and is paid monthly by the Company. The Advance Note is entitled to
the benefits of the Credit Agreement. Also on February 7, 1996 the bank issued
a $1,100,000 standby letter of credit on behalf of the Company.
Borrowings under the Credit Agreement are secured by substantially all
of the Company's assets. Additionally, the holders of the Company's 8 3/8%
Series D Cumulative Convertible Preferred Stock have pledged the preferred
stock as security for the Credit Agreement. The Credit Agreement requires,
among other things, the maintenance of certain financial covenants including
(i) minimum consolidated net worth, as defined, of $18 million through June 30,
1996 and minimum consolidated net worth to remain at the June 30, 1996 level for
the remainder of 1996, subject to certain adjustments thereafter, and (ii)
minimum monthly and quarterly earnings, as defined, of $250,000 and $1 million,
respectively, for the third and fourth quarters of 1996, subject to certain
adjustments thereafter. Further, the Credit Agreement requires the Company to
maintain a lock box arrangement for cash receipts with the bank and restricts
the Company from additional borrowings, prohibits payment of dividends on common
stock, and limits capital expenditures. Under the terms of the Credit
Agreement, the bank may accelerate the maturity of 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. The Company has obtained waivers from
the bank for certain financial and other covenant violations during 1995 and for
the first and second quarters of 1996. If the Company is unable to remain in
compliance with the terms of the Credit Agreement or is unable to obtain
additional 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 retire the debt. As a result, the Company's operations may be negatively
impacted. While management believes the Company will be able to remain in
compliance with the terms of the Credit Agreement or obtain waivers in the event
of default, there are no assurances such levels of compliance will be achieved
or further forebearance will be provided by the bank.
The acquisition note payable matured on December 31, 1995 and represents a
note payable to Mobley Environmental Services, Inc. ("Mobley"). This note was
incurred as part of the Company's acquisition of Gibraltar Chemical Resources,
Inc. on December 31, 1994. The note is non-interest bearing and payment of the
note is subject to set-off any indemnification amounts owed by Mobley to the
Company. The Company has not paid the note to Mobley, since it is the
Company's opinion that its claims against Mobley in conjunction with the
acquisition are materially in excess of the amount of the acquisition note
payable to Mobley.
At December 31, 1995 the Company had a total of $4,452,000 of issued letters
of credit outstanding, including $1,872,000 issued under the bank credit
facility, of which the most significant relate to site operating permits for
licenses and guarantees for site closure and post-closure required in obtaining
operating permits for the disposal sites. The issued letters of credit are
secured by cash and investment securities. The Company is required to pay fees
ranging from 1/2 of one percent to one percent on letters of credit drawn. The
letters of credit expire no more than one year after December 31, 1998.
NOTE 8. PREFERRED STOCK
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 shares 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 $88,000 at December 31,
1995. 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.
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NOTE 9. INCOME TAXES
Effective January 1, 1993, the Company prospectively adopted Financial
Accounting Standards No. 109, Accounting for Income Taxes ("Statement 109").
The effect of the adoption was not material to the Company's financial position
or results of operations. The Company previously accounted for income taxes
under Statement of Financial Accounting Standards No. 96.
The components of the income tax provision (benefit) were as follows (in
thousands):
Year Ended December 31,
1995 1994 1993
------------ ------------ ------------
Current - Federal $ (6,061) $ (1,184) $ 192
- State (170) (75) 364
-------- -------- --------
(6,231) (1,259) 556
-------- -------- --------
Deferred - Federal 816 3,044 2,232
-------- -------- --------
$ (5,415) $ 1,785 $ 2,788
======== ======== ========
The following is a reconciliation between the effective income tax (benefit)
rate and the applicable statutory federal income tax (benefit) rate:
Year Ended December 31,
1995 1994 1993
------------ ------------ ------------
Income tax (benefit) - statutory rate (34.0)% 34.0% 34.0%
State income taxes, net of federal tax benefit (.3) (.1) 3.1
Dividend income excluded from taxable income (.1) (2.2) (1.2)
Non-deductible goodwill amortization 5.3 1.6 --
Valuation allowance for deferred tax assets 18.0 -- --
Other, net 1.1 (1.6) 1.1
---------- ---------- ----------
Total effective tax (benefit) rate (10.0)% 31.7% 37.0%
========== ========== ==========
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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):
January 1, Deferred December 31,
1995 Provision 1995
-------------- ----------- --------------
Deferred tax assets:
Environmental compliance and
other site related costs,
principally due to accruals for
financial reporting purposes $ 5,655 $ 2,557 $ 8,212
Depreciation and amortization -- 6,396 6,396
Net operating loss carryforward 2,177 524 2,701
Other 3,803 (1,702) 2,101
---------- ---------- ----------
Total gross deferred tax assets 11,635 7,775 19,410
Less valuation allowance (5,266) (9,443) (14,709)
---------- ---------- ----------
Net deferred tax assets 6,369 (1,668) 4,701
---------- ---------- ----------
Deferred tax liabilities:
Site development costs (874) (1,759) (2,633)
Depreciation and amortization (1,239) 1,239 --
Insurance claim - (1,000) (1,000)
Other (3,440) 2,372 (1,068)
---------- ---------- ----------
Total gross deferred tax liabilities (5,553) 852 (4,701)
---------- ---------- ----------
Net deferred tax assets $ 816 $ (816) $ --
========== ========== ==========
The Company has established a valuation allowance for certain deferred tax
assets due to realization uncertainties inherent with the long-term nature of
deferred site maintenance costs, uncertainties regarding future operating
results and for limitations on utilization of acquired net operating loss
carryforwards for tax purposes. The realization of a significant portion of
net deferred tax assets is based in part on the Company's estimates of the
timing of reversals of certain temporary differences and on the generation of
taxable income before such reversals. The net operating loss carryforward of
approximately $7,944,000 at December 31, 1995, begins to expire in the year
2007 and utilization of $5,222,000 of this carryforward is limited pursuant to
the net operating loss limitation rules of Internal Revenue Code Section 382.
NOTE 10. EMPLOYEE'S BENEFIT PLANS
Retirement Plan. Effective December 31, 1995, the Company's defined
contribution retirement plan ("Plan") was amended to provide that participants
will not earn additional benefits under the Plan, no Company contributions will
be made and no employees will be eligible to become participants in the Plan on
or after December 31, 1995.
Prior to the December 31, 1995 amendment, the Plan covered substantially all
of the Company's full-time employees after one full year of employment. The
Company made contributions to the plan equal to 5% of the participant's monthly
compensation, as defined. The Company also made an additional 5% contribution
for employees who earned in excess of the prior year's FICA base compensation,
as defined. The Company's contributions vest to the employees at 20% per year,
beginning with the first full year of employment.
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. The plan covers substantially all of
the
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Company's employees. Participants may contribute between 1% and 10% of their
compensation. The Company matches 55% of participant contributions up to 6%
of an employee's compensation. The Company's matching contributions vest to
the employee over a three year period.
The Company's total contribution for both the retirement plan and 401(k) plan
was $829,000, $946,000 and $783,000, for 1995, 1994, and 1993, respectively.
The Company has no post-retirement or post-employment benefit plans.
NOTE 11. STOCK OPTION PLANS
The Company presently maintains four stock option plans affording employees
and outside directors of the Company the right to purchase shares of its common
stock. The exercise price, term and other conditions applicable to each option
granted under the Company's plans are generally determined by the Compensation
Committee of the Board of Directors at the time of the grant of each option and
may vary with each option granted. No option may be granted at a price less
than the fair market value of the shares when the option is granted, and no
options may have a term longer than ten years. The following is a summary of
the transactions under the plans:
1995 1994 1993
-------------- ------------ ------------
Under option:
Options outstanding, beginning of year 691,950 611,450 612,550
Granted 706,000 125,000 119,150
Exercised (6,800) (35,000) (120,250)
Canceled (204,550) (9,500) --
---------- -------- --------
Options outstanding, end of year 1,186,600 691,950 611,450
========== ======== ========
Price range per share of outstanding options $ 4.00- $ 2.79- $ 2.79-
$ 14.75 $ 14.75 $ 14.75
========== ======== ========
Price range per share of options exercised $ 8.00- $ 2.79-
$ 2.79 $ 8.58 $ 8.00
========== ======== ========
Prince range per share of options canceled $ 6.38- $ 10.13- $ --
$ 14.75 $ 11.00 $ --
========== ======== ========
Options exercisable at end of year 721,340 521,660 401,300
========== ======== ========
Options available for future grant at end of year 383,900 710,900 226,400
========== ======== ========
NOTE 12. ACQUISITIONS
On September 19, 1994, the Company acquired the assets of Quadrex Recycle
Center, ("Recycle Center"), a business segment of Quadrex Corporation
("Quadrex") that provides recycling, decontamination, volume reduction of
radioactive waste and related equipment rental services to government,
commercial and nuclear power industries. The purchase consideration was
comprised of payments by the Company for assumed liabilities and working
capital for the Recycle Center through the closing date, additional unpaid
liabilities assumed as of the closing date, and direct acquisition costs, all
of which total approximately $28,000,000. The purchase method of accounting
was used for this asset acquisition, therefore, the Recycle Center's results of
operations are consolidated with the Company's since September 19, 1994. The
excess of acquisition cost over fair value of net tangible assets of the
Recycle Center of approximately $22,165,000 was written down during 1995 as
discussed in Note 4. The acquisition cost was reduced by the estimated fair
value of 545,000 common shares of Perma-Fix,
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Inc. ("Perma-Fix") which Quadrex transferred to the Company effective September
30, 1994. The Company has the right to receive up to 355,000 additional common
shares of Perma-Fix, Inc. from Quadrex pending certain regulatory approvals and
approval of the bankruptcy court where Quadrex has filed its bankruptcy
proceedings. The fair value of these additional shares will reduce the
acquisition cost when received.
The Company has recorded receivables totaling $2,538,000 at December 31, 1995
for anticipated insurance claim settlements relating to a fire which damaged a
processing building and related equipment at the Recycle Center in July 1994.
The amount of proceeds from business interruptions and property and related
damage claims is subject to negotiations and final determination.
On December 31, 1994, the Company acquired Gibraltar Chemical Resources, Inc.
("the Winona facility"), a wholly-owned subsidiary of Mobley. The Winona
facility provides fuels blending, solvent recycling, and deepwell injection
services to the hazardous and industrial waste disposal markets with a fixed
base facility in Winona, Texas and collections and technical operations in El
Paso, Texas and Laredo, Texas. The total acquisition cost of $10,628,000
included cash, a $550,000 note payable to Mobley, assumed liabilities, and
direct acquisition costs. The excess of cost over fair market of net assets of
the Winona facility of approximately $3,458,000 was written down during 1995 as
discussed in Note 4. Since the acquisition was effective the last day of 1994
and since the purchase method of accounting was used for this acquisition, no
results of operations of the Winona facility were included in the Company's
1994 consolidated results.
The consolidated results of operations on an unaudited proforma basis as
though the businesses acquired in 1994 and 1993 had been acquired on January 1,
1993 are as follows (in thousands, except per share amounts):
1994 1993
---------- ----------
Revenues $ 91,335 $ 96,357
Net loss $ (16,356) $ (19,170)
Net loss per share $ (2.09) $ (2.49)
The pro forma financial information is presented for information purposes
only and is not necessarily indicative of the operating results that would have
occurred had the acquisitions been consummated as of the above dates, nor are
they necessarily indicative of future operating results.
NOTE 13. COMMITMENTS AND CONTINGENCIES
Richland, Washington Facility. In 1964, the Washington Department of Ecology
("WDOE") leased from the U.S. Department of Energy ("DOE") a 1,000 acre portion
of the Hanford Reservation. In 1965, the WDOE subleased 100 acres of that
property to the Company for use as a Low-Level Radioactive Waste ("LLRW")
disposal facility under the regulation of the Washington Department of Health
pursuant to the Atomic Energy Act. In 1990, the DOE applied to the EPA for a
permit under the Resource Conservation and Recovery Act of 1976, as amended
("RCRA") and other laws and regulations to obtain the appropriate regulatory
approvals needed to proceed with the environmental cleanup of the Hanford
Reservation. In 1994, the Environmental Protection Agency ("EPA") issued a
corrective action permit that includes most of the land owned by the DOE at the
Hanford Reservation, including that portion leased to WDOE, which includes the
100 acres subleased to the Company for its LLRW disposal facility. Since the
Company's Richland, Washington facility is located on land owned by the DOE,
the EPA considered the Company's disposal site to be part of the "Facility"
covered by the RCRA permit. Thirteen trenches at the Company's LLRW disposal
facility have been included in the final permit as "solid waste management
units" which may require further investigation to determine whether releases of
any hazardous wastes have occurred. Because portions of the Company's facility
remain included in the final permit issued to the DOE, the Company is
potentially subject to proposed permit conditions for site investigation and
possible cleanup should any releases be discovered even though the Company is
not a permittee and though it was not involved in the activities contributing
to the DOE Hanford facility contamination that are the subject of the
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DOE Hanford consent order. It is the Company's opinion that is has legal
defenses that may preclude the inclusion of its Hanford site in the DOE permit
and to any corrective action relating to the LLRW disposal facility that may be
proposed pursuant to the DOE permit. Both the Company and the DOE have
appealed to the Environmental Appeals Board ("EAB") of the EPA those terms of
the permit that may potentially apply to any of the Company's facilities. That
appeal has been stayed during protracted negotiations with the EPA, DOE,
Washington Department of Ecology and Washington Department of Health. The
purpose of the negotiations is to determine whether an agreeable process for
site investigation can be negotiated. It appears at this time that all parties
will agree upon a method of sampling below certain trenches and testing for
hazardous constituents under RCRA. All parties to the appeal before the EAB
have requested a two-year stay while the negotiations are completed and the
Company conducts the site investigation. The EAB recently issued an order
dismissing the Company's appeal without prejudice to raising the identical
issues in any subsequent appeal and remanding the matter to the EPA to modify
the permit if necessary. The order specifically allows any party to resume the
appeal if negotiations fail. The EPA does not believe a modification is
necessary (thereby obviating the need for the Company to file another appeal at
this time). The Company is presently negotiating an agreement with the state
agencies for a Company investigation of the site. Depending on the results of
the site investigation, the cost of conducting the site investigation and any
corrective action, if any, could be material. As part of its negotiations, the
Company is seeking to have all the costs of investigations and any resultant
corrective actions included in its rate base. As of December 31, 1995, the
Company had not recognized any liability in its financial statements for any
costs associated with the site investigation because the site investigation
terms have not been determined and the costs of any site investigation may be
recovered in the rate base.
In 1992, the Benton County assessor issued property tax assessments on
improvements owned by the Company and located on the Company's leasehold at the
Hanford Reservation. The increased property taxes totaled $1.7 million for the
years 1989, 1990 and 1991. Prior to 1989, the annual taxes had been about
$5,400. The Company sued Benton County and the Assessor and Treasurer to enjoin
them from collecting these taxes. An injunction was granted by the Benton
County Superior Court but overturned by the State Court of Appeals which ruled
that the Company should first pursue all of its administrative remedies.
Accordingly, the Company has prosecuted its appeal to the State Board of Tax
Appeals. A hearing was held in November 1995. A decision is expected in 1996.
The Company has recently been assessed an additional $1.9 million in taxes for
1992, 1993 and 1994. Management believes that Benton County's assessments were
improper and intends to vigorously defend this matter in the courts and through
any appropriate administrative process, if necessary. The Company has not
recognized any liability in the financial statements for any of the tax
assessments discussed above.
Winona, Texas Facility - The Company purchased the stock of Gibraltar Chemical
Resources, Inc. ("Gibraltar"), since renamed American Ecology Environmental
Services Corporation, from Mobley on December 31, 1994. The Company's stock
purchase agreement with Mobley provides that Mobley will indemnify the Company,
without limitation as to amount, for any damages or costs, including legal fees,
associated with certain pre-closing liabilities, including the claims set forth
hereunder. Pursuant to its stock purchase agreement with Mobley, the Company
was also named as an additional insured for a one year period (1995) for
pre-closing claims under Mobley's pollution liability insurance policy. The
policy has a $10 million aggregate limit and a $5 million per loss limit.
Permit renewal filings were made for the Winona, Texas facility in November
1994 and a hearing on the renewal was held November 28, 1995. The renewal of
the Permits is required under Part B of the RCRA and other environmental
regulatory laws. There is active opposition in the local area to the renewal
of these permits. This matter will be determined by the TNRCC, and the Company
expects a final determination in late 1996. If these permits are not
ultimately renewed, such result could have a material adverse effect on the
Company's consolidated financial position and results of operations.
A group called Mothers Organized to Stop Environmental Sins filed a lawsuit
in 1994 against the Company in the United States Eastern District Court for the
State of Texas alleging that the Winona facility violated certain permits and
regulations, and contributed to the handling, storage, treatment,
transportation and disposal of solid and hazardous waste that presents an
imminent and substantial endangerment to health and the environment. The
plaintiffs have requested that the facility be shut down and civil penalties
imposed on the Company. The
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Company has filed a Motion for Summary Judgment in this matter and the Court
has granted a partial summary judgment but has yet to rule on some issues
presented in the Motion. In December 1995, legal counsel was retained by the
Company in connection with a potential conflict of interest which arose from
the October merger of a law firm retained by the Company in other matters with
the law firm representing the plaintiff's counsel. The Company is in the
process of preparing a motion to disqualify plaintiffs' counsel in this matter.
The case is in its initial phases of discovery and it is too early to
accurately evaluate this case. The Company believes there is no factual
background to support this claim and intends to vigorously defend this case.
Four lawsuits, including one purported class action, were filed against
Gibraltar in 1992 and 1993 which are pending in State District Court in Smith
County, Texas, by certain persons in Winona, Texas. In August 1995, another
lawsuit was filed in Dallas County, Texas by other Winona citizens. The suits
assert various theories of liability, including subsurface trespass, nuisance
per se, negligence, gross negligence, and fraudulent concealment for alleged
air emissions. The suits also allege that the plaintiffs have experienced
personal injuries, diminution in property values, and other economic losses
which are alleged to have been caused by operation of the Winona facility. The
plaintiffs assert various grounds for recovery, and seek unspecified altered
and punitive damages. On August 4, 1995, a jury in one of the lawsuits found
that the Company's Winona facility did not use or possess the plaintiffs'
property and awarded nothing in damage. To date, the Company and Mobley have
settled certain of the plaintiffs' claims in these actions for amounts that
were not material and which were funded by the Mobley insurance policy referred
to above.
In 1992, a citizens group filed a petition with the TNRCC for revocation of
the Winona facility's deepwell permits alleging that a geological fault exists
in the vicinity of the Winona facility's deepwells and other alleged grounds.
The EPA has previously concluded in its proceedings relating to the Winona
facility's second injection well that no such fault exists. There has been a
recent filing with TNRCC by the opponents asking that there be a decision made
on the revocation request. At this time we know of no response by the agency
to that filing. The Company believes the petition is without merit.
Compact Related Disputes. The Company is involved in numerous challenges and
legal proceedings in connection with its siting efforts for LLRW facilities for
the Southwest Compact and Central Interstate Compact. For a description of
these proceedings, see "Business - Low-Level Radioactive Waste Services -
Disposal Services - Proposed Ward Valley, California Facility" and "- Proposed
Butte, Nebraska Facility".
A claim has been made by the Central Interstate Low-Level Radioactive Waste
Commission ("Commission") against the Company in a letter dated May 1, 1995, in
the amount of $195,000, resulting from bonuses paid by the Company to certain
of its employees for the period July 1987 through December 1993. The
Commission apparently reimbursed the Company for the payment of these bonuses
and now is claiming that the reimbursement was not authorized under the
contract between the Company and the Commission. The Company has disputed the
claim and believes such reimbursement was proper. The parties have attempted
to negotiate a settlement but as of this time none has been reached. The
Company believes that a settlement can be reached. There has been no threat of
suit as of this time.
In August 1995, the Company and the Southeast Compact Commission reached a
mutually acceptable agreement on past access fee assessments incurred by
Quadrex Corporation, the previous parent company of the Recycle Center. The
Company had received and objected to invoices from the Southeast Compact for
approximately $1.5 million and a notice that an additional $1.5 million could
also be subsequently invoiced. In disputing the assessment fees the Company
argued that the fees were calculated on abnormal past waste volumes shipped to
the Barnwell, South Carolina disposal facility. The assessment calculations
included extraordinary cleanup events at the Recycle Center that were not
indicative of normal operations. In August 1995, the Southeast Compact
Commission agreed to recalculate the fee assessment on an average of normal
historical waste disposal volumes. This action resulted in a total access fee
liability of $206,156 which the Company paid during 1996. The Company had
previously recognized this liability in its consolidated financial statements.
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Other Litigation. The City of San Antonio filed suit against several parties
related to environmental issues in connection with the acquisition, development
and construction of a bus transit station and multi-purpose dome stadium and
sports complex, commonly known as the Alamodome. The City named as the
defendants: the former owner of the property, various consultants involved in
the project, the project manager, and a subsidiary of the Company which served
as the construction contractor for the project. The City alleged that its
consultants failed to advise the City that the site selected for construction
of the Alamodome was environmentally contaminated, thereby breaching their
contracts and committing torts. The City also alleged that following the
discovery of actual or potential environmental problems, that the consultants
and project manager failed to act properly in handling allegedly contaminated
soil and groundwater. Various citizen groups raised concerns over the on-site
landfill and lobbied the TNRCC to force the City to move the landfill off-site.
In June 1994, the TNRCC wrote a letter to the City stating that the agency
believed that the on-site landfill should be removed. During the summer and
fall of 1995, the on-site landfill was removed. In January 1996, the Company's
insurance carrier and the City of San Antonio reached an agreement to settle
the City's claim against the Company. Prior to such settlement, however, one
of the defendants filed a cross claim against the Company. The Company has
filed two motions for Summary Judgment and a hearing was held March 29, 1996 on
one such motion. The Company is unable to predict the outcome of this cross
claim.
In November 1994, the Company was named as a defendant in a purported class
action lawsuit by former employees of Quadrex that relates to unpaid medical
benefits and an underfunded pension plan of Quadrex. Based on information
available to it, the Company believes that the aggregate amount of these claims
are less than $1 million. The Company purchased the assets of the Quadrex
Recycle Center from Quadrex on September 19, 1994. However, the asserted
claims in the purported class action were specifically excluded by the purchase
agreement pursuant to which the Company purchased the assets of the Quadrex
Recycle Center. Some of the former Quadrex employees on whose behalf the suit
was brought are now employees of the Company. The Company does not believe it
has any liability in this matter and as such has not recognized any liability
in its financial statements. The Company intends to contest the matter
vigorously. The Company's purchase agreement with Quadrex provides that
Quadrex will indemnify the Company for any damages or costs, including legal
fees, associated with a claim of this sort. However, because Quadrex filed for
bankruptcy protection in February 1995, it is very likely that the Company will
not realize the benefits of such indemnification.
In September 1994, an unfair labor practice charge was filed against the
Company by the Oil, Chemical and Atomic Workers International Union ("Union").
The Complaint alleges that the Company and Quadrex have operated as joint
employers at the Oak Ridge, Tennessee facility during the period April 8, 1994
to September 1, 1994. As a result of this contention, the National Labor
Relations Board ("NLRB") asserts that the Company was obligated at all times
since April 8, 1994 to assume and abide by the collective bargaining agreement
negotiated by the Union and Quadrex. A hearing was held on December 12, 1995
before an administrative law judge of the NLRB. If the NLRB prevails in this
action, the Company will be liable for any and all variances for the collective
bargaining agreements since April 8, 1994. The Company recognized a liability
of $447,000 in its Consolidated Financial Statements during 1995 for the
estimated settlement of this claim.
The Company has received a notice from an individual purporting to own debt
secured by certain real property in Midlothian, Texas. The individual alleges
that a predecessor of the Company's subsidiary, Texas Ecologists, caused
environmental contamination of the property in the early 1970's. The Company
believes it has no liability in connection with the matter and intends to
contest the matter vigorously. In connection with its investigation of the
matter, the Company also conducted its own assessment of the property with an
independent environmental consultant and concluded that any contamination on
the property falls below material levels.
In April 1995, management learned that one of its subsidiaries had not
always complied with the transit time limitations allowed for hazardous waste
being transferred from generators to final disposal sites. These requirements
are under the regulatory supervision of the TNRCC, and the Company promptly
reported the situation to the TNRCC. As a result of an internal review of this
matter, the Company determined that there was a substantial number of instances
where the transit time limitations were exceeded over approximately eight
months from June 1994 through February 1995. As a direct result of this
circumstance, the Company has
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reorganized the operations of the subsidiary, including the replacement of a
number of personnel, and the adoption of stronger internal systems for
monitoring the movement of boxes and transportation vehicles. At this time,
the Company does not know whether the TNRCC will ultimately assess any fines
against the Company for exceeding transit time limitations. While the Company
believes the steps that it has taken are appropriate and responsible, it is
possible that the TNRCC may seek to impose a fine on the Company in connection
with the matter. The Company is not in a position to assess the amount of such
a fine. However, a fine of sufficient magnitude could have a material adverse
effect upon the consolidated financial position of the Company.
In 1990, the Company was sued by certain landowners owning property adjacent
to the Robstown, Texas facility. The landowners have alleged that there has
been migration of pollutants through groundwater which has contaminated the
subterranean reservoir and other water resources on their respective
properties. These landowners have alleged theories including nuisance per se,
negligence and trespass. The case had a trial date in September 1995.
However, the landowners' counsel withdrew prior to the trial date and to our
knowledge, they have yet to obtain new counsel. The case has been continued.
The Company's investigation has found no migration of pollutants onto the
adjacent landowners' properties and the Company intends to contest this matter
vigorously.
In 1992, the U.S. EPA initiated an administrative enforcement action against
US Ecology and alleged in its complaint that the Company had failed to comply
with certain regulatory requirements to provide financial assurances for
closure and post-closure costs as well as liability insurance relating to its
hazardous waste management facility in Sheffield, Illinois. The EPA is seeking
a penalty of approximately $1 million and ordering compliance. The Company
ceased operating that facility in 1983 and it has been undergoing closure and
corrective action pursuant to regulatory requirements and a RCRA 3008(h)
Consent Order since that time. Because the Sheffield facility has not been an
interim status facility under the RCRA regulations since November of 1985, the
Company has responded that the interim status regulatory requirements for
financial assurance and liability insurance do not apply to the facility.
Moreover, the Company has objected to the penalties demanded by U.S. EPA in its
complaint as entirely unwarranted. Recently, the administrative law judge has
ruled that the Sheffield facility is subject to the RCRA regulatory
requirements for financial assurance and liability insurance, notwithstanding
its loss of interim status in 1985. The Company has appealed that decision to
the Environmental Appeals board. The penalty amount, if any, has yet to be
litigated or decided. Though the outcome of this matter is uncertain, the
Company believes these insurance requirements are not applicable to this closed
site and intends to vigorously contest this matter. As of December 31, 1995,
the Company had not recognized any liability in its financial statements for
the penalty.
Since 1987, the Company has been engaged in litigation with many of its
former insurers regarding coverage for environmental damages at two facilities
formerly operated by the company. The Company has been seeking coverage for
costs arising from its Sheffield, Illinois waste facility which ceased
receiving waste in 1983. Most of the defendant-insurers entered into
settlement agreements with the Company. Several of the insurers continued to
litigate, however, and moved for summary judgment on the grounds that the
Company either knew of its loss at the Sheffield facility before the subject
insurance policies were issued or failed to notify the insurers of the
occurrences at the Sheffield facility as soon as practicable. In September
1995, the Bureau County Circuit Court granted summary judgment in favor of the
remaining insurers on grounds of both known loss and late notice. The Company
has filed a notice of appeal from that ruling with respect to certain of those
insurers.
The Company has been litigating against the same insurers with respect to the
Maxey Flats waste disposal facility which the Company operated in Kentucky
through the mid-1970's. All but two of the insurers have entered into
settlement agreements with the Company regarding that dispute. The Circuit
Court of Jefferson County, Kentucky has denied several major motions of the
insurers for summary judgment and discovery is now proceeding with respect to
the remaining issues in the litigation.
In October 1995, Boston Edison Company ("Boston Edison") filed a complaint
against U.S. Ecology, Inc. (the "Company") in the United States District Court
of Massachusetts alleging claims related to the Company's alleged failure to
indemnify Boston Edison for various costs arising out of the shipping and
burial of waste materials at the
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Maxey Flats Nuclear Disposal Site. The Company had entered into a series of
contracts with Boston Edison to provide radioactive waste disposal services at
this site. Boston Edison alleges that the Company breached these contracts
because the Company failed to indemnify Boston Edison for its costs. Boston
Edison also alleges that the Company committed an unfair and deceptive trade
practice in the State of Massachusetts because of its failure to indemnify
Boston Edison as required by these contracts. Finally, Boston Edison seeks a
declatory judgment that would set forth the contractual rights and liabilities
of the parties. Boston Edison claims $600,000 in past and future costs for the
alleged breach of the contracts. It also seeks treble damages equal to three
times the actual damages caused by the Company's alleged violation of the
Massachusetts Deceptive Trade Practices Act. At this time, we are not in a
position to predict a favorable or unfavorable outcome of this case or the
amount of potential loss, if any, which might result to the Company if the
outcome in this matter was unfavorable. The Company intends to answer the
complaint and defend this action vigorously.
In addition to the above described litigation, the Company and its
subsidiaries are involved in various other administrative matters of
litigation, including personal injury and other civil actions, as well as other
claims, disputes and assessments that could result in additional litigation or
other proceedings. The Company and its subsidiaries are also involved in
various other environmental matters or proceedings, including permit
application proceedings in connection with the established operation, closure
and post-closure activities of certain sites, as well as other matters or
claims that could result in additional environmental proceedings.
Management has established reserves as deemed necessary for the matters
discussed above based on management's estimates of the outcome. It is
reasonably possible that the Company's estimates for such matters will change
in the near term. Due to the Company's current financial condition and
liquidity issues, management is unable to conclude that the outcome of these
claims, disputes and other matters described above and adjustments, if any,
which may result from these matters will not have a material adverse effect on
the operations or financial position of the Company.
Financial Assurance and Insurance. Under RCRA, the Company is required to
develop closure and post-closure plans for each of its chemical waste disposal
sites. In conjunction with these plans, the Company must prepare closure and
post-closure cost estimates and give financial assurance that the planned
actions will be completed. Financial assurance must be given by either funding
a trust, posting a bond, providing a letter of credit, providing a certificate
of insurance, or if the operator meets certain financial tests, giving a
corporate guarantee. The Company currently covers these requirements by
pledging letters of credit, providing certificates of insurance and by
corporate guarantee. Cash and investment securities have been pledged as
collateral for these instruments (See Note 2.). The Company could be required
to fund additional monies for financial assurance if the Company was to fail to
meet certain financial tests under existing corporate guarantees, or if a
regulatory entity requires additional funding.
RCRA regulations require the Company to carry environmental impairment
insurance against sudden and accidental occurrences, as well as against
non-sudden occurrences such as subsurface migration. While the Company's
current level of coverage meets the requirements (except for the Sheffield
chemical site), there is no assurance that insurance carriers will continue to
provide such coverage to operators, or that such coverage will be obtainable in
future years.
Lease Commitments. The Company leases substantial portions of its office and
other facilities under various lease agreements. Future minimum lease
commitments under noncancellable operating leases as of December 31, 1995, were
as follows (in thousands):
1996 $ 1,069
1997 1,075
1998 1,001
1999 776
2000 673
Thereafter 1,397
--------
Total minimum payments $ 5,991
========
- 57 -
58
The above lease commitments include amounts related to the Company's
non-cancelable lease which expires in 2002 for its previous corporate offices.
The Company is currently negotiating a sublease for this previously occupied
space and has provided a $1,100,000 reserve for the anticipated difference
between its lease commitment and estimated sublease rental income. In the
event that actual sublease income varies materially from estimated amounts or
the Company is unsuccessful in negotiating a sublease, the Company's
consolidated financial position and results of operations could be materially
impacted.
Rental expense, which also includes month-to-month equipment rentals, was
$2,793,000, $2,307,000, and $1,848,000, for 1995, 1994, and 1993, respectively.
NOTE 14. SHAREHOLDER RIGHTS PLAN
During December 1993, the Company adopted a Shareholder Rights Plan (the
"Plan"). Pursuant to the Plan each outstanding share of the Company's Common
Stock on December 17, 1993, received one Right as a dividend that becomes
exercisable upon certain triggering events. On March 29, 1995, the Company
terminated the Plan and authorized the redemption of all outstanding Rights
issued under the Plan. The redemption price was $.01 per Right, totaling
$78,000 and was paid on April 15, 1995 to shareholders of record on April 10,
1995.
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, not
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.
- 58 -
59
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 Arthur Andersen LLP
Reports of Independent Auditors
Consolidated Balance Sheets - December 31, 1995 and
1994
Consolidated Statements of Operations for the years
ended December 31, 1995, 1994 and 1993
Consolidated Statements of Shareholders' Equity for
the years ended December 31, 1995, 1994 and 1993
Consolidated Statements of Cash Flows for the years
ended December 31, 1995, 1994 and 1993
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
Exhibit Incorporated by Reference
No. Description from Registrant's
------- ----------- -----------------
3.1 Restated Certificate of Incorporation, as amended 1989 Form 10-K
3.2 Certificate of Amendment to Restated Certificate of Form S-4 dated 12-24-92
Incorporation 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 Form 10 filed 3-8-84
Washington, 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 1989 Form 10-K
issued to 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 1986 Form 10-K
US Ecology, Inc. dated January 21, 1987
10.11 Agreement between The Central Interstate Low-Level Radioactive 2nd Quarter 1988 10-Q
Waste 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, 1994 Form 10-K
1990
10.13 Second Amendment to Central Interstate Compact Agreement dated 1994 Form 10-K
June 24, 1991
- 59 -
60
10.14 Third Amendment to Central Interstate Compact Agreement dated 1994 Form 10-K
July 1, 1994
10.15 Settlement Agreement dated May 25, 1988 among the Illinois Form 8-K dated 6-7-88
Department 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 1988 Form 10-K
Hazardous 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 1988 Form 10-K
Management Site (Part B) issued to Texas Ecologists, Inc.
dated December 5, 1988
10.18 Memorandum of Understanding between American Ecology 1989 Form 10-K
Corporation and the State of California dated August 15, 1988
10.19 United States Environmental Protection Agency approval to 1989 Form 10-K
dispose of non-liquid polychlorinated biphenyl (PCB) wastes at
the Beatty, Nevada chemical waste disposal facility
10.20 Employment Agreement between American Ecology Corporation and 1993 Form 10-K
C. Clifford Wright, Jr. dated April 1, 1994 * (terminated in
1995)
10.21 Employment Agreement between American Ecology Corporation and 1993 Form 10-K
William P. McCaughey dated April 1, 1994 * (terminated in
1995)
10.22 Employment Agreement between American Ecology Corporation and 1993 Form 10-K
Stephen W. Travers dated April 1, 1994 * (terminated in
1995)
10.23 Employment Agreement between American Ecology Corporation and 1993 Form 10-K
Harry O. Nicodemus, IV dated April 1, 1994 * (terminated in
1995)
10.24 Employment Agreement between American Ecology Corporation and 1993 Form 10-K
Ronald K. Gaynor dated April 1, 1994 * (terminated in 1995)
10.26 Amended and Restated American Ecology Corporation 1992 Stock Proxy Statement dated
Option Plan * 4-26-94
10.27 Amended and Restated American Ecology Corporation 1992 Outside Proxy Statement dated
Director Stock Option Plan * 4-26-94
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 1994 Form 10-K
Ecology Corporation in favor of Texas Commerce Bank, National
Association (terminated by 10.43 below)
10.32 Security Agreement by subsidiaries of American Ecology 1994 Form 10-K
Corporation 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 Form S-4 filed 12-24-92
VPM 1988-1, 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, 1993 Form 10-K
Inc., the State of Nevada, the Nevada State Environmental
Commission, and the Nevada Dept. of Human Resources
- 60 -
61
10.37 Settlement Agreement dated as of January 19, 1994 by and among 1993 Form 10-K
US 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 1st Quarter 1994 Form 10-Q,
and among American Ecology Corporation, American Ecology Schedule 13D dated 9-27-94
Recycle Center, Inc., 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 1st Quarter 1994 Form 10-Q,
between American Ecology Corporation and Mobley Environmental 3rd Quarter 1994 Form 10-Q
Services, Inc., as amended by Amendment dated September 21,
1994.
10.41 Second Amended Restated Credit Agreement between American
Ecology Corporation, its subsidiaries and Texas Commerce Bank
National Association dated June 30, 1995.
10.42 Security Agreement dated June 30, 1995 by American Ecology
Corporation in favor of Texas Commerce Bank National
Association.
10.43 Security Agreement dated June 30, 1995 by subsidiaries of
American Ecology Corporation in favor of Texas Commerce Bank
National Association.
21 List of Subsidiaries 1994 Form 10-K
23 Consent of Arthur Andersen LLP
27 Financial Data Schedule
* Management contract or compensatory plan.
(B) REPORTS ON FORM 8-K
The Company did not file any Reports on Form 8-K during the
quarter ended December 31, 1995.
- 61 -
62
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: May 17, 1996 By: /s/ Jack K. Lemley
----------------------------------
Jack K. Lemley
Chairman of the Board and Chief
Executive Officer
SIGNATURE TITLE DATE
- --------- ----- ----
/s/ Jack K. Lemley Chairman of the Board and Chief May 17, 1996
- ------------------------------- Executive Officer
JACK K. LEMLEY
/s/ Edmund J. Gorman President and Chief Operating May 17, 1996
- ------------------------------- Officer (Principal Financial and
EDMUND J. GORMAN Accounting Officer)
/s/ Jack J. Agresti Director May 17, 1996
- -------------------------------
JACK J. AGRESTI
Director
- -------------------------------
ROTCHFORD L. BARKER
/s/ Paul Bergson Director May 17, 1996
- -------------------------------
PAUL BERGSON
/s/ Patricia M. Eckert Director May 17, 1996
- -------------------------------
PATRICIA M. ECKERT
/s/ Edward F. Heil Director May 17, 1996
- -------------------------------
EDWARD F. HEIL
63
/s/ Harry J. Phillips, Jr. Director May 17, 1996
- -------------------------------
HARRY J. PHILLIPS, JR.
/s/ Paul F. Schutt Director May 17, 1996
- -------------------------------
PAUL F. SCHUTT
/s/ John J. Scoville Director May 17, 1996
- -------------------------------
JOHN J. SCOVILLE
64
EXHIBIT INDEX
10.41 Second Amended Restated Credit Agreement between American
Ecology Corporation, its subsidiaries and Texas Commerce Bank
National Association dated June 30, 1995.
10.42 Security Agreement dated June 30, 1995 by American Ecology
Corporation in favor of Texas Commerce Bank National
Association.
10.43 Security Agreement dated June 30, 1995 by subsidiaries of
American Ecology Corporation in favor of Texas Commerce Bank
National Association.
23 Consent of Arthur Andersen LLP
27 Financial Data Schedule