Back to GetFilings.com
1
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, 1998 COMMISSION FILE NUMBER 0-11688
AMERICAN ECOLOGY CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 95-3889638
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
805 W. IDAHO, SUITE #200, BOISE, IDAHO 83702-8916
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (208) 331-8400
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, $.01 par value per share
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.[ ].
At March 29, 1999, Registrant had outstanding 13,557,275 shares of its
Common Stock. The aggregate market value of the Registrant's voting stock held
by non-affiliates at this date was approximately $39,307,600 based on the
closing price of $2.93 per share as reported on the NASDAQ Stock Market, Inc.'s
National Market System. For purposes of the foregoing calculation, all directors
and officers of the Registrant have been deemed to be affiliates, but the
Registrant disclaims that any of such directors or officers is an affiliate.
Documents Incorporated by Reference
Portions of the Proxy Statement for 1998 Annual Meeting of Stockholders.
Part III
2
PART I
ITEM 1. BUSINESS
American Ecology Corporation and its subsidiaries (collectively referred to
as the "Company" unless otherwise indicated) 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
radioactive elements and isotopes and is generated by nuclear power facilities,
industry, hospitals, universities, laboratories and other research facilities.
In 1998, 41% of the Company's revenues were derived from hazardous waste
services and 59% of the Company's revenues were derived from LLRW services.
The Company operates through wholly owned subsidiaries. Its principal
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 (ALEX).
The Company and its predecessors have been in business for over 46 years.
The following table identifies sites currently operated by the Company.
CHEMICAL SERVICES
FACILITY LOCATION SERVICES
- -------- -------- --------
US Ecology Beatty, Nevada Chemical Hazardous Waste
& PCB Disposal
Texas Ecologists Robstown, Texas Hazardous and Class I Non Hazardous
Waste Disposal
Surecycle(R) Robstown, Texas Hazardous and Non
Hazardous Waste Brokerage
AET Transportation Robstown, Texas Hazardous and Non
Hazardous Waste Transportation
AEESC Winona, Texas Closed Hazardous Waste Recycling and Deep-well
Injection Facility
LLRW SERVICES
FACILITY LOCATION SERVICES
- -------- -------- --------
US Ecology Richland, Washington LLRW Disposal
Mid-West Brokerage Oak Ridge, Tennessee LLRW Brokerage
AERC Oak Ridge, Tennessee LLRW Processing, Recycling, Packaging, Surveying, and
Large Motor Rebuilding
2
3
CHEMICAL AND HAZARDOUS WASTE SERVICES
The Company provides a variety of hazardous waste management services to
its customers including stabilization, solid waste disposal, transportation, and
brokerage. Customers are in the chemical, petroleum, pharmaceutical,
manufacturing, electronics and transportation industries.
Generally the Company performs services pursuant to non-exclusive service
agreements that obligate it 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,
distance to the processing or disposal facility, state fees and taxes. The
Company periodically reviews and adjusts the fees charged for its services.
The Company competes with several very large companies, including WMI,
recently acquired by USA Waste, Browning-Ferris Industries, Inc, and other waste
and hazardous waste companies. The Company is small in relation to its
competition and does not provide municipal waste services at this time.
STABILIZATION AND DISPOSAL SERVICES
Beatty, Nevada Facility. The Company's Beatty, Nevada hazardous waste
landfill site is on 80 acres. Located 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 that provided for an initial
20-year term, with a 10-year option for renewal. The Company renewed the lease
for 10 years in 1997.
The hazardous waste site was opened in 1970 and operates under hazardous
waste permits from the Nevada Department of Conservation and Natural Resources
and the Environmental Protection Agency's ("EPA") Region IX. It is also subject
to regulations of the U.S. Department of Transportation ("DOT") relating to
methods of handling, packaging and transporting chemical waste. The current
state permit was issued in April 1997 and will expire in the normal five-year
term at April 2002. The federal EPA "PCB" disposal permit will expire in January
of 2001.
The State of Nevada charges waste fees, which are deposited in a state
maintained trust fund for closure and post-closure activities. The Company does
not control the state fund but understands from the State of Nevada that the
fund is approximately $3,075,000 as of December 31, 1998.
Beatty's business performance improved considerably in 1998 over 1997. The
amount of waste disposed increased 22 percent to 71,000 cubic yards in 1998 from
58,000 cubic yards in 1997. As of December 31, 1998 there were 61,837 cubic
yards of below grade air space remaining in the open cell 11. The Company
anticipates state approval for an additional 580,000 cubic yards of above ground
air space in cell 11 the first of June 1999. In addition, the site permit
allows a new cell 12 to be constructed when needed at an additional below
ground capacity of approximately 1.3 million cubic yards.
There was also significant progress on regulatory issues at Beatty during
1998. During the year, the State of Nevada Division of Environmental Protection
accepted the Company's 1992 investigation report. As a result, the Company began
a one year pilot program to extract vapors from soils at the site under a
corrective measures study plan approved by the State. The Company and the State
also reached agreement on projected costs of $6.3 million for closure and post
closure activities after the facility stops disposing of waste. The Company
provided a $3.2 million closure/ post closure commercial insurance policy to
augment the $3.1 million it has contributed to the state closure and post
closure costs accounts.
Robstown, Texas Facility. The Company owns 400 acres of land near Robstown,
Texas, 15 miles west of Corpus Christi, and operates a hazardous waste disposal
site on 240 acres of the land. The site is operated under hazardous waste
regulations and permits issued by the Texas Natural Resource Conservation
Commission ("TNRCC"). The site is also subject to EPA and DOT regulation. In
1988, the site received a RCRA Part B permit.
3
4
The facility serves a wide range of industries including refining,
petrochemical, agricultural and manufacturing. In operation since 1972, the
facility has disposed of more than 900,000 cubic yards of hazardous waste.
Approximately 20,000 cubic yards of disposal capacity remain. In 1998, 1997 and
1996, 8,000, 11,000 and 41,000 cubic yards of hazardous waste, respectively,
were disposed of at the facility. The facility disposed of 36,000 cubic yards of
non-hazardous Class I waste in 1998. There are approximately 58,100 cubic
yards of physical below ground air space remaining in the current permitted
cells. In conjunction with the RCRA Part B permit renewal submitted to the
State, the Company has proposed vertical stacking on a current cell that will
provide an additional 847,000 cubic yards of air space. Approval of the permit
renewal is expected in the second quarter of 1999.
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 is implementing corrective action plans in compliance with its
permit. The Company operates a non-commercial deep-injection well at the
facility to dispose of contaminated groundwater and leachate in compliance with
groundwater remediation requirements. The program has had substantial success to
date.
General. The Company also offers hazardous waste transportation services to
its customers. American Ecology Transportation (AET), managed from the Robstown
site, focuses 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 facility or incinerator. Waste is transported primarily
in vehicles specially constructed to comply with applicable DOT requirements.
The Company's hazardous waste fleet includes 25 trucks or tractors, 289 roll-off
containers and 65 trailers.
The Company also operates a scheduled, containerized hazardous waste
collection service in the Gulf Coast market called Surecycle(R), a division of
American Ecology Environmental Services Corporation (AEESC). Surecycle(R)
provides small quantity generators with comprehensive waste analysis, technical
consultation, labeling, manifesting, collection, transportation, treatment and
disposal services for hazardous and non-hazardous wastes. The program uses
intermediate bulk containers as a replacement for drums. Surecycle(R) also
offers specialized 350 gallon waste packages or "totes". Totes allow waste
generators to accumulate up to six drums worth of material in the same space
required to store four drums. The totes are reusable, affording the customer
substantial drum purchase savings.
Management is evaluating bids for the disposition of non-strategic assets
and certain properties of AET and Surecycle(R).
Winona, Texas Facility. The Winona facility, now closed, formerly provided
fuels blending, solvent recovery deep well injection and waste brokerage
services on a 620 acre site. In August 1996, the Company suspended further
receipt of waste at the Winona facility. This business decision was based in
part on adverse impacts caused by inaccurate public statements and other actions
of persons opposed to the facility. The litigation strategy pursued by persons
opposed to the facility includes duplicative lawsuits filed in multiple
jurisdictions. The Company is defending its interests in the litigation while
seeking opportunities to resolve remaining disputes based on permanent facility
closure.
Company officials met with State regulators and negotiated an Agreed Order,
with a mutually acceptable March 1997 schedule for closure of the facility. The
Agreed Order required financial assurances in the amount of $1,318,478. The
Company complied with this requirement, and closure activities are underway.
LOW-LEVEL RADIOACTIVE WASTE SERVICES
Low-level radioactive waste consists primarily of solid materials
containing radioactive contamination, generally decaying to safe levels within
several decades up to 500 years. The Company's LLRW business includes packaging,
transportation, disposal, treatment, recycling and processing. LLRW 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,
4
5
radiopharmaceuticals (laboratory materials) and other medical wastes. This waste
generally requires minimal shielding to provide radiation protection. It is
packaged in metal containers designed to protect the public during
transportation and provide additional waste containment after it is placed in
the permanent disposal facility.
The LLRW services market is generally composed of five segments: (i)
commercial waste disposal; (ii) processing waste to minimize nuclear
contamination prior to disposal in order to recycle reusable materials and
minimize the volume of waste placed in permanent disposal; (iii) waste
service/brokerage; (iv) waste management for customers at their facilities; and
(v) managing low level radioactive waste under contract for federal Department
of Energy facilities.
The Company currently operates one commercial LLRW disposal facility on
government owned land near Richland, Washington. In addition, it has contracted
with a private company to manage waste disposal at its licensed (2) mill
tailings disposal facility. The Company has one major waste processing/recycling
facility in Oak Ridge, Tennessee.
The Company has contracts to provide on-site waste management services for
the Department of Energy, and has bid on a contract to provide off-site disposal
for wastes managed by the U.S. Army Corps of Engineers.
COMMERCIAL LOW-LEVEL RADIOACTIVE WASTE DISPOSAL
In 1980, the U.S. Congress passed a law requiring that state governments
ensure commercial LLRW produced in their states could be disposed of safely as
needed. The majority of states joined with other states to form "compacts" with
the intention of licensing regional facilities to serve their collective needs.
Several compacts then invited private companies to submit proposals to site,
design, license, construct, and operate new regional disposal facilities.
American Ecology's subsidiary, US Ecology, was selected to site, design,
license, construct, or operate several of these facilities. Although the federal
law was passed nearly 20 years ago, there is only one compact facility operating
in the United States today. It is operated by US Ecology near Richland,
Washington.
Richland, Washington Facility. The Richland facility is located on 100
acres within the Department of Energy's Hanford Reservation ("Hanford")
approximately 35 miles north of Richland, Washington. The State of Washington
leases the land from the federal government and the Company subleases the land
from the State. The lease between the State and the Federal government
terminates in 2061. The Company's sublease is to be re-negotiated in 2005.
The facility is licensed for health, safety, and environmental protection
by the Washington Department of Health which has delegated authority from the
U.S. Nuclear Regulatory Commission. The Washington Department of Ecology
regulates access to and use of the facility exclusively by waste generators in
compact member states through issuance of site use permits. The Washington State
Utilities and Transportation Commission regulates facility disposal rates under
the presumption that the site operates as a monopoly. The Northwest Interstate
Compact purports to regulate waste imported into the Northwest Compact region.
The facility disposes of all commercial LLRW produced in Washington, Idaho,
Oregon, Alaska, Wyoming, Utah, Montana, and Hawaii, (Northwest Compacts states),
and also accepts limited amounts of Commercial LLRW produced in Colorado,
Nevada, and New Mexico (Rocky Mountain Compact states). Under the federal
"compact" law, commercial LLRW generated in other states may not be disposed at
US Ecology's Richland facility in spite of the fact the location is geologically
sound; has an excellent safety, health, and environmental protection record; and
has adequate capacity to dispose of all commercial waste projected to be
produced in the United States over the next 60 years. As of the end of 1997, the
Company had collected and remitted approximately $27 million to the State to
properly close the facility when it stops accepting waste, as well as
approximately $27.5 million to maintain and care for the site following closure
plan implementation.
5
6
Richland's radioactive materials permit renewal application was submitted
to the State in early 1997. The Company submitted an updated closure plan in the
same time period, and has been working cooperatively with the State to evaluate
the significance of potential chemicals present in site soils. The State
combined its review of these topics in an environmental assessment prepared
pursuant to Washington's State Environmental Policy Act (SEPA). Completion of
the assessment and subsequent State action on the closure plan and license
renewal are anticipated during 1999.
Proposed Ward Valley, California Facility. In 1985, the State of California
selected US Ecology to site, design, license, construct, and operate a low-level
disposal facility to serve commercial LLRW generators in California, Arizona,
North, and South Dakota (Southwestern Compact states). The Company identified a
suitable site for the facility northwest of Needles, California in Ward Valley
in 1988 and submitted a license application to the State in 1989. The State
issued a license in 1993. It is the only license issued for a new full service
LLRW disposal site since the federal law was enacted in 1980.
The land selected for the site is managed by the U.S. Bureau of Land
Management. The State of California entered into a contract with the federal
government to purchase the land in late 1992 and the company remitted the
$500,000 purchase price to the federal government. Shortly after President
Clinton took office in 1993, the federal government reneged on its contract with
California. The Company and the State tried in vain to negotiate a resolution of
the issue for several years. Finally in early 1997, the State of California
brought suit against the federal government seeking a writ of mandamus in
federal district court ordering the Secretary of Interior to convey the land to
California. US Ecology joined the lawsuit. In addition, the Company filed a
separate action for breach of contract seeking damages in excess of $73.1
million in an attempt to recover its costs plus interest and lost opportunity.
The State of California subsequently filed a claim for its own damages. For
discussion of the current status of the two cases, see Item 3, Other Material
Litigation.
Proposed Butte, Nebraska Facility. In June 1987, the Company was chosen by
the Central Interstate Low- Level Radioactive Waste Commission - representing
the States of Kansas, Nebraska, Oklahoma, Arkansas, and Louisiana - to site,
design, license, develop and operate a low-level commercial LLRW disposal
facility in Nebraska. The Company submitted a license application to the
Nebraska Departments of Environmental Quality and Health in July 1990. In
December 1998, the license application was denied. The Company and several major
waste generators from the five state compact region have shared license
application costs in excess of $90 million over the past 10 years. Shortly after
the State's decision, the major generators sued in federal district court to
recover unnecessary costs incurred in what they termed a "sham" license review
process. The compact was allowed to realign itself as a plaintiff. The Company
is currently reviewing a draft complaint to intervene in the case as well. To
protect its rights as well as those of the compact and waste generators, the
Company has also filed an appeal for an administrative contested case hearing to
review the license decision. However, the federal judge hearing the lawsuit
issued a temporary restraining order in February 1999 barring the State from
proceeding with the hearing.
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 field services performed at
radioactive waste generator sites. The Company's processing and volume reduction
services are performed by its Recycle Center in Oak Ridge, Tennessee.
The Recycle Center, acquired from Quadrex Corp. in September 1994, is
equipped to sort, process and recycle materials which are contaminated with low
levels of radioactivity. The Recycle Center primarily serves nuclear power
facilities, industrial nuclear generators and the federal government.
Historically, customers have included a substantial number of public utilities.
The Recycle Center's principal services are discussed below.
6
7
NUCLEAR MATERIAL MANAGEMENT CENTER
The Nuclear Materials Management Center (NMMC) operation now enjoys a
market edge in price and customer service. Sequential processing technologies
leading to free release where possible and disposal as LLRW only when necessary
has proven to be a more economical option to incineration while achieving
similar volume reduction ratios. The Company's step-wise waste segregation and
processing system linked with minimized disposal in an all-inclusive pricing
concept is the basis of a business plan for sustained growth. Specific services
include:
LLRW Brokerage Services. The Company contracts to package and transport
LLRW from laboratories, hospitals, universities and government facilities to
disposal facilities. The waste is either shipped by the Company in its own
vehicles, or by common carriers under subcontract. The Company supplies many of
these customers with equipment and material for waste packaging, labeling, and
transportation.
Metal Waste Decontamination. Radioactive contaminated metals exist
primarily in the form of large nuclear power plant components such as pumps,
valves, fuel racks, and larger items such as condensers and heat exchangers. The
Recycle Center decontaminates these metals. New investment in equipment is
allowing more aggressive decontamination processes and higher throughput. The
Recycle Center recently entered a long-term contract with the Department of
Energy to decontaminate and free release structural steel members from
decommissioned government facilities.
Dry Active Waste ("DAW") Processing. DAW processing services perform waste
volume reduction and free release programs primarily for plastic, clothing, and
paper wastes. The Recycle Center first sorts and segregates the waste, optimizes
volume reduction by compressing waste into bales and moves the bales to a
super-compactor to further reduce the remaining LLRW volume before it is shipped
for disposal.
Green is Clean Program. In 1989, the Recycle Center initiated its free
release Green is Clean program. Under this program, generators place potentially
contaminated waste in yellow bags, which are shipped to the Recycle Center for
processing. Waste sorted and certified as uncontaminated is disposed of in an
industrial waste landfill. Clean, non-contaminated material goes in green bags.
Material that cannot be certified as clean is packaged for disposal as
radioactive waste. This packaging process also includes super-compaction to
reduce disposal volumes.
Remedial Services. The Field Services Division of the Recycle Center offers
a full range of turnkey services including site characterization, verification,
on-site volume reduction, license termination, decontamination and
decommissioning. Recycle Center staff have conducted radiological
decontamination projects for over 20 years, and implemented multiple projects on
time and within budget.
Scaffolding and Lead Management Services. Scaffolding and lead blankets are
routinely used to perform maintenance at nuclear power plants. The Recycle
Center maintains a sizeable inventory of scaffolding and lead blankets which are
decontaminated, surveyed, refurbished and painted for rental to electric utility
customers.
NUCLEAR EQUIPMENT SERVICE CENTER (NESC)
The Nuclear Equipment Service Center (NESC) offers unique refurbishment and
repair capabilities for nuclear power plant electric motors, valves, pumps and
other high value equipment which require periodic maintenance. Services include
component decontamination, disassembly, modifications, re-assembly and testing
to meet stringent client requirements for safety and reliability. The center can
remove contaminated winding insulation, decontaminate the motor stator and
rotor, then rebuild and test the motor with minimal outside service providers.
Additionally, the Company frequently provides field services to nuclear power
plants for removal, inspection, maintenance and reinstallation of refurbished
equipment.
7
8
Major Competitors in the commercial LLRW processing and recycling market
include GTS Duratek, Allied Technology Group, Inc., Frank Hake and Associates,
Inc., and Manufacturing Sciences Company. The Company believes that NESC is the
only major facility in the United States providing the full range of services
described above.
CLOSED FACILITIES
The Company has made substantial progress in recent years to resolve legal
disputes and fulfill its obligations to properly close and maintain formerly
operating waste management facilities. While substantial work remains at several
sites, the Company believes this progress has significantly reduced its
environmental liability exposure. The status of the affected sites is discussed
below.
Beatty, Nevada LLRW Facility. The Beatty LLRW facility, operated by the
Company from 1962 to 1993, was the nations first commercial facility licensed to
dispose such waste. In 1997, it became the only commercial LLRW disposal
facility to complete closure and post-closure activities and transfer its
license to the State for institutional control. The State of Nevada is
undertaking long-term maintenance and surveillance using an approximately $10
million fund contributed during the facility operations phase.
Sheffield, Illinois Facility. The Company previously operated two hazardous
waste disposal sites near Sheffield, Illinois on 45 acres owned by the Company.
These sites are adjacent to a closed, 20 acre state-owned LLRW site also
previously operated by the Company. One hazardous waste site was opened in 1974
and ceased accepting waste in 1983. The second site occupied less than five
acres, and accepted hazardous waste from 1968 through 1974. The two sites were
operated and are maintained under federal and state environmental regulations.
In 1982, hazardous constituents were detected in site-monitoring wells at
one of the two hazardous waste facilities. As a result, the Illinois EPA
requested that the Company conduct an investigation. The Company completed,
pursuant to a 1985 Consent Order, a Remedial Investigation and Feasibility
Study. A final Corrective Measures Implementation Plan was issued by the U.S.
EPA in October of 1990 and the Company is implementing this plan as modified.
The Company is currently renegotiating the terms of the Corrective Measures
Implementation Plan for groundwater monitoring and extraction programs. A pilot
air sparging system approved by the U.S. EPA is now operating to accelerate
remediation.
RCRA regulations require the Company to carry environmental impairment
insurance to cover sudden and accidental occurrences, as well as non-sudden
occurrences such as subsurface migration. See "Insurance". These coverages are
not available for the Sheffield, Illinois site due to its 1984 inclusion on the
CERCLA National Priorities List, even though the site was removed from the list
following the consent agreement between the Company and U.S. EPA.
The LLRW disposal facility last received waste in 1978. The Company is
maintaining the site pursuant to a 1988 Settlement Agreement resolving
litigation filed earlier by the state. The Company's obligation at the LLRW
disposal site will be completed when remaining financial assurance requirements
are satisfied. The Company anticipates that these matters will be satisfactorily
resolved during 1999.
REGULATION
The environmental services industry is subject to extensive regulation by
federal, state and local authorities. The regulatory process requires the
Company to obtain and retain numerous governmental licenses, permits or other
authorizations to conduct its operations, any of which may be subject to
revocation, modification or denied renewal. Enforcement actions or adverse
decisions by governmental authorities on company permit applications 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.
8
9
Due to public interest in environmental protection, companies in the
environmental service business, including American Ecology Corporation, may in
the normal course of their business be 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, including alleged violations of such permits,
licenses or environmental laws and regulations.
The Company's business is fundamentally based on environmental laws and
regulations that require wastes to be managed at 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 business, but
is not always able to do so. Federal, state and local governments from time to
time propose or adopt laws or regulations that significantly affect the
environmental services industry. These have included laws and regulations to ban
or restrict the interstate shipment of LLRW, 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. 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 maintain federal,
state and local 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. Operations are subject to RCRA (as discussed below), the
Safe Drinking Water Act (which regulates deep well injection), TSCA (under which
the EPA regulates 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). Company transportation operations are subject to the jurisdiction of the
Interstate Commerce Commission and are regulated by the DOT and state regulatory
agencies. Employee safety and health standards adopted by the Occupational
Safety and Health Act ("OSHA") also apply to Company operations.
RCRA. Pursuant to RCRA, the EPA has established a comprehensive,
"cradle-to-grave" system for the management of solid and hazardous wastes.
States that have adopted hazardous waste management programs with standards at
least as stringent as those promulgated by the EPA may be authorized by the EPA
to administer their programs in lieu of the EPA.
Under RCRA and federal transportation laws, all generators of hazardous
wastes are required to label shipments 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. Every facility that treats or disposes of hazardous wastes must obtain a
RCRA permit from the EPA or an authorized state and comply with certain
operating standards. The Company believes that each of its facilities are in
substantial compliance with the applicable requirements promulgated pursuant to
RCRA and its permits.
Superfund. Superfund provides for response and removal actions coordinated
by the EPA to control releases of hazardous substances into the environment, and
authorizes the federal government either to clean up facilities at which
hazardous substances pose hazards or to order persons responsible for the
situation to do so. Superfund also 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. Those persons have a liability that owned or operated
such facilities at the time the hazardous substances were disposed; or arranged
for disposal or treatment of a hazardous substance or transportation of a
hazardous substance, and waste transporters who selected such facilities for
treatment or disposal of hazardous substances.
9
10
It is possible that the Superfund statute will be revised. In addition to
possible changes in the statute's funding mechanisms and provisions for
allocating liability, Congress could alter provisions governing 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 wastes, or adopt 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
employed, and the degree to which permitted hazardous waste management
facilities will be needed to manage future remediation wastes.
LLRW Regulations. The Company's LLRW services are also subject to extensive
governmental regulation. LLRW services are regulated by various state agencies,
the U.S. Nuclear Regulatory Commission ("NRC") and the DOT. Applicable
regulations control packaging, handling, labeling, shipment and disposal 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 also govern Company operations.
Financial Assurance and Site Maintenance. The Company operates its
hazardous waste disposal sites under RCRA permits. The LLRW sites are operated
under licenses from state agencies. When these facilities reach capacity, or
upon lease or license termination, 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 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 satisfies its obligations through a combination of insurance,
performance bonds, investment securities, and state held closure and post
closure funds. The financial assurance amounts generally equals the present
value of estimated future closure and post-closure obligations.
INSURANCE
The Company believes it operates professionally and prudently, however, the
environmental business exposes the Company to risks, including potential
releases of harmful substances causing damage or injury. The Company's insurance
program generally has self-insured retention limits or deductibles. These range
from $25,000 to $250,000 and include fully insured layers of coverage above such
retentions or deductibles. Accidental environmental contamination losses are
generally not covered by primary casualty insurance programs, however, to
provide insurance protection for environmental claims, the Company has obtained
environmental impairment liability insurance and professional environmental
consultants liability insurance for non-nuclear related occurrences. For the
latter, the Company has purchased nuclear liability insurance covering
operations of its facilities, suppliers and transporters. In addition, the
Company has purchased primary property, casualty and excess liability policies
through traditional third party insurance.
Pursuant to RCRA, the Company is required to maintain environmental
impairment liability insurance coverage with specified minimum limits for sudden
and non-sudden accidental occurrences. The Company meets required limits and
coverage, through insurance, with the exception of the Sheffield, Illinois site
where alternate means are employed. See "Closed Facilities".
In September 1998, the Company discontinued providing financial assurance
for its closure and post-closure responsibilities through its wholly owned
subsidiary, American Liability and Excess Insurance Company ("ALEX"). Company
facilities and operations previously insured through ALEX are now covered by
traditional third party insurance and are subject to site-specific deductibles
for which the Company maintains a cash reserve. Coverage has been written on a
five-year pre-paid policy. ALEX continues to underwrite a performance bond for
one of the Company's subsidiaries.
10
11
CUSTOMERS
The Company's consolidated revenues from a cost reimbursement contract with
the Central Interstate Low-Level Radioactive Waste Commission were approximately
$6,808,000 or 17.5% in 1998, $7,579,000 or 18% in 1997 and $5,711,000 or 11% in
1996. No other single customer accounted for 10% or more of the Company's
consolidated revenues for either 1998, 1997 or 1996. Revenues from Central
Interstate Compact are expected to decrease substantially in 1999. Due to the
relatively small margins involved, this will have a minimal effect on the
Company's profitability.
PERSONNEL
As of March 13, 1999, the Company had a total of 274 employees. The Company
has collective bargaining agreements at two of its facilities. The Paper,
Allied-Industrial Chemical & Energy Workers International Union, AFL-CIO, CLC
(PACE), formerly the OCAW, represents 10 employees in Richland, Washington and
66 employees in Oak Ridge, Tennessee.
Pending before the National Labor Relations Board is the question of
whether the Company bargained in good faith with OCAW/PACE and whether the
parties were at impasse allowing the Company to implement new terms and
conditions of employment.
On February 9, 1998, when the old collective bargaining agreement expired,
the OCAW/PACE directed its workers to strike. This occurred despite the
Company's attempts over several months to negotiate a fiscally sound agreement.
In an effort to return the facility to profitability, the Company asked
bargaining unit employees to accept wages and benefits in line with the rest of
the Corporation. The strike eventually ended and the bargaining unit employees
returned to work without a new contract. The Company continued to attempt to
negotiate a new agreement. On March 4, 1998, when it became clear that the
OCAW/PACE would not make sufficient concessions, the Company declared an impasse
and implemented its final offer.
On January 21 and 22, 1999, an evidentiary hearing was held before an
Administrative Law Judge at which the Company vigorously contested charges that
it had not engaged in good faith bargaining. The Company is optimistic that it
will be successful. If it should lose, the Company would be required to
reinstate the old terms and conditions of employment and return to the
bargaining table with the OCAW/PACE.
Relations with bargaining unit employees at the Recycle Center suffered as
a result of the strike and implementation of the Company's final offer.
Subsequently, the relationship between the bargaining unit employees and the
Company improved when a new plant manager assumed responsibility.
11
12
ITEM 2. PROPERTIES
The Company believes that its property and equipment are well maintained,
in good operating condition and adequate for the Company's current projected
needs. The Company's headquarters are located in Boise, Idaho in leased office
space. The Company also leases sales and administrative offices in Washington,
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 UTILIZATION
- -------- -------- ------- --------- -----------
CHEMICAL SERVICES
Beatty, Nevada Hazardous Waste Disposal Facility 80 acre(s) Lease 100%
Pasadena, Texas Transportation Facility/Office 3 acre(s) Own 100%
Robstown, Texas Transportation Facility 1 acre(s) Own 100%
Robstown, Texas Waste Disposal Facility 400 acre(s) Own 100%
Robstown, Texas Proposed Expansion Area 40 acre(s) Own* 100%
Winona, Texas Closed facility March 17, 1997 620 acre(s) Own* 10%
LLRW SERVICES
Oak Ridge, Tennessee LLRW Processing Facility 16 acre(s) Own 100%
Richland, Washington LLRW Disposal Facility 100 acre(s) Lease 100%
*Properties subject to mortgage or lien holder.
The principal properties of the Company, which make up less than 10% of
total assets, are sufficient and suitable to the Company's needs. The Company
plans to expand the Robstown, Texas Hazardous and Non-Hazardous Waste Disposal
Facility to include the adjoining, not yet permitted, 160 acres. There are only
two cells remaining on the currently permitted 240 acres.
12
13
ITEM 3. LEGAL PROCEEDINGS
GENERAL LITIGATION
In the ordinary course of conducting business, the Company becomes
involved in judicial and administrative proceedings involving federal, state and
local governmental authorities, citizen groups or individuals in connection with
permitting or repermitting facilities, alleging violations of existing permits,
or claiming damages suffered from alleged exposure to hazardous substances
purportedly released from Company operated sites, and other litigation. The
Company maintains insurance intended to cover property, environmental and
personal injury claims asserted as a result of its operations. Periodically
management reviews and may establish reserves for legal and administrative
matters, or fees expected to be incurred in connection therewith. At this time,
management believes that resolution of pending matters will not have a material
adverse effect on the Company's financial position, results of operations or
cash flows.
In December 1998 and January 1999 two previously reported cases,
ILLINOIS, ET AL V. AMERICAN ECOLOGY CORPORATION, ET AL and PERKINS COIE V.
AMERICAN ECOLOGY CORPORATION, were settled. Neither settlement had a material
adverse impact on the Company's financial position, results of operations, or
cash flows.
ENVIRONMENTAL MATTERS
The United States Environmental Protection Agency (EPA) has requested
information regarding waste the Company may have shipped to a Superfund site
near Denver, Colorado. The EPA subsequently informed the Company it may be
liable for about $29,000 clean-up costs as a potentially responsible party.
The Company and the Washington Department of Ecology are jointly
conducting an investigation of hazardous constituent migration from disposal
trenches at the Company's Richland, Washington facility. The investigation is
funded from the site's segregated closure/post-closure account held by
Washington.
OTHER MATERIAL LITIGATION
One of the Company's principal subsidiaries is a plaintiff in two related
cases against the United States in which one or more favorable outcomes may have
a potentially significant favorable future impact on the Company. In the first
case, US Ecology is suing to recover approximately $73.1 million of Ward Valley
site development costs as well as lost profits and lost opportunity costs. In
the second case US Ecology is seeking an order (writ of mandamus) from a federal
court which may result in the eventual opening of the long delayed Ward Valley
LLRW site.
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 1998.
13
14
PART II
ITEM 5. MARKET FOR AMERICAN ECOLOGY CORPORATION COMMON STOCK AND RELATED
STOCKHOLDER MATTERS
American Ecology Corporation common stock is currently listed on the NASDAQ
National Market System under the symbol ECOL. As of March 23, 1999, 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:
1998 1997 Dividends Per Share
---- ---- -------------------
PERIOD High Low High Low 1998 1997
---- --- ---- --- ---- ----
1st Quarter 2 1 3 1 $ -- $ --
2nd Quarter 1-7/8 1 1-7/8 1 -- --
3rd Quarter 1-3/4 15/16 2-1/16 1-1/2 -- --
4th Quarter 1-1/2 3/4 1-7/8 1-1/4 -- --
The Company's bank credit facility prohibited cash dividends on any of the
Company's outstanding stock until the fourth quarter of 1998, when the Company
settled its debt with the bank. In the first quarter of 1999, the Company
borrowed approximately $1.3 million, the terms of which preclude payment of cash
dividends until the notes have been paid.
14
15
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, 1998 1997 1996 1995 1994
--------- --------- --------- --------- ---------
Revenues $ 38,960 $ 41,522 $ 49,972 $ 67,895 $ 71,891
% Increase (decrease) in revenues from prior year (6.2)% (16.9)% (26.4)% (5.6)% 19.2%
Net income (loss) (1) $ 762 $ (676) $ (11,407) $ (48,903) $ 3,850
Basic earnings per share (2) $ .03 $ (.17) $ (1.47) $ (6.12) $ .48
Shares used to compute income (loss) per share (000's) 12,772 8,163 7,907 7,826 7,851
Working capital (deficit) $ (7,567) $ (16,930) $ (16,693) $ (16,115) $ 1,563
Total assets $ 61,800 $ 98,431 $ 99,027 $ 114,125 $ 155,439
Long-term debt, net of current portion $ 2,223 $ 39,872 $ 36,202 $ 28,357 $ 33,493
Shareholders' equity $ 17,460 $ 13,380 $ 13,604 $ 22,024 $ 67,045
Long-term debt to total capitalization as a percentage 11.3% 74.9% 72.7% 56.3% 33.3%
Current ratio (current assets divided by current liabilities) 0.7:1 0.4:1 0.4:1 0.6:1 1.0:1
Return on average equity 4.9% (5.0)% (64.0)% (109.8)% 5.9%
Dividends declared per common share $ -- $ -- $ -- $ .025 $ .10
Capital spending, including capital expenditures and site
development costs $ 2,128 $ 3,442 $ 5,659 $ 8,445 $ 8,035
Depletion, depreciation and amortization expense $ 3,152 $ 3,106 $ 5,383 $ 7,319 $ 6,279
(1) 1996, expenses include $7,451 in impairment losses on long-lived assets
for the Winona facility. 1995 includes $33,048 in impairment losses on
long-lived assets for the Recycle Center, WPI Waste Processors and the Winona
facility. (2) Per SFAS 128, basic earnings per share was restated for 1997.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion contains trend information and other forward
looking statements that involve a number of risks and uncertainties. Whether the
Company's actual results prove to be accurate with these forecasts depends on a
variety of factors, which could differ materially from the Company's historical
results of operations. Factors that could cause actual results to differ
materially are included, but are not limited to, those identified in Notes to
the Consolidated Financial Statements herein, Part I, Item 3. Legal Proceedings,
and the discussion below. The following discussion and analysis should be read
in conjunction with the Financial Statements and Notes thereto included
elsewhere in this Form 10-K.
15
16
The Company has been in business for over 46 years and has two main
business operations: chemical and hazardous waste services; and low-level
radioactive waste services. The Company experienced significant growth until
1994, when in that year it acquired three businesses that became very large
encumbrances. In 1995, senior management was replaced in an effort to revitalize
the Company. Since 1995, the Company has overcome some very large hurdles, and
written off three business ventures that cost the Company nearly $50 million.
The Company experienced large losses from 1995 through 1997 of $48.9, $11.4, and
$.7 million respectively. In 1998, the Company made a profit of $762,000 and may
have turned the corner towards financial stability. There are many issues yet to
be resolved including the working capital deficit, certain permitting, and
expanding the market share. Major efforts and sacrifices have been made to keep
the Company moving forward. Those efforts have resulted in the elimination of
$41.9 million of long-term debt; a successful rights offering generating new
working capital; creating an improved business environment to encourage the
return of previous customers and draw new customers, and maintaining a strong
core revenue base while eliminating non-performing assets. The Company has not
restored complete financial stability, but is certainly headed in the right
direction.
In the first two months of 1999, the Company had a year to date loss that
was $112,000. The Company currently has no bank debt, but in March 1999, it
borrowed $1,300,000 from two Directors to pay the Series D preferred stock
dividends.
The Company's revenues are mainly derived from fees charged for disposal of
chemical, hazardous and low-level radioactive waste. The Company also processes
these same types of waste for disposal. Other revenues are derived from
rebuilding and decontaminating large electric motors from nuclear power plants
and from transportation operations. The transportation operations have not
proved to be profitable and were recently relocated to Robstown, Texas where it
will likely be sold or merged with another business.
Operating revenues from disposal fees, known as tipping fees, are charged
to the customers or generators who had the waste. These fees are often state
regulated and are generally based on the volume or weight of the waste
deposited. The Company has costs of processing, stabilizing the waste (generally
mixing the waste with concrete), and transporting the waste. Some of these costs
create inter-company charges and revenues, all of which have been eliminated in
the consolidated financial statements presented herein.
Operating expenses include direct and indirect costs for labor, maintenance
and repairs, subcontracted costs and equipment, insurance, and related taxes and
appropriate accruals for burial fees and other costs. The Company has properly
accounted for fees assessed by regulatory authorities for the issuance of
permits and licenses. The Company is in the process of permitting a new
municipal solid waste landfill in southern Texas and has accounted for those
costs through the proper accruals and capitalization methods allowed under
generally accepted accounting principles.
Selling, general & administrative costs include management salaries, sales
and marketing efforts, clerical and administrative costs, legal fees, office
rentals, corporate package policy insurance, general liability insurance, and
other administrative costs for the general corporate overhead.
CAPITAL RESOURCES AND LIQUIDITY
For the twelve months ended December 31, 1998 the Company had a working
capital deficit of $7,567,000. This is a considerable improvement compared to
the $16,930,000 and $16,693,000 deficits reported for 1997, and 1996,
respectively. This improvement reduced the working capital deficit by almost $9
million in less than twelve months, as a result of several strategic financial
moves by the Company. These included a full settlement with the Company's bank
for all long-term debt owed to the bank. To accomplish the bank settlement
agreement, the Company dissolved its ALEX re-insurance program (described below)
freeing up several million dollars of cash and investment securities. The
Company agreed with Reliance Insurance Company to a prepaid five-year premium to
accomplish nearly the same collateral level held under the re-insurance program.
After settling with the bank, available excess funds were immediately used to
pay down aged accounts payable. During 1998, the Company also
16
17
met certain time constraint obligations and cash assets previously pledged were
released as cash equivalents, and certain reclassifications of assets from long
term to short term as well as liabilities reclassified to long term.
As reported in the 1997 Form 10-K and the first quarter 1998 Form 10-Q, the
Company concluded a successful Rights Offering on February 10, 1998. This Rights
Offering provided $2,900,000 of new capital and remaining Series E preferred
stock was either converted or retired.
On November 13, 1998 the Company signed and completed a settlement
agreement with its primary bank, Chase Bank of Texas N.A., eliminating
substantially all of the Company's $41.9 million debt to the bank. Essential
terms included the payment of $4.2 million of cash to the bank, the sale and
assignment of an interest in the Company's Ward Valley, California LLRW disposal
project including potential proceeds from litigation against the Federal
Government; and warrants to purchase common stock of the Company equal to 10% of
the number of common shares outstanding at that date. The bank is entitled to a
maximum return from its interest in the Ward Valley project, including potential
proceeds from pending Ward Valley litigation of $29.6 million. This amount is
subject to reduction by as much as $1.0 million for attorney's fees incurred in
the litigation after November 13, 1998.
As of March 5, 1999 the Company has continued to maintain a business
banking relationship with First Security Bank, in Boise, Idaho, with no debt. On
March 4, 1999, the Company signed two long- term notes payable to two members of
the Company's Board of Directors totaling $1.3 million.
The Company believes that it is capable of meeting its future obligations
as they become due from the business operations. The results of 1998 indicate
that the strategic plan implemented in 1996 has proven effective.
Strategic Plan
The Company implemented a revised business plan in 1996 after prior
management had made some unsuccessful acquisitions. The purpose was to restore
profitability and improve working cash flows. In 1998, the Company reported a
profit and significantly improved its working cash situation. Management and
staff are now dedicated to extending the Company's ongoing two-year plan. This
plan will further reduce the working capital deficit and improve the working
cash flows from expanded operations. Management will expand marketing efforts
and target positioning to take advantage of Department of Energy utility
closures and changes in the LLRW policy act.
Management has continued to consider the Company's position in the market
place, measuring customer potentials and managing unprofitable assets.
Unprofitable operations have been either eliminated or reorganized to be
efficient and effective. The Company operates with two divisions. Each has been
dissected and analyzed to measure break-even points, maximum revenues from
customers, and optimum operating levels to maximize profitability. These
variables have been measured and adjusted to fit the changing times of the
environmental industry. This development has forced environmental companies to
evaluate their place in the industry. The outcome in many areas is difficult to
forecast, but the management of the Company and its strategic plans promote
flexibility to adapt quickly to industry changes.
The Chemical Services division has not been profitable in over three years.
This performance is being monitored closely, and changes have been made to
compensate for lost earnings. AET Transport has been relocated to Robstown,
Texas to facilitate servicing of both hazardous and non-hazardous customers in
the Gulf Coast market. This market has been on the decline and the Company is
actively reviewing options to re-deploy certain assets. These efforts will
likely result in personnel reductions and a further reduction of direct costs to
the transportation business.
The Company will continue to close the Winona, Texas facility under terms
of the 1997 consent order. The Company has been restoring the site and the
equipment allowing certain assets to be sold, maximizing proceeds from the sale
of these assets. Proceeds are used to fund closure and post-closure work,
partially offsetting negative
17
18
cash flow at this site. While management believes adequate reserves have been
established, there can be no assurance that closure and post-closure work will
not require unplanned financial contributions.
The Company continues to evaluate the viability of under-performing
operations, and opportunities to improve profitability or shareholder position.
In the plan, a new budget was adopted for 1999-2000. Capital expenditures were
planned for enhancements at several sites to improve the economics of operation,
certain regulatory obligations, and required operational repairs. The Company
believes its plan will improve both cost structure and operating results.
Recent Developments and Future Considerations
Management implemented an aggressive business plan that has yielded
positive results. It believes that existing LLRW and Chemical Services
businesses will improve, although no assurances can be given that such
improvements will occur.
In the fourth quarter of 1998, the Company completed a settlement agreement
with its bank for the elimination of bank debt (See Note 9. to the financial
statements for discussion). The Company also signed an agreement with Envirocare
Corporation, which reduced favorably the cost of fees for disposal of aged waste
at Oak Ridge.
The Company continues to work with the State of Tennessee's Department of
Environment and Conservation, Division of Radiological Health to remove and
dispose aged waste stored at its Oak Ridge facility. Aged waste, for purposes
herein, includes waste that was onsite when the Company acquired Quadrex and
waste since generated by the Company and not disposed of within 365 days of
receipt. In a March 1998 agreement with the State, the Company adopted a goal of
reducing the volume of this waste by approximately 17 percent that calendar
year. The actual amount disposed was approximately 20 percent of the total
volume. A substantial portion of the remaining waste is in liquid form. The
facility upgraded its water treatment system and by December 1998, was able to
process the majority of these wastes for free release.
In December 1998, the license application was denied for the Butte,
Nebraska LLRW facility. The Company and several major waste generators from the
five state compact region have shared license application costs in excess of $90
million over the past 10 years. Shortly after the State's decision, the major
generators sued in federal district court to recover unneccessary costs incurred
in what they termed a "sham" license review process. The compact was allowed to
realign itself as a plaintiff. The Company is currently reviewing a draft
complaint to intervene in the case as well. To protect its rights as well as
those of the compact and waste generators, the Company has also filed an appeal
for an administrative contested case hearing to review the license decision.
However, the federal judge hearing the lawsuit issued a temporary restraining
order in February 1999 barring the State from proceeding with the hearing.
The Company filed an amended federal income tax refund claim in 1996 for
approximately $740,000. The U.S. Tax Courts have heard similar cases both in
favor and against, preventing firm outcome predictions.
18
19
RESULTS OF OPERATIONS
The Company as a whole has shown improvement in operations since 1994. In
1998, the first year since 1994, the Company reported a profit of $762,000. This
1998 net income compares to losses of $676,000 and $11,407,000 for 1997, and
1996. The following table allows for a comparison of the two service groups
without inter-company or consolidated corporation costs or the captive insurance
company ALEX.
CONDENSED STATEMENT OF OPERATIONS
Reported in $000 December 31, 1998 December 31, 1997
Chemical LLRW Chemical LLRW
---------- ---------- ---------- ----------
Operating revenues $ 16,030 $ 22,930 $ 15,387 $ 26,135
Operating costs 9,488 14,057 9,320 13,899
---------- ---------- ---------- ----------
Gross Profit $ 6,542 $ 8,873 $ 6,067 $ 12,236
Selling, G & A 6,544 6,272 (7,761) (6,141)
---------- ---------- ---------- ----------
Income (loss) from
operations $ (2) $ 2,601 $ (1,694) $ 6,095
Other income (expense)
$ (1,312) $ (2,258) $ (1,534) $ (2,113)
---------- ---------- ---------- ----------
Net Income (loss) $ (1,314) $ 343 $ (3,228) $ 3,982
========== ========== ========== ==========
The following table sets forth items in the Statements of Operations for
the three years ended December 31, 1998, as a percentage of revenue:
Percentage of Revenues for the
Year Ended December 31,
------------------------------
1998 1997 1996
------ ------ ------
Revenues 100.0% 100.0% 100.0%
Operating costs 60.4 55.9 67.2
------ ------ ------
Gross profit 39.6 44.1 32.8
Selling, general and administrative expenses 40.3 52.8 48.4
Impairment losses on long-lived assets -- -- 14.9
------ ------ ------
Income (loss) from operations (.7) (8.7) (30.5)
Other (income) expense, net 2.8 7.4 4.6
------ ------ ------
Income (loss) before income taxes 2.1 (1.3) (25.9)
Income tax expense (benefit) .1 .3 (3.0)
Preferred stock dividends 1.1 1.8 0.9
------ ------ ------
Net income (loss) to common shareholders .9% (3.4)% (23.8)%
====== ====== ======
19
20
Revenues
Revenues for 1998 were $38,960,000, a 6.2% decrease from 1997 revenues of
$41,522,000. The 1997 revenues decreased 17% from 1996 revenues of $49,972,000.
The Recycle Center labor strike in early 1998, combined with the decline of
motor center activity accounted for $2.7 million of the decline. Transportation
operations, relocated from Pasadena to Robstown, Texas, experienced an $800,000
decrease in revenues from the prior year. Management has made continuous efforts
to strategically align both Chemical and LLRW divisions business activities.
Since 1996, certain facilities have been closed as either non-performing or cost
prohibitive, like the Winona facility in Texas. Management has closed and
reorganized certain operations that were generating revenue but not profits,
improving the overall health of the Company. The hazardous waste industry has
been particularly impacted by changes in the past three years. All of these
changes have contributed to reduced revenues and stiff competition in that
generally declining industry.
Declines in revenue have influenced management's decisions to revitalize
marketing strategies, redeploy non-performing assets, dispose of certain assets
and operations, and seek out prospective new revenue generating opportunities.
At this time management is working on several large contract proposals, that if
awarded to the Company, will have a considerable influence on future revenue.
The Company continues to monitor the activity of Chemical Services.
Chemical Services revenues have continued to decline and without further
expansion into the commercial waste disposal, it does not seem likely that
revenues will increase. The Texas Ecologists facility is seeking to permit a
400-acre municipal waste landfill adjacent to the existing hazardous waste
disposal facility. Public hearings on the permit proposal are scheduled for
mid-1999.
The Company will continue to maintain strong alliances with others in the
LLRW industry and seek to grow revenues at the Oak Ridge Recycle Center. These
alliances and others are a part of the strategic plan to develop further the
LLRW Services. Revenues at the Richland, Washington LLRW disposal facility are
generally expected to remain constant. Facility revenues may increase based on
the outcome of negotiations to dispose of a largely intact reactor vessel from a
closed nuclear power plant during 1999.
Operating Costs
Operating costs for 1998 totaled $23,545,000 an increase of 1% over the
prior year, while operating costs were $23,219,000 and $33,571,000 for 1997 and
1996 respectively.
Reported in $000 December 31, 1998 December 31, 1997
Chemical LLRW Chemical LLRW
-------- ------- -------- -------
Operating Costs $9,488 $14,057 $9,320 $13,899
In 1998, both Chemical Services and the LLRW Services operating costs
increased by approximately 1% over 1997. Most of the increase came in the fourth
quarter of 1998 when operating expenses totaled $5,975,000 or 58% of revenue
compared to $4,196,000 or 41% of revenue for the same period in 1997. The
largest area of increase in operating costs was for subcontracted work at the
Oak Ridge facility.
Consolidated Results of Operations (in thousands):
1998 1997 1996
---- ---- ----
Revenues $38,960 $41,522 $49,972
Operating costs 23,545 60.4% 23,219 55.9% 33,571 67.2%
------- ------- -------
Gross profit (loss) $15,415 39.6% $18,303 44.1% $16,401 32.8%
20
21
For the year ended 1998, operating costs were 60.4% of revenue compared to
55.9% in 1997 and 67.2% in 1996. While there has been some fluctuation in
operating costs, the downward trend in percentage of revenue demonstrates
improved control over operating costs. Lower operating cost is more apparent
over five years than three.
In 1998 and 1997, there were no material amounts written off as unusual and
non-recurring type operating costs, compared to $7,451,000 in 1996 for the
Winona, Texas facility. The closure of the Winona facility has reduced revenues
and reduced operating costs while increases have been seen at the Beatty, Nevada
facility and the Oak Ridge, Tennessee facility. The Beatty Nevada facility
experienced increasing revenues while Oak Ridge, Tennessee experienced increased
costs and decreased revenues due to labor disputes. Some operational
improvements at Oak Ridge, Tennessee were a result of changes in senior
management and redevelopment of good business practices.
Selling, General and Administrative Expenses
Selling, general and administrative costs for 1998 totaled $15,702,000 a
decrease of 28% from the prior year. Selling, general and administrative costs
were $21,909,000 and $24,187,000 for 1997 and 1996 respectively. This 28%
decrease in 1998 reflects several different areas within the selling, general
and administrative cost category. The primary decreases in 1998 from 1997 are
due to: legal fees reduced by $1,100,000, an accrual for a pending lawsuit made
in 1997, and settled in 1998 allowed another favorable reduction of $1,142,000,
a reduction of unnecessary labor costs $400,000, selling costs $300,000, outside
services $300,000, general insurance premiums $490,000, building leases $75,000
and other miscellaneous amounts by good cost cutting measures. There was an
increase of approximately $375,000 for professional consulting to establish a
new credit facility.
Consolidated Results of Operations (in thousands):
1998 1997 1996
---- ---- ----
Revenues $38,960 $41,522 $49,972
Selling, G&A expenses 15,702 40.3% 21,909 52.8% 24,187 48.4%
------ ------ ------
The following table includes selling, general and administrative costs for
the Chemical and LLRW services, but excludes corporate consolidated adjustments
and elimination.
Reported in $000 December 31, 1998 December 31, 1997
Chemical LLRW Chemical LLRW
-------- ------ -------- ------
Selling, G & A $6,544 $6,272 $7,761 $6,141
In 1998, Chemical Services selling, general and administrative decreased
15.7%. LLRW Services selling, general and administrative increased by 2.1% over
1997. Chemical Services reduced costs as a result of decreasing operations. The
Pasadena, Texas office was closed and AET transportation was relocated to
Robstown, resulting in a considerable cost savings. Other than the Beatty,
Nevada facility, the Chemical Services operations reflected a reduction in
Selling, G&A costs.
Investment Income
Investment income is comprised principally of interest income earned on
various investments in securities held-to-maturity, dividend income, and
realized and unrealized gains and losses earned on the Company's stock portfolio
classified as trading securities. As of December 31, 1998 the Company reported
investment income of $542,000 compared to $1,075,000 and $915,000 for 1997 and
1996, respectively. The main reason for this decrease is the withdrawal of
approximately $6,000,000 from ALEX stock portfolio classified as trading
securities.
21
22
Interest Expense
Interest expense is the total interest expense incurred by the Company on
outstanding indebtedness less capitalized amounts. Interest costs is the total
interest expense incurred by the Company before capitalization. In 1998, 1997,
and 1996, the Company incurred $3,441,000, $3,708,000 and $3,558,000,
respectively, in interest cost. The majority of this interest expense 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 1998, 1997, and 1996 related to borrowings under the Company's
Credit Agreement with its bank lender, which was finalized and settled in
November 1998. Please refer to Note 8 of the financial statements for a complete
discussion on the elimination of long-term debt.
Income Taxes
The Company's federal effective income tax (benefit) rates were 0%, 0%, and
(12)%, for the fiscal years 1998, 1997, and 1996, respectively. The effective
rate of 0% in 1998 does not reflect any recognition of future tax benefits on
timing differences or net operating loss carry forwards. The income tax expense
in 1998 for $55,000 is for payments on different state and local taxes including
franchise taxes.
Financial Assurance and Site Maintenance
The Company operates its hazardous waste disposal sites under Resource
Conservation and Recovery Act ("RCRA") permits. The LLRW site is operated under
a state license. When these facilities reach capacity, or upon lease or license
termination dates, 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 $5,405,000, $14,287,000 and
$16,394,000 at December 31, 1998, 1997 and 1996, respectively, have been pledged
as collateral for the Company's closure/post-closure obligations. During the
year ended December 31, 1998, the total value of pledged securities decreased by
$8,882,000. This decrease was the result of the sale of assets previously held
by the Company's ALEX subsidiary and subsequent insurance agreement with
Reliance Insurance Company. The Company paid a five year premium and holds
pledged investment securities and sufficient monies to pay the deductible should
the Company need to exercise these policies. The Company also holds pledged
securities for the 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
deep well at the Company's Robstown, Texas hazardous disposal site closure costs
for the Recycle Center, closure costs for the Winona facility, test borings at
the proposed LLRW sites in Nebraska and California, settlement with generators
of waste at the Richland, Washington facility and performance bonds.
The RI/FS for the Sheffield facility was completed and approved by the EPA
in 1990. The Company is in the remedial phase of the Sheffield program as set
forth in the EPA's corrective measures implementation plan. During 1998, the
Company spent approximately $610,000 on remediation at the closed Sheffield
hazardous disposal site compared to $457,000 in 1997.
The nature of the waste materials handled by the Company and its
subsidiaries could give rise to substantial damages if spills, accidents or
environmental releases occur. Such events could have a material adverse effect
upon the Company's liquidity and operating results.
22
23
PREFERRED STOCK
In February 1998 the Company completed its Rights Offering and retired the
300,000 shares of Series E redeemable convertible preferred stock with a $10.00
par value. The Company has authorized an outstanding 105,264 shares of Series D
cumulative convertible preferred stock $.01 par value that has been accruing
interest at 8 3/8% since 1995. The Company's previous bank debt agreement
precluded payment of dividends until November of 1998. At that time, the debt
was settled and the Company was obligated to pay accrued dividends totaling
$1,354,000 on December 31, 1998. The Company borrowed the funds necessary to pay
the mandatory Series D dividend from two of its directors. Those dividends were
paid March 9, 1999.
CORPORATE DEVELOPMENT CONSIDERATIONS
See "Business - Low-Level Radioactive Waste Services - Disposal Services -
Proposed Ward Valley, California Facility" and "Proposed Butte, Nebraska
Facility" for a description of the Company's facilities, applicable litigation
and the impact of such facilities and other future considerations on the
Company's consolidated financial condition and results of operations.
ENVIRONMENTAL MATTERS
The Company has reserves and insurance policy commitments for costs
associated with future closure and post-closure obligations for the disposal
facilities it operates, and those it has closed or is potentially responsible
for. The Company has established reserves and insurance policies for these
commitments based on professional engineering studies, and interpretations of
current regulatory requirements and proposed regulatory changes performed at
least annually. The accounting for closure and post-closure costs includes final
capping for the site, gas emission control, subsurface soil and groundwater
monitoring, and other operational and maintenance costs expected after a site
stops accepting waste. The Company believes it has made adequate accounting
through reserves and the insurance policy for closure and post-closure
obligations.
The Company has estimated that the aggregate final closure and post-closure
costs for all insured sites owned or operated as of December 31, 1998, is
approximately $19,539,000. As of December 31, 1998 and 1997, the Company
recorded liabilities of $19,539,000 and $21,179,000, respectively, for closure
and post-closure costs of disposal facilities. As described in Item 1,
Insurance, the Company has a five year prepaid insurance policy for closure and
post closure of these disposal sites. The Company also has investment securities
set aside to pay certain deductible limits as well as Letters of Credit in cash
to ensure proper compliance with applicable federal and state regulations.
Management believes that disposition of these environmental matters will
not have a material, adverse effect on the financial condition of the Company.
The Company's operation of disposal facilities subjects it to operational,
monitoring, site maintenance, closure and post-closure obligations that could
result in unforeseen costs for monitoring and corrective measures. The Company
cannot predict the likelihood or effect of such costs, regulations or
legislation enacted, or other future events affecting the Company's operations.
SEASONAL EFFECTS
The Company's operating revenues are lower in the winter months, and
increase in the warmer summer months. The volume of both chemical and LLRW tends
to decrease during winter months.
YEAR 2000 COSTS
The Year 2000 issue is the result of potential problems with computer
systems or other equipment with computer chips that use dates where the year has
been stored as two characters (e.g. 98 for 1998). These systems may incorrectly
evaluate dates beyond the year 1999; potentially causing system failure and
disruption of operations that could affect our business. The Company believes
that its computer systems are currently in compliance with Year 2000
requirements for date changes. Some of the companies we do business with may not
23
24
be compliant. Consequently, the Company has implemented a Year 2000 Plan that
addresses traditional hardware and software systems, embedded systems, and
service providers. The plan includes identification and coordination with
external interfacing systems. The Company expects to be compliant with these
issues by mid-year 1999, and does not expect expenses associated with compliance
to have a material affect on its financial position or cash flows.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, Disclosures about Segments of an
Enterprise and Related Information ("SFAS No. 131"). SFAS No. 131 establishes
standards for reporting information about operating segments in annual financial
statements and requires that those enterprises report selected information about
operating segments in interim financial reports issued to shareholders. SFAS No.
131 is effective for fiscal years beginning after December 15, 1997. Adoption is
not recognized for interim periods in the initial year of application. Adoption
of this statement will not have a material impact on the consolidated financial
statements of the Company.
Financial Accounting Standards Board has recently issued Statement of
Financial Accounting Standards (SFAS 133), "Accounting for Derivative
Instruments and Hedging Activities." SFAS 133 established standards for
recognizing all derivative instruments including those for hedging activities as
either assets or liabilities in the statement of financial position and
measuring those instruments at fair value. SFAS No. 133 is effective for fiscal
years beginning after June 15, 1999. Management believes the adoption of this
statement will have no material impact on the Company's financial statements.
SOP 98-5, "Reporting on the Costs of Start-Up Activities," requires that
the costs of start-up activities, including organization costs, be expenses as
incurred. This Statement is effective for financial statements issued for fiscal
years beginning after December 15, 1998. Management believes that the adoption
of SOP 98-5 will have no material effect on its financial statements.
24
25
INDEPENDENT AUDITORS' REPORT
To the Shareholders and Board of Directors
American Ecology Corporation
We have audited the accompanying consolidated balance sheets of American Ecology
Corporation and subsidiaries as of December 31, 1998 and 1997, and the related
consolidated statements of operations, shareholders' equity and cash flows for
the years ended December 31, 1998, 1997 and 1996. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated 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 consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated 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 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of American Ecology
Corporation and subsidiaries as of December 31, 1998 and 1997, and the results
of their operations and their cash flows for the years ended December 31, 1998,
1997 and 1996, in conformity with generally accepted accounting principles.
Balukoff, Lindstrom & Co., P.A.
Boise, Idaho
February 25, 1999
25
26
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
AMERICAN ECOLOGY CORPORATION
CONSOLIDATED BALANCE SHEETS
($ IN 000'S EXCEPT PER SHARE AMOUNTS)
As of December 31,
--------------------
1998 1997
-------- --------
ASSETS
Current Assets:
Cash and cash equivalents $ 4,442 $ 366
Receivables, net of allowance for doubtful
accounts of $1,047 and $1,440, respectively 9,506 7,929
Income taxes receivable 740 740
Prepayments and other 1,023 877
-------- --------
Total current assets 15,711 9,912
Cash and investment securities, pledged 5,405 14,287
Property and equipment, net 11,145 13,004
Deferred site development costs 26,909 58,890
Intangible assets relating to acquired businesses, net 414 438
Other assets 2,216 1,900
-------- --------
Total Assets $ 61,800 $ 98,431
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long term debt $ 119 $ 111
Accounts payable 5,101 8,997
Accrued liabilities 17,267 14,801
Deferred site maintenance, current portion 700 2,842
Income taxes payable 91 91
-------- --------
Total current liabilities 23,278 26,842
Long term debt, excluding current portion 2,223 39,872
Deferred site maintenance, excluding current portion 18,839 18,337
Commitments and contingencies
Shareholders' equity:
Convertible preferred stock, $.01 par value,
1,000,000 shares authorized, none issued -- --
Series D cumulative convertible preferred stock, $.01 par value,
105,264 authorized, 105,264 shares issued and outstanding 1 1
Series E redeemable convertible preferred stock, $10.00 par value,
300,000 authorized, 300,000 shares converted and retired -- 3,000
Common stock, $.01 par value, 25,000,000 authorized, 13,557,275
and 8,462,533 shares issued and outstanding, respectively 136 85
Additional paid-in capital 54,385 47,701
Retained earnings (deficit) (37,062) (37,407)
-------- --------
Total shareholders' equity 17,460 13,380
-------- --------
Total Liabilities and Shareholders' Equity $ 61,800 $ 98,431
======== ========
The accompanying notes are an integral part of these financial statements.
26
27
AMERICAN ECOLOGY CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
($ IN 000'S EXCEPT PER SHARE AMOUNTS)
Year Ended December 31,
--------------------------------
1998 1997 1996
-------- -------- --------
Revenues $ 38,960 $ 41,522 $ 49,972
Operating costs 23,545 23,219 33,571
-------- -------- --------
Gross profit 15,415 18,303 16,401
Selling, general and administrative expenses 15,702 21,909 24,187
Impairment loss on long-lived assets -- -- 7,451
-------- -------- --------
Loss from operations (287) (3,606) (15,237)
Investment income 618 1,203 932
Gain on sale of assets 72 136 55
Other income 414 1,723 1,326
-------- -------- --------
Income or (loss) before income taxes 817 (544) (12,924)
Income tax expense (benefit) 55 132 (1,517)
-------- -------- --------
Net income or (loss) 762 (676) (11,407)
Preferred stock dividends 417 760 465
-------- -------- --------
Net income or (loss) available to common
shareholders $ 345 $ (1,436) $(11,872)
======== ======== ========
Basic earnings per share $ .03 $ (.17) $ (1.47)
======== ======== ========
Diluted earnings per share $ .03 $ (.17) $ (1.47)
======== ======== ========
Dividends paid per common share $ -- $ -- $ --
======== ======== ========
The accompanying notes are an integral part of these financial statements.
27
28
AMERICAN ECOLOGY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
($ 000'S)
Year Ended December 31,
--------------------------------
1998 1997 1996
-------- -------- --------
Cash flows from operating activities:
Net income (loss) $ 762 $ (676) $(11,407)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Impairment loss on long-lived assets -- -- 7,451
Depletion, depreciation and amortization 3,152 3,106 5,383
(Gain) loss on sale of assets (72) (136) (58)
Loss on sale of securities -- 59 --
Debt restructure fees -- -- 265
Stock compensation -- 198 --
Changes in assets and liabilities:
Receivables (1,577) 2,467 6,542
Income taxes receivable -- -- 4,599
Proceeds from insurance claim -- -- 2,538
Investment securities classified as trading 1,942 1,953 (582)
Other assets (1,034) (204) (850)
Deferred site maintenance (1,640) (1,693) (2,278)
Other liabilities 169 (2,225) (6,433)
-------- -------- --------
Total adjustments 940 3,525 16,577
-------- -------- --------
Net cash provided by operating activities 1,702 2,849 5,170
Cash flows from investing activities:
Capital expenditures, excluding site development costs (697) (1,356) (1,677)
Site development costs, including capitalized interest (1,431) (2,086) (3,982)
Proceeds from sales of assets 72 136 31
Net proceeds from sales of investment securities 6,940 1,660 (1,993)
Transfers to (from) cash and investment securities, pledged -- (678) 384
-------- -------- --------
Net cash provided (used in) investing activities 4,884 (2,324) (7,237)
Cash flows from financing activities:
Proceeds from issuance's and indebtedness 16,096 23,022 29,008
Payments of indebtedness (21,519) (23,518) (29,985)
Proceeds from rights offering 2,193 -- --
Proceeds from preferred stock issued, net -- -- 3,000
Stock options exercised -- 152 --
-------- -------- --------
Net cash provided by (used in) financing activities (2,510) (344) 2,023
-------- -------- --------
Increase (decrease) in cash and cash equivalents 4,076 181 (44)
Cash and cash equivalents at beginning of year 366 185 229
-------- -------- --------
Cash and cash equivalents at end of year $ 4,442 $ 366 $ 185
======== ======== ========
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest, net of amounts capitalized $ 72 $ 128 $ --
Income taxes paid 144 88 --
Non-cash investing and financing activities
Long-term debt exchange for asset interest 24,323 -- --
Long-term debt offset capitalized interest 12,461 -- --
Warrants issued on exchange for debt 1,660 -- --
Stock issuance - directors compensation 79 -- --
The accompanying notes are an integral part of these financial statements.
28
29
AMERICAN ECOLOGY CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
($ IN 000'S)
ACCUMULATED
ADDITIONAL OTHER RETAINED
PREFERRED COMMON PAID-IN COMPREHENSIVE EARNINGS COMPREHENSIVE
STOCK STOCK CAPITAL INCOME (DEFICIT) INCOME
----------- ----------- ----------- ----------- ----------- -------------
Balance, December 31, 1995 $ 1 $ 78 $ 46,762 $ (718) $ (24,099)
Net loss -- -- -- -- (11,407) $ (11,407)
Preferred stock issuance's -- -- -- -- --
Common stock issuance's -- 2 209 -- --
Dividends - preferred stock -- -- -- -- (465)
Unrealized gain (loss) on
securities available-for-sale -- -- -- 241 -- 241
Total Comprehensive Income (11,166)
----------- ----------- ----------- ----------- ----------- ------------
Balance, December 31, 1996 1 80 46,971 (477) (35,971)
Net loss -- -- -- -- (676) (676)
Common stock issuance's -- 5 730 -- --
Dividends - preferred stock -- -- -- -- (760)
Unrealized gain (loss) on
securities available-for-sale -- -- -- 477 -- 477
Total Comprehensive Income (199)
----------- ----------- ----------- ----------- ----------- ------------
Balance, December 31, 1997 1 85 47,701 -- (37,407)
Net income -- -- -- -- 762
Common stock issuance -- 51 5,025 -- --
Dividends of preferred stock -- -- -- -- (417)
Preferred stock-retired -- -- -- -- --
Paid in capital-warrants -- -- 1,660 -- --
Total Comprehensive Income
----------- ----------- ----------- ----------- ----------- ------------
Balance, December 31, 1998 $ 1 $ 136 $ 54,386 $-- $ (37,062) $ --
=========== =========== =========== =========== =========== ============
Note: Convertible Preferred Stock is not shown above because no shares have
been issued. The two classes of preferred stock that are included,
8.375% Series D Cumulative Convertible Preferred for $1,000 and 11.25%
Series E Redeemable Convertible Preferred for $3,000,000.
The accompanying notes are an integral part of these financial statements
29
30
AMERICAN ECOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. NATURE OF BUSINESS
American Ecology Corporation (a Delaware Corporation) and its subsidiaries
("the Company") provide processing, recycling, packaging, transportation,
remediation and disposal services for generators of hazardous waste and
low-level radioactive waste. The Company services the needs of hazardous waste
generators nationally, but the larger market share is in the Gulf and West Coast
regions of the country at its hazardous waste landfill disposal sites in
Robstown, Texas and Beatty, Nevada. The Company services the needs of low-level
radioactive waste (LLRW), generators in the Northwest and Rocky Mountain Compact
regions 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 at its Oak Ridge, Tennessee facility.
Business and Going Concern Considerations
The financial statements have been prepared assuming the Company will
continue as a going concern. The Company was profitable in 1998, but incurred
significant losses in the prior three years. At December 31, 1998, the Company
had a working capital deficit of $7.6 million which is an improvement from prior
deficits of $16.9 and $16.7 million for 1997 and 1996 respectively. This
improvement in working capital was the result of the Company making several
strategic financial moves. These accomplishments included the Company reaching a
full settlement with its bank for all of the long-term debt, dissolving its
reinsurance program through ALEX freeing up several million dollars of cash and
investment securities, and paying off certain aged accounts payable.
The Company agreed with its new insurance provider, Reliance Insurance
Company, to a prepaid five-year premium accomplishing nearly the same as
collateral previously held under the ALEX re-insurance program. After settling
with the bank, excess funds were immediately used to pay obligations and improve
the working capital position. During 1998, the Company also met certain time
constraint obligations where cash assets previously pledged were now released as
cash equivalents.
Management believes that it has taken the steps necessary for the Company
to continue in business for a reasonable period of time, greater than twelve
months. The previous strategic plan implemented in 1995, and revised each year,
has been executed with success. Again, in 1998, management revised its
operational plan to be successful for a reasonable time period that includes
additional marketing strategies, re-employment of previously idle or
non-performing assets, and maximum use of human resources.
The financial statements do not include any adjustments that might be
necessary if the Company is unable to continue as a going concern. The Company
has had a positive cash flow from operations for the years ended 1998, 1997, and
1996. Management believes that it will be able to meet its obligations as they
become due and be self-sustaining without the need to borrow additional capital,
excluding the $1.3 million the Company borrowed in March 1999, from two of its
board of directors. That capital was used to pay preferred stock dividends in
arrears for the same amount. Management has no intention at this time to raise
additional capital through equity offerings or to borrow capital on a long-term
basis.
Now in it's fifth year, management has continued with an aggressive
business plan to improve the Company's financial performance by reducing
operating expenses and enhancing revenues from low-level radioactive waste
disposal and processing. Actions taken to date include reductions in personnel,
decentralization of responsibilities to facility managers, and reanalysis of
operations to improve operating efficiency and reduce operating costs within
each operating division. Furthermore, the Company has limited future capital
expenditures. Management believes the plans that have been implemented and the
strategies exercised will continue to show improvement. However, there can be no
assurance that future results of the business plan will be successful.
30
31
Management is also pursuing damage recovery claims for breach of contract
by the federal government relating to the transfer of land located in Ward
Valley, California to the state of California for the development and
construction of a LLRW site for the Southwestern Compact. See note 13 for more
details.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation. The accompanying financial statements are
prepared on a consolidated basis. There are eight reporting subsidiaries with
activity and three subsidiaries that had no activity in 1997. Inter-company
accounts for revenues and expenses have been eliminated in the consolidated
financial statements. Certain estimates and assumptions have been made by the
Company for the consolidated financial statements. The consolidated financial
statements are prepared in accordance with generally accepted accounting
principles (GAAP).
Cash and Investment Securities Pledged. Pledged cash and investment
securities totaled $5,405,000 at December 31, 1998 and consists of letters of
credit and a performance bond backed by cash, money market accounts, securities
classified as trading, and other cash all of which is pledged. The Company is
responsible to repay rebates to LLRW waste generators in the Northwest Compact
region that will total $4,500,000 according to the Washington Utilities
Transportation Commission (WUTC), by April 1999. The Company also maintains cash
and investment securities pledged with ALEX for approximately $2,700,000 to
cover insurance policy deductibles and as funds to reserve for the closure and
post closure of certain landfill sites.
Revenue Recognition. Generally, revenues are recognized as services are
performed, and as waste materials are buried or processed.
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 and used for disposal is depleted over the estimated useful life of
the disposal site on a straight-line basis. Cell development costs represent
waste disposal facility preparation costs that are capitalized and charged to
operating costs as disposal space is utilized. The Company engaged independent
surveys by certified engineers and surveyors to measure remaining cell volume
for each site for December 31, 1998 and 1997. Cell development costs include
direct costs related to site preparation, including legal, engineering,
construction, and the direct cost of company personnel dedicated for these
purposes. The estimated useful lives of buildings and improvements is fifteen to
thirty-one years. The estimated useful lives of vehicles, decontamination,
processing and other equipment is three to ten years. See Note 4 for major
categories of property and equipment. Expenditures for major renewals and
betterment's are capitalized and expenditures for maintenance and repairs are
charged to expense as incurred. During 1998, 1997, and 1996, maintenance and
repair expenses were $209,000, $521,000 and $982,000, respectively.
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 $336,000, $312,000 and $288,000 at December 31, 1998, 1997 and 1996,
respectively. Amortization of intangible assets was $24,000 for each of the last
three years. On an ongoing basis, the Company measures the value of its
intangible assets. In the event that facts and circumstances indicate intangible
or other assets may be impaired, an evaluation of recoverability would be
performed. If an evaluation was required, the estimated future undiscounted cash
flows associated with the assets would be compared to the asset's carrying
amount to determine if a write-down to market value or discounted cash flow
value was necessary.
Permitting Costs. Permitting costs, included under the caption Other Assets
in the Consolidated Balance Sheets, are primarily comprised of outside
engineering and legal expenses and are capitalized and amortized over the life
of the applicable permits. At December 31, 1998 and 1997, there were $1,955,000
and $1,295,000, respectively, of unamoratized costs included in other assets in
the accompanying consolidated balance sheets.
The Company operates its various sites under the regulations of, and
permits issued by various state and federal agencies. Several of the Company's
existing sites are currently seeking permit renewals and/or expansion permits.
There is no assurance of the outcome of any permitting efforts. The permitting
process is subject to regulatory
31
32
approval, time delays, local opposition and potential restrictions from
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 reliability of related asset values. As of December 31, 1998,
management believes that assets that could currently be affected by permitting
efforts are recoverable at their recorded values.
Self-Insurance. The Company has insurance policies that cover any annual
losses exceeding $45,000 per employee for employee health care. The Company also
has insurance policies covering claims in excess of $100,000 for workers'
compensation, auto, and general liability costs. A self-insurance liability is
based on claims filed and estimates for claims incurred but not reported.
The Company believes it operates professionally and prudently, however, the
environmental business exposes the Company to many risks. The risks include
potential release of harmful substances into the environment causing damage or
injury. An insurance program has been reviewed and put into place that under its
insurance policies, the Company generally has self-insured retention limits or
deductibles. These range from $25,000 to $250,000 and include fully insured
layers of coverage above the retention or deductibles. The nature of the
Company's business exposes it to accidental environmental contamination losses
that are generally not covered by primary casualty insurance programs. To
provide insurance protection for environmental claims the Company has obtained
environmental impairment liability insurance and professional environmental
consultants liability insurance for non-nuclear related occurrences. For
radioactive risk, the Company has purchased nuclear liability insurance covering
operations of its facilities, suppliers and transporters. In addition, the
Company has purchased primary casualty and excess liability policies all through
traditional third party insurance.
Pursuant to RCRA, the Company is required to maintain environmental
impairment liability insurance coverage with specified minimum limits for sudden
and non-sudden accidental occurrences. The Company is in compliance with
required limits and coverage with the exception of the Sheffield, Illinois site
where such insurance has been unavailable.
The Company restructured its closure and post-closure insurance with
Reliance Insurance Company under a five year prepaid premium policy. The Company
no longer is reinsuring the financial assurance for closure and post-closure of
the Company's facilities. The Company continues to use ALEX for holding
collateral on two facilities not totally covered by the new insurance
arrangement. ALEX is holding $2.7 million of cash and securities classified as
trading for this collateral.
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 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 both closed and operating sites and
revises accruals for estimated post-closure, remediation or other costs related
to these locations as deemed necessary. The Company's recorded liabilities are
based on best estimates of current costs and are updated periodically to include
the effects of existing technology, presently enacted laws and regulations,
inflation and other economic factors. The Company estimates its future cost
requirements for closure and post-closure monitoring and maintenance for
operating chemical disposal sites based on Resource Conservation and Recovery
Act (RCRA) and the respective site permits. RCRA requires that companies provide
financial assurance for the closure and post-closure care and maintenance of
their chemical sites for at least thirty years following closure. Where both the
amount of a particular environmental liability and the timing of the payments
are reliably determinable, the cost is discounted to present value at a discount
rate of 2.5%, net of inflation. The Company has not discounted any of the
deferred site maintenance accruals for 1998, 1997, or 1996.
Net Income (Loss) Per Share. In February 1997, the Financial Accounting
Standards Board issued SFAS No. 128 "Earnings Per Share," which supercedes APB
Opinion 15. This statement, with new standards, is effective for annual
32
33
periods ending after December 15, 1997. The Company is required to restate all
periods presented. The adoption of SFAS No. 128 by the Company did not have a
material effect on earnings per share.
Basic EPS is simply the per share allocation of income available to common
stockholders based only on the weighted average number of common shares actually
outstanding during the period. Diluted EPS represents the per share allocation
of income attributable to common stockholders based on the weighted average
number of common shares actually outstanding plus all dilutive potential common
shares outstanding during the period.
(000' except per share amounts)
Year Ended December 31,
--------------------------------
1998 1997 1996
--------- --------- ---------
Net income (loss) $ 762 $ (676) $ (11,407)
Adjustments to net income (loss):
Preferred stock dividends 417 760 465
--------- --------- ---------
Adjusted net income (loss) available to
common shareholders $ 345 $ (1,436) $ (11,872)
Weighted average shares outstanding-
Common shares outstanding at year end 12,772 8,163 7,907
Adjustment factor for rights offering -- 1.022 1.022
--------- --------- ---------
Adjusted shares 12,772 8,342 8,081
Basic EPS $ .03 $ (.17) $ (1.47)
========= ========= =========
Diluted EPS $ .03 $ (.17) $ (1.47)
========= ========= =========
Restated EPS for the Effects of the Rights Offering. On December 30, 1997
the Company filed its prospectus and Form S-3 for a rights offering. The Company
issued non-transferable rights to subscribe for up to 8,379,813 shares of the
Company's Common Stock $.01 par value per share. Each holder of the Company's
Common Stock was entitled to receive one Right for each share of Common Stock
held on the Record Date of December 8, 1997. Each holder was entitled to
purchase one additional share of Common Stock for each Right held. The Rights
Offering expired on February 10, 1998 at 5:00 PM eastern time. A total of
3,912,936 shares were issued from the Rights Offering.
Use of Estimates. The preparation of financial statements in conformity
with GAAP requires the Company to make estimates and assumptions. These
estimates and assumptions 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
recoverability of deferred site development costs, waste processing and burial,
valuation of warrants issued in 1998, and deferred site maintenance, discussed
in Notes 7 and 8. Actual results could materially differ from estimates.
Major Customers. Revenues resulting from the cost reimbursement contract
with the Central Interstate Low-Level Radioactive Waste Commission were
approximately $6,808,000, $7,579,000 and $5,711,000 in 1998, 1997 and 1996
respectively, or 18%, 18%, and 11% of the Company's consolidated revenues. No
other single customer accounted for 10% or more of the Company's consolidated
revenues for 1998, 1997, or 1996. It is expected that there will be a
significant decline in 1999 revenues from this contract, which can be
terminated with ten days notice by the Central Interstate Compact Commission.
Credit Risk Concentration. Concentrations of credit risk with respect to
accounts receivable are believed to be limited due to the number,
diversification and character of the obligors and the Company's credit
evaluation process. Typically, the Company has not required collateral for such
obligations.
Fair Value of Financial Instruments. The book values of investment
securities, excluding investments in common and preferred stocks, receivables,
accounts payable and financial instruments included in other assets and accrued
liabilities approximate their fair values principally because of the short-term
nature of these instruments. Investments in
33
34
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. Estimated market values were used to determine the fair market value of
the investments in preferred stocks.
Commitment. The Company signed an agreement in January 1999, to dispose of
a minimum of 10,000 cubic feet of waste material during each six-month period
for the next three years.
Labor Concentrations
The Company has collective bargaining agreements at two of its facilities.
The Paper, Allied-Industrial Chemical & Energy Workers International Union,
AFL-CIO, CLC (PACE), formerly OCAW, represents 10 employees in Richland,
Washington and 66 employees in Oak Ridge, Tennessee.
New Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, Disclosures about Segments of an
Enterprise and Related Information ("SFAS No. 131"). SFAS No. 131 establishes
standards for reporting information about operating segments in annual financial
statements and requires that those enterprises report selected information about
operating segments in interim financial reports issued to shareholders. SFAS No.
131 is effective for fiscal years beginning after December 15, 1997. Adoption is
not recognized for interim periods in the initial year of application. Adoption
of this statement will not have a material impact on the consolidated financial
statements of the Company.
Financial Accounting Standards Board has recently issued Statement of
Financial Accounting Standards (SFAS 133), "Accounting for Derivative
Instruments and Hedging Activities." SFAS 133 established standards for
recognizing all derivative instruments including those for hedging activities as
either assets or liabilities in the statement of financial position and
measuring those instruments at fair value. SFAS No. 133 is effective for fiscal
years beginning after June 15, 1999. Management believes the adoption of this
statement will have no material impact on the Company's financial statements.
SOP 98-5, "Reporting on the Costs of Start-Up Activities," requires that
the costs of start-up activities, including organization costs, be expenses as
incurred. This Statement is effective for financial statements issued for fiscal
years beginning after December 15, 1998. Management believes that the adoption
of SOP 98-5 will have no material effect on its financial statements.
NOTE 3. CASH AND INVESTMENT SECURITIES
Merrill Lynch Company now holds the securities and investment cash of the
Company and the wholly owned subsidiary American Liability and Excess Insurance
Company (ALEX). ALEX serves as a captive insurance company, underwriting the
Company's performance bond in conjunction with investing some collateral for
certain site closure obligations, performance of remedial investigations and
feasibility studies (RI/FS), and performance of corrective action at the closed
Sheffield, Illinois facility, compliance with Texas Natural Resource
Conservation Commission (TNRCC) requirements related to the Winona, Texas
facility.
34
35
Cash and investment securities at December 31, 1998, and 1997, were as follows
(in thousands):
Market Unrealized
December 31, 1998 Costs Value Gain/(loss)
---------- ---------- ----------
Cash and cash equivalents $ 4,442 $ 4,442 $ --
Trading Securities 1,653 1,696 43
Securities held-to-maturity 3,709 3,709 --
---------- ---------- ----------
$ 9,804 $ 9,847 $ 43
========== ========== ==========
December 31, 1997
Cash and cash equivalents $ 3,484 $ 3,484 $ --
Trading securities 6,243 6,781 538
Securities held-to-maturity 4,388 4,388 --
---------- ---------- ----------
$ 14,115 $ 14,653 $ 538
========== ========== ==========
The change in net unrealized gains on trading securities was $(495,000),
$503,000, and $115,000 in 1998, 1997 and 1996, respectively, each of which has
been included in earnings. Investments in securities held-to-maturity mature
over various dates during 1999 and are reported at their amortized cost basis,
which approximates fair value at December 31, 1998. Investments in securities
held-to-maturity at December 31, 1998 and 1997, consisted of the following (in
thousands):
1998 1997
---------- ----------
Corporate Bonds/Commercial Paper $ 3,169 $ 4,147
Certificates of deposit 100 83
Money market accounts and other 440 158
---------- ----------
$ 3,709 $ 4,388
========== ==========
Certain cash accounts and substantially all investments in securities
held-to-maturity and trading securities totaling $5,405,000 and $14,287,000 at
December 31, 1998 and 1997, respectively, have been classified as non-current
assets as cash and investment securities, pledged. The amounts pledged by the
Company generally equal the present value of its estimated future closure and
post-closure obligations.
NOTE 4. PROPERTY AND EQUIPMENT
Property and equipment at December 31, 1998 and 1997, were as follows (in
thousands):
1998 1997
---------- ----------
Land $ 1,830 $ 1,819
Cell development costs 11,035 11,035
Buildings and improvements 6,211 7,531
Decontamination and processing equipment 1,144 1,143
Vehicles and other equipment 19,627 18,624
---------- ----------
39,847 40,152
Less: Accumulated depletion, depreciation and amortization (28,702) (27,148)
---------- ----------
$ 11,145 $ 13,004
========== ==========
Depreciation expense was $1,958,000, $2,637,000 and $4,798,000, for 1998,
1997 and 1996, respectively.
35
36
NOTE 5. DEFERRED SITE DEVELOPMENT COSTS
The Company has been licensed to construct and operate the low-level
radioactive waste ("LLRW") facility, for the Southwestern Compact ("Ward Valley
facility"), and been selected to obtain a license to develop and operate the
Central Interstate Compact ("Butte facility").
The Company currently holds a license from the California Department of
Health Services to operate the Ward Valley LLRW facility to serve the
Southwestern Compact region. However, the State of California has been unable to
carry out its obligation to the Company to obtain the project property from the
U.S. Department of the Interior. To realize its investment, the US Government
will need to transfer the land to the State of California, or the Company will
need to recover monetary damages from the lawsuit that it has filed against the
US Government. In the first quarter of 1997, the Company filed two lawsuits
against the United States. The first was filed in the Court of Federal Claims,
seeking monetary damages in excess of $73 million. The second case was filed in
the Federal District Court in Washington D.C. seeking injunctive relief and a
writ of mandamus ordering the land transfer to California. Both cases are
pending.
All costs related to the development of the Ward Valley facility have been
capitalized. In November 1998, the Company settled with its bank for all of the
long-term bank debt. See Note 9., Long Term Debt, for a full explanation of the
bank settlement agreement. After adjusting for the bank settlement in November
1998, as of December 31, 1998, the Company had deferred $20,431,000 (33% of
total assets) of pre-operational facility development costs of which $895,000
was capitalized interest. These deferred costs relating to the development of
the Ward Valley facility are to be recovered during the facility's first 30
years of operating from future waste disposal revenues based upon disposal fees
approved by the Department of Health Services (DHS), in accordance with existing
state rate-base regulations. The disposal fee approval process is to include an
independent prudency review of 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
$6,808,000, $7,579,000 and $5,711,000, in 1998, 1997 and 1996, respectively.
Substantially all funding to develop the Butte facility, has been provided by
major generators of waste, that are part of the CIC. As of December 31, 1998 the
Company has contributed and deferred approximately $6,478,000 (11% of total
assets), which $386,000 was capitalized interest, toward the development of the
Butte facility.
In August, 1998, the State issued a Notice of Intent to Deny USE's license
application on seven grounds. All of the findings, except one, had been
addressed previously and were inconsistent with the State's earlier position
regarding the site's suitability and the Company's finances. The seventh dealt
with a relatively minor issue in the accident response plan. Nonetheless, in
December, 1998, the State of Nebraska denied US Ecology's license application to
build and operate the facility. The decision was not unexpected given the
State's record on this matter the past eight years.
On January 13, 1999, the Central Interstate Commission directed US Ecology
to submit and vigorously prosecute a Petition for a Contested Case challenging
the State's denial. Accordingly, US Ecology filed its Petition pursuant to the
Nebraska Administrative Procedure Act on January 15, 1999. Both the Company and
the Commission had anticipated the need to file an administrative appeal in
Nebraska.
By letter dated February 1, 1999, the Commission reiterated that it had
directed US Ecology to vigorously prosecute the Contest Case Activities while
the Commission continues to secure sufficient funding to cover those legal
costs. (Although the Commission does not currently have a funding contract with
the central states' Major Generators, it has cash reserves and also generates
cash receipts by processing requests from central states' generators to export
wastes pending construction of its own disposal facility.) In the same letter,
the Commission explicitly stated that (while) "This Commission Ramp Down Notice
is intended to modify the US Ecology, Inc. Commission contract...This Ramp Down
Notice is not (emphasis added) to be taken or considered...as a Notice of
Termination under that contract..."
36
37
In addition to the Contested Case filed by US Ecology, the central states'
Major Generators filed suit in Federal District Court for the District of
Nebraska on December 30, 1998 seeking to recover certain costs expended on the
Nebraska licensing process and prevent the State of Nebraska from proceeding
with the license review process.
US Ecology attorneys have drafted a complaint seeking to intervene as
plaintiffs in the case to protect the company's equity interest which is
expected to be filed in March 1999. The filing is viewed as additional insurance
against the history of arbitrary actions by the State of Nebraska the past eight
years. In the event the state should sustain its decision to deny the license
application in the administrative contested case, the Company plans to appeal
that decision in court.
The State of Nebraska has lost every court action involving this project
since it began in 1987. In contrast, the State and Federal courts have
consistently ruled in favor of the project. It is expected that they will
continue to do so whether in the Complaint to Intervene or in a judicial appeal
of an adverse administrative appeals decision should we receive one.
While US Ecology has a minor equity position in the Butte, Nebraska
project, it has acted principally as a contractor pursuant to its contract with
Central Interstate Low-Level Radioactive Waste Commission. As such, it will
continue to carry out the Commission's instructions and expects to be reimbursed
for all activities undertaken pursuant to the contract.
Various political and environmental opposition toward the development of
the sites is delaying the construction and operation of the Ward Valley and
Butte facilities along with 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, 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 pursue the conveyance of the land from the federal
government to the State of California so that construction may begin, and to
continue pursuing licensing of the Butte facility. The Company believes that the
Butte facility license will be granted, operations of both facilities will
commence and that the deferred site development costs for both facilities will
be realized. In the event the Butte facility license is not granted, operations
of either facility do not commence or the Company is unable to recoup its
investments through legal recourse, the Company would suffer losses that would
have a material adverse effect on its financial position and results of
operations.
In 1994, the Company began to capitalize interest in accordance with
Statement of Financial Accounting Standards (SFAS) No. 34, Capitalization of
Interest Cost, on the site development projects while facilities being developed
are undergoing activities to ready them for their intended use. As a result of
the bank settlement, the Company eliminated $12,461,000 of capitalized interest
leaving only $1,282,000 of capitalized interest at December 31, 1998. Interest
capitalized was $3,708,000 in 1997 and $3,558,000 in 1996.
NOTE 6. ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS
In March 1995, the Financial Accounting Standards Board issued SFAS No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of, which is intended to establish more consistent
accounting standards for measuring the recoverability of long-lived assets. The
Company adopted this statement during 1995 in conjunction with recording a
substantial writedown of goodwill and certain property and equipment. There were
no impairments in 1998 or 1997. The Company has made a complete evaluation of
assets every year since 1995, and applied the accounting rules of FASB 121. The
impairment in 1996 of $7,451,000 was for the Winona, Texas facility when the
Company decided to discontinue operations.
37
38
NOTE 7. ACCRUED LIABILITIES
Accrued liabilities at December 31, 1998 and 1997 were as follows (in
thousands):
1998 1997
---------- ----------
Waste processing and burial fees $ 7,314 $ 5,567
Fees and taxes 288 1,360
Regulated rate settlements 4,517 1,238
Compensation costs 1,015 680
Deferred revenue 1,064 948
Houston Office Lease -- 2,044
Other 3,069 2,030
Preferred stock dividends -- 934
---------- ----------
$ 17,267 $ 14,801
========== ==========
NOTE 8. DEFERRED SITE MAINTENANCE
Deferred site maintenance accruals at December 31, 1998 and 1997 were as
follows (in thousands):
1998 1997
---------- ----------
Accrued costs associated with open facilities $ 9,903 $ 9,585
Accrued costs associated with closed facilities 9,636 11,594
---------- ----------
Sub-total 19,539 21,179
Less: current portion (700) (2,842)
---------- ----------
Deferred site maintenance, excluding current portion $ 18,839 $ 18,337
========== ==========
Deferred site maintenance includes the accruals associated with obligations
for closure and post-closure of the Company's operating and closed disposal
sites and for corrective actions and remediation. The Company generally provides
accruals for the estimated costs of closures and post-closures monitoring and
maintenance as permitted airspace of such sites is consumed. Liabilities are
recorded when environmental assessments and/or remedial efforts are probable,
and the costs can be reasonably estimated.
The State of Nevada and the State of Washington have collected money in
segregated accounts for the costs of closure and post-closure care and
maintenance of the Richland, Washington site. The Company currently submits
waste volume-based fees to these 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.
NOTE 9. LONG TERM DEBT
Long term debt at December 31, 1998 and 1997 consisted of the following (in
thousands):
1998 1997
---------- ----------
Secured bank credit facility $ -- $ 39,257
Note payable 1,300 --
Capital lease obligations and other 1,042 726
---------- ----------
2,342 39,983
Less: Current maturities (119) (111)
---------- ----------
Long term debt $ 2,223 $ 39,872
========== ==========
38
39
Aggregate maturity of future minimum payments under capital leases are as
follows (in thousands):
Year Ended
December 31,
------------
1999 $ 119
2000 1,512
2001 441
2002 270
-------
Total $ 2,342
=======
The Company has three long-term leases that total $871,000 one at Oak
Ridge, Tennessee maturing April 30, 2001 with 10% interest. The other two are
at Beatty, Nevada maturing April 1, 1999 and April 1, 2001 at 7.5% and 8.9%
interest respectively.
The notes payable, issued March 1999, are with two of the Company's board
members, as an eighteen-month term at 9% interest and $1.3 million principal,
prohibiting the Company from paying dividends on common or preferred shares.
At November 12, 1998, prior to the settlement between the Company and its
Bank, the outstanding balance of the Company's total secured debt was
$42,604,890. This amount was made up of the following: $5,000,000 balance on a
Revolving Credit Note; $35,140,836 balance on the Term Loan; $2,300,371 balance
of interest accrued at a rate of 3%; a $160,000 short-term loan, as evidenced by
a Demand Promissory Note executed between the Company and its Bank on August
21,1998; and $3,683 of interest accrued at a rate of 10% on the short-term loan.
On November 13, 1998, the Company closed a multi-part transaction with its
bank, Chase Bank of Texas (the "Bank"), eliminating substantially all of the
Company's long-term debt and all of its $41.9 million debt to the Bank. The
essential terms of the transaction included: (1) the payment of approximately
$4.2 million of cash to the Bank; effected by liquidating that amount from an
investment portfolio held in ALEX, a wholly owned subsidiary; (2) the sale and
assignment of an interest in the Company's Ward Valley, California project
including potential proceeds from litigation against the U.S. Department of
Interior; and (3) warrants to purchase common stock of the Company equal to 10%
of the number of common shares outstanding. The maximum amount the Bank can earn
from its interest in the Ward Valley project litigation, is $29.6 million, and
is subject to reduction by as much as $1.0 million for attorneys' fees incurred
in respect of the litigation after November 13, 1998. The Company accounted for
this transaction by reducing capitalized interest. Cost of approximately $12.4
million against unpaid interest included in the $41.9 million bank debt. The
remaining value of the debt of approximately $24.3 million was recorded as a
sale of a portion of the Ward Valley project. No gain or loss was recognized in
this transaction.
The Warrant in the (3) above replaces an earlier warrant granted to the
Bank and permits the Bank to purchase up to 1,349,843 shares of the Company's
common stock at $1.50 per share. The Warrant is effective immediately and,
unless earlier exercised, terminates June 30, 2010. The value of the warrants
was estimated using the Black -Scholes option pricing model. The warrant was
issued on November 13, 1998 and the warrant value is $1.23 each for purchasing
up to 1,349,843 common shares. The Warrant will be adjusted pursuant to
anti-dilution provisions if the Company issues common stock or other securities
convertible or exercisable for common stock at a price less than the equivalent
of $1.50 per share of common stock. If the Bank receives a total of $35.0
million from its interest in the litigation and Ward Valley project, the cash
payment made November 13, 1998, and a partial exercise of the Warrant, the Bank
will have thirty days to exercise the unexercised part of the Warrant or it
expires.
The Ward Valley Interest Agreement and Assignment ("WV Agreement") assigns
the Bank an 85% interest in the cash generated by two of the five rate-base
components set by California regulatory authorities to be charged to generators
of waste utilizing the disposal site. The two components are an annual
amortization of 1/20 of capital investment in the project prior to November 13,
1998 and the return factor specified by the Company in the license application.
The Bank will not share in the depreciation, interest reimbursement or annual
operating cost rate-base components. As stated in the Company's annual reports,
the project has been effectively stalled by the Clinton administration's refusal
to convey the land on which the project is to be sited to the state of
California. California and the Company are engaged in two lawsuits against the
United States. The Company is claiming damages in excess of $70.0 million and
suing for an order that the land be conveyed to California. If the Company
recovers damages from the United States, the damages, reduced by up to $1.0
million of attorneys' fees, will be paid to the Bank under the WV Agreement
until it has received from the litigation and the Ward Valley project a maximum
amount of $29.6 million.
39
40
The settlement of the bank debt resulted in the Company reducing both the
capitalized asset and the capitalized interest for both the Ward Valley and
Nebraska projects. The following table shows the ending balances before and
after the bank settlement for the years ended December 31, 1998 and 1997 in
thousands of dollars.
Capitalized Capitalized
1998 Costs Interest Total
--------- ----------- -----------
Ward Valley Project $ 19,536 $ 895 $ 20,431
Butte, Nebraska Project
6,092 386 6,478
1997
Ward Valley Project $ 41,283 $ 10,035 $ 51,318
Butte, Nebraska Project
6,092 1,480 7,572
In addition to the Bank closing and a near simultaneous settlement of a
court judgement, the Company made a $160,000 loan, supported by the Demand
Promissory Note, now repaid in full to the bank. The Company made this agreement
to settle litigation between the Company and Houston Office 88, Inc. The Company
received a court judgment to pay Houston 88, Inc. $2,044,346. The two parties
settled the case for $900,000. This amount was funded by the short-term loan
from the Bank plus an assignment to the Bank by the Company of an IRS refund
claim in the amount of $740,000. This assignment is collateralized by a lien on
and perfected security interest in real property located in Smith County.
At December 31, 1998, the Company had issued letter of credit and a
performance bond with an outstanding face value of $4,190,000 that relate to the
site locations operating permits. Cash and investment securities secure the
issued letters of credit and performance bond. The fees range from 1/2 of one
percent to one percent and expire no more than one year after December 31, 1999.
NOTE 10. PREFERRED STOCK
In November 1996, the Company issued 300,000 shares of Series E Redeemable
Convertible Preferred Stock ("Series E") in a private offering to four of its
directors for $3,000,000 in cash. The Series E bore an 11.25% annual dividend,
paid quarterly in shares of the Company's common stock. The Series E was issued
to fulfill a requirement of the Third Amended and Restated Credit Agreement with
Chase Bank of Texas ("Bank Agreement") to raise $3 million of new equity by
year-end 1996. There were no voting rights or powers attached to this 11.25%
Series E Preferred Stock.
The Company made a shareholder rights offering that concluded on February
10, 1998. The Company sold 3,912,936 shares of its common stock in the rights
offering; 2,912,936 for cash at $1.00 each and 1,000,000 by tender of 100,000
shares of Series E in lieu of cash payment in accordance with the terms of the
Series E. Of the remaining 200,000 shares of Series E, 91,294 were redeemed at
$10.00 each and 108,706 were converted into 1,087,060 shares of common stock of
the Company. The partial redemption and mandatory conversion of the remaining
Series E at the conclusion of the rights offering was a term of the Series E
Designation Certificate. As a result of the rights offering and Series E
conversion, the Company now has approximately 13,557,275 shares of common stock
outstanding at March 26, 1999. The Series E stock is now retired but carries
3,000,000 warrants with no assigned value, a $1.50 per share exercise price and
expire June, 2008.
In September 1995, the Board of Directors 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.
The Company sold 105,264 of 8 3/8% Preferred Stock with warrants in a private
offering to a group of members or past members of the Board of Directors for
$4,759,000. Offering expenses of $101,000 and $140,000 in settlement of
liabilities is deducted from the proceeds. 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. Previous bank
covenants prohibited the payment of dividends. Accrued dividends
40
41
at December 31, 1998 totaled $1,354,000 and were paid March 9, 1999, by borrowed
funds from two of its directors. 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 at issuance was deemed to be de minimus.
NOTE 11. STOCK OPTION PLANS
The Company presently maintains three stock option plans, one which expired
in 1998, 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 first plan is the 1988 plan that provided a 10-year life and all but
260,000 options have expired. In 1992, the Company adopted the second and third
plans as the 1992 Stock Option Plan for Employees and the 1992 Stock Option Plan
for Directors. On December 30, 1998, 300,000 options were added to the
Director's Plan of 1992. Options under the employee plan are designated as
incentive or non-qualified in nature at the discretion of the Compensation
committee, and only employees will receive options under the 1992 Stock Option
Plan for Employees. Only directors will receive options under the Director's
Plan.
As of December 31, 1998, the 1992 Stock Option Plan for Employees had
issued 664,000 options with 136,000 remaining available, under the Stock Option
Plan for Directors, 367,000 options had been issued with 282,000 available.
The Company accounts for these plans under APB Opinion No. 25, "Accounting
for Stock Issued to Employees". Under this opinion, the Company has recorded no
compensation cost for 1998, 1997, and 1996. Had compensation cost for the plans
been determined consistent with FASB Statement No. 123, "Accounting for
Stock-Based Compensation", the Company's 1998, 1997, and 1996 net loss would
have been increased pro forma by $660,980, $493,603 and $49,118, respectively.
Basic income (loss) per share would have increased (decreased) $(.05), $.06, and
$.01 for 1998, 1997, and 1996, respectively. Diluted loss per share would have
been the same as basic loss per share as the common stock equivalents are
anti-dilutive. The FASB Statement No. 123 method of accounting has not been
applied to options granted prior to January 1, 1995. The pro forma compensation
cost may not be representative of that to be expected in future years.
41
42
The fair value of each option grant is estimated using the Black-Scholes
option-pricing model with the following weighted-average assumptions used for
grants in 1998, 1997, and 1996:
1998 1997 1996
----------- ----------- -----------
Expected volatility 213% 137% --
Risk-free interest rates 6.0% 6.0% --
Expected lives 3 years 3 years --
Dividend yield 0% 0% --
Weighted-average fair value of options granted
during the year (Black-Scholes) $ 1.14 $ 1.38 $ --
Under option:
Options outstanding, beginning of year 716,650 542,600 1,186,600
Granted 571,422 340,000 --
Exercised -- (97,500) --
Canceled (30,500) (68,450) (644,000)
----------- ----------- -----------
Options outstanding, end of year 1,257,572 716,650 542,600
=========== =========== ===========
Price range per share of outstanding options $ (1.00) $ (1.00) $ (4.00)
$ 14.75 $ 14.75 $ 14.75
=========== =========== ===========
Price range per share of options exercised $ -- $ (1.25) $ --
$ -- $ 2.00 $ --
=========== =========== ===========
Price range per share of options canceled $ (8.58) $ (5.50) $ (4.62)
$ (8.58) $ 14.25 $ 14.25
=========== =========== ===========
Options exercisable at end of year 1,124,772 609,320 417,070
=========== =========== ===========
Options available for future grant at end of year 461,928 733,350 1,073,350
=========== =========== ===========
NOTE 12. EMPLOYEE'S BENEFIT PLANS
401(k) Plan. The Company maintains a 401(k) plan for employees who
voluntarily contribute a portion of their compensation, thereby deferring income
for federal income tax purposes. Effective November 20, 1996 the 401(k) plan was
merged with the Retirement Plan to form a single plan called The American
Ecology Corporation 401(k) Savings Plan.
The 401(k) Savings Plan was amended and reinstated in its entirety. The
Plan covers substantially all of the Company's employees after one full year of
employment. Participants may contribute a percentage of salary up to the IRS
limits. The Company's contribution matches 55% of participant contributions up
to 6% of deferred compensation.
The Company contributions for the 401(k) plan were $119,000, $147,000, and
$269,000, for 1998, 1997, and 1996 respectively. The Company has no
post-retirement or post-employment benefit plan.
42
43
NOTE 13. INCOME TAXES
The components of the income tax provision (benefit) were as follows (in
thousands):
Year Ended December 31,
---------------------------------------
1998 1997 1996
---------- ---------- ----------
Current - Federal $ -- $ -- $ (1,552)
- State 55 132 35
---------- ---------- ----------
55 132 (1,517)
---------- ---------- ----------
Deferred - Federal -- -- --
---------- ---------- ----------
$ 55 $ 132 $ (1,517)
========== ========== ==========
The following reconciles between the effective income tax (benefit) rate
and the applicable statutory federal income tax (benefit) rate:
Year Ended December 31,
--------------------------------------
1998 1997 1996
---------- ---------- ----------
Income tax (benefit) - statutory rate 34.0% (34.0)% (34.0)%
State income taxes, net of federal tax benefit -- -- (.3)
Dividend income excluded from taxable income -- -- (.1)
Non-deductible goodwill amortization -- -- 5.3
Valuation allowance for deferred tax assets (40.8) 14.9 18.0
Tax refund -- 5.7 --
Other, net 6.8 1.4 1.1
---------- ---------- ----------
Total effective tax (benefit) rate -- % (12.0)% (10.0)%
========== ========== ==========
43
44
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,
1998 Provision 1998
---------- ---------- ------------
Deferred tax assets:
Environmental compliance and
Other site related costs,
Principally due to accruals for
Financial reporting purposes $ 7,639 $ 9 $ 7,648
Depreciation and amortization 7,120 (2,178) 4,933
Net operating loss carry forward 10,342 (182) 10,160
Other 712 100 812
---------- ---------- ----------
Total gross deferred tax assets 25,813 (2,260) 23,553
Less valuation allowance (20,131) (1,926) (22,057)
---------- ---------- ----------
Net deferred tax assets 5,682 (4,186) 1,496
---------- ---------- ----------
Deferred tax liabilities:
Site development costs (1,944) 817 (1,127)
Capitalized Interest (4,431) 4,062 (369)
Other (3,738) (693) --
---------- ---------- ----------
Total gross deferred tax liabilities (5,682) 4,186 (1,496)
---------- ---------- ----------
Net deferred tax assets $ -- $ -- $ --
========== ========== ==========
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 carry
forwards 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 carry forward of
approximately $26,513,000 at December 31, 1998, begins to expire in the year
2006. Of this carry forward, $2,744,000 is limited pursuant to the net operating
loss limitation rules of Internal Revenue Code Section 382. The portion of the
carry forward limited under Internal Revenue Code Section 382 expires $793,000
in 2006, $1,079,000 in 2007 and $872,000 in 2008. The remaining unrestricted net
operating loss carry forward expires $4,848,000 in 2011, $12,553,000 in 2012
and 6,368,000 in 2018. The Company's federal income tax returns and amended
federal income tax returns to report net operating loss carry backs are
currently under examination. As of December 31, 1998, certain refunds claimed
had not been received and $740,000 is reflected as income taxes receivable.
NOTE 14. COMMITMENTS AND CONTINGENCIES
In the ordinary course of conducting business, the Company becomes
involved in judicial and administrative proceedings involving federal, state and
local governmental authorities. There may also be actions brought by individuals
or groups of citizens in connection with permitting of planned facilities,
alleging violations of existing permits, or alleging damages suffered from
exposure to hazardous substances purportedly released from Company operated
sites, and other litigation. The Company maintains insurance intended to cover
property and damage claims asserted as a result of its operations.
Periodically management reviews and may establish reserves for legal and
administrative matters, or fees expected to be incurred in connection therewith.
At this time, management believes that resolution of these matters will not have
a material adverse effect on the Company's financial position, results of
operations or cash flows.
44
45
OTHER MATERIAL LITIGATION
One of the Company's principal subsidiaries is a plaintiff in two related
cases against the United States in which one or more favorable outcomes may have
a potentially significant favorable future impact on the Company. In the first
case, US Ecology is suing to recover approximately $73.1 million of Ward Valley
site development costs as well as lost profits and lost opportunity costs. In
the second case US Ecology is seeking an order (writ of mandamus) from a federal
court which may result in the eventual opening of the long delayed Ward Valley
LLRW site.
NOTE 15. SELECTED QUARTERLY FINANCIAL DATA, UNAUDITED
The unaudited consolidated quarterly results of operations for 1998 and
1997 (in thousands, except per share amounts) were:
TOTAL FOURTH THIRD SECOND FIRST
YEAR QUARTER QUARTER QUARTER QUARTER
Operating revenues:
1998 38,960 10,231 8,855 10,230 9,644
1997 41,522 10,189 11,002 10,702 9,629
Income (loss) from Operations
1998 (287) 1,752 (1,202) (358) (479)
1997 (3,606) (2,131) (569) 86 (992)
Income (loss) before income taxes
And extraordinary item:
1998 817 1,615 (1,125) 262 65
1997 (544) (1,223) 146 1,484 (951)
Net income (loss):
1998 762 1,705 (1,089) 226 (80)
1997 (676) (1,346) 257 1,321 (908)
Basic earnings (loss) per common Share:
1998 .12 (.09) .01 (.01)
1997 .01 .14 (.14)
(.17)
Diluted earnings (loss) per common share:
1998 .11 (.09) .01 (.01)
1997 (.17) .01 .13 (.14)
Basic and diluted earnings per common share for each of the quarters
presented above is based on the respective weighted average number of common.
The dilutive potential common shares outstanding for each period and the sum of
the quarters may not necessarily be equal to the full year basic and diluted
earnings per common share amounts.
45
46
NOTE 16. OPERATING SEGMENTS
The Company has adopted SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information," which changed the way the Company reports
information about its operating segments. The Company operates with two
segments, Chemical Services and LLRW Services. The Chemical Services provides
hazardous waste management, while LLRW Services processes, packages, and
disposes of material contaminated with low-level nuclear material. The
accounting policies of the segments are the same as those described in Note 2,
"Summary of Significant Accounting Policies." The Company evaluates the
performance of its operating segments based on gross profit, selling, general
and administrative expense, interest expense and income, corporate allocation
and after an apportioned income tax. Segment data includes intercompany
transactions at cost, as well as allocation for certain corporate costs.
Summarized financial information concerning the Company's reportable
segments are shown in the following table. The "Corporate & Other" column
includes corporate-related items not allocated to the reportable segments.
Chemical Services LLRW Services Corporate & Other Total
----------------- ------------- ----------------- -------------
1998
Sales $ 16,030 $ 22,930 $ $ 38,960
Operating Costs 9,488 14,057 -- 23,545
------------- ------------- ------------- -------------
Gross Profit $ 6,542 $ 8,873 $ -- $ 15,415
S, G&A Expense 6,544 6,272 2,886 15,702
Interest Expense/Income (453) (70) (581) (1,104)
Corporate Allocation 1,764 2,328 (4,092) --
Federal Taxes -- -- 55 55
------------- ------------- ------------- -------------
Net Income $ (1,314) $ 343 $ (1,732) $ 762
Total Assets $ 15,535 $ 38,000 $ 8,265 $ 61,800
1997
Sales $ 15,387 $ 26,135 $ -- $ 41,522
Operating Costs 9,320 13,899 -- 23,219
------------- ------------- ------------- -------------
Gross Profit $ 6,067 $ 12,236 $ -- $ 18,303
S, G&A Expense 7,761 6,141 8,007 21,909
Interest Expense/Income (406) (363) (2,293) (3,062)
Corporate Allocation 1,940 2,476 (4,416) --
Federal Taxes -- -- 132 132
------------- ------------- ------------- -------------
Net Income $ (3,228) $ 3,982 $ (1,430) $ (676)
Total Assets $ 16,075 $ 57,752 $ 24,604 $ 98,431
1996
Sales $ 26,476 $ 27,025 $ (3,529) $ 49,972
Operating Costs 20,022 17,466 (3,917) 33,571
------------- ------------- ------------- -------------
Gross Profit $ 6,454 $ 9,559 $ 388 $ 16,401
S, G&A Expense 9,218 6,996 7,983 24,187
Interest Expense/Income 7,492 (793) (1,562) 5,137
Corporate Allocation 3,354 4,121 (7,475) --
Federal Taxes -- -- (1,516) (1,516)
------------- ------------- ------------- -------------
Net Income $ (13,609) $ (755) $ (2,958) $ (11,407)
Total Assets $ 19,935 $ 56,497 $ 22,595 $ 99,027
46
47
ITEM 9. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
PART III
Items 10, 11, 12, and 13 of Part III have been omitted from this report
because the Company will file with the Securities and Exchange Commission, no
later than 120 days after the close of its fiscal year, a definitive proxy
statement. The information required by Items 10, 11, 12, and 13 of this report,
which will appear in the definitive proxy statement, is incorporated by
reference into Part III of this report.
47
48
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) FINANCIAL STATEMENTS, SCHEDULES AND EXHIBITS
1. Financial statements and report of Balukoff,
Lindstrom & Co., P.A.
Independent Auditors' Report
Consolidated Balance Sheets - December 31, 1998
and 1997
Consolidated Statements of Operations for the
years ended December 31, 1998, 1997 and 1996
Consolidated Statements of Shareholders' Equity
for the years ended December 31, 1998, 1997
and 1996
Consolidated Statements of Cash Flows for the
years ended December 31, 1998, 1997 and 1996
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 No. Description Incorporated by Reference from
Registrant's
- -------------------------------------------------------------------------------------------------------------------
3.1 Restated Certificate of Incorporation, as amended 1989 Form 10-K
- -------------------------------------------------------------------------------------------------------------------
3.2 Certificate of Amendment to Restated Certificate of Incorporation Form S-4 dated 12-24-92
dated June 4, 1992
- -------------------------------------------------------------------------------------------------------------------
3.3 Amended and Restated Bylaws dated February 28, 1995 1994 Form 10-K
- -------------------------------------------------------------------------------------------------------------------
10.1 Sublease dated February 26, 1976, between the State of Washington, Form 10 filed 3-8-84
the United States Dept. of Commerce and Economic Development, and
Nuclear Engineering Company with Amendments dated January 11, 1980,
and January 14, 1982.
- -------------------------------------------------------------------------------------------------------------------
10.2 Lease dated May 1, 1977 ("Nevada Lease"), between the state of Form 10 filed 3-8-84
Nevada, Dept. of Human Resources and Nuclear Engineering Company,
with Addendum thereto, dated December 7, 1982
- -------------------------------------------------------------------------------------------------------------------
10.3 Addendum to Nevada Lease dated March 28, 1988 1989 Form 10-K
- -------------------------------------------------------------------------------------------------------------------
10.4 Nevada State Health Division, Radioactive Material License issued to 1989 Form 10-K
US Ecology, Inc. dated December 29, 1989
- -------------------------------------------------------------------------------------------------------------------
10.5 Administrative Order by Consent between the United States 1985 Form 10-K
Environmental Protection Agency and US Ecology, Inc. ("USE") dated
September 30, 1985
- -------------------------------------------------------------------------------------------------------------------
10.6 State of Washington Radioactive Materials License issued to US 1986 Form 10-K
Ecology, Inc. dated January 21, 1987
- -------------------------------------------------------------------------------------------------------------------
48
49
- -------------------------------------------------------------------------------------------------------------------
Exhibit No. Description Incorporated by Reference from
Registrant's
- -------------------------------------------------------------------------------------------------------------------
10.11 Agreement between the Central Interstate Low-Level Radioactive Waste 2nd Quarter 1988 10-Q
Compact Commission and US Ecology, Inc. for the development of a
facility for the disposal of low-level radioactive waste dated
January 28, 1988 ("Central Interstate Compact Agreement")
- -------------------------------------------------------------------------------------------------------------------
10.12 Amendment to Central Interstate Compact Agreement dated May 1, 1990 1994 Form 10-K
- -------------------------------------------------------------------------------------------------------------------
10.13 Second Amendment to Central Interstate Compact Agreement dated June 1994 Form 10-K
24, 1991
- -------------------------------------------------------------------------------------------------------------------
10.14 Third Amendment to Central Interstate Compact Agreement dated July 1994 Form 10-K
1, 1994
- -------------------------------------------------------------------------------------------------------------------
10.15 Settlement agreement dated May 25, 1988 among the Illinois Form 8-K Form 8-K dated 6-7-88
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 Hazardous 1988 Form 10-K
Waste Treatment, Storage and Disposal (Part B) issued to US Ecology,
Inc. dated June 24, 1988
- -------------------------------------------------------------------------------------------------------------------
10.17 Texas Water Commission Permit for Industrial Solid Waste Management 1988 Form 10-K
Site (Part B) issued to Texas Ecologists, Inc. dated December 5,
1988
- -------------------------------------------------------------------------------------------------------------------
10.18 Memorandum of Understanding between American Ecology Corporation and
1989 Form 10-K the State of California dated August 15, 1988
- -------------------------------------------------------------------------------------------------------------------
10.19 United States Environmental Protection Agency approval to dispose of 1989 Form 10-K
non-liquid polychlorinated biphenyl (PCB) wastes at the Beatty,
Nevada chemical waste disposal facility
- -------------------------------------------------------------------------------------------------------------------
10.20 Employment Agreement between American Ecology Corporation and C. 1993 Form 10-K
Clifford Wright, Jr. dated April 1, 1994 * (terminated in 1995)
- -------------------------------------------------------------------------------------------------------------------
10.21 Employment Agreement between American Ecology Corporation and 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 Harry 1993 Form 10-K
O. Nicodemus, IV dated April 1, 1994 * (terminated in 1995)
- -------------------------------------------------------------------------------------------------------------------
10.24 Employment Agreement between American Ecology Corporation and Ronald 1993 Form 10-K
K. Gaynor dated April 1, 1994 * (terminated in 1995)
- -------------------------------------------------------------------------------------------------------------------
10.26 Amended and Restated American Ecology Corporation 1992 Stock Option Proxy Statement dated 4-26-94
Plan *
- -------------------------------------------------------------------------------------------------------------------
10.27 Amended and Restated American Ecology Corporation 1992 Outside Proxy Statement dated 4-26-94
Director Stock Option Plan *
- -------------------------------------------------------------------------------------------------------------------
10.28 American Ecology Corporation 401 (k) Savings Plan * 1994 Form 10-K
- -------------------------------------------------------------------------------------------------------------------
10.29 American Ecology Corporation Retirement Plan * 1994 Form 10-K
- -------------------------------------------------------------------------------------------------------------------
10.30 Credit Agreement between American Ecology Corporation, its 1994 Form 10-K
subsidiaries and Texas Commerce Bank National Association dated
December 1, 1994 (terminated by 10.41 below)
- -------------------------------------------------------------------------------------------------------------------
10.31 Security Agreement dated as of December 1, 1994 by American Ecology 1994 Form 10-K
Corporation in favor of Texas Commerce Bank, National Association
(terminated by 10.43 below)
- -------------------------------------------------------------------------------------------------------------------
49
50
- -------------------------------------------------------------------------------------------------------------------
Exhibit No. Description Incorporated by Reference from
Registrant's
- -------------------------------------------------------------------------------------------------------------------
10.32 Security Agreement by subsidiaries of American Ecology Corporation 1994 Form 10-K
dated as of December 1, 1994 in favor of Texas Commerce Bank,
National Association (terminated by 10.43 below)
- -------------------------------------------------------------------------------------------------------------------
10.33 Lease Agreement between American Ecology Corporation and VPM 1988-1, Form S-4 filed 12-24-92
Form S-4 filed 12-24-92 Ltd. dated October 14, 1992
- -------------------------------------------------------------------------------------------------------------------
10.34 Rights Agreement dated as of December 7, 1993 between American Form 8-K dated 12-7-93
Ecology Corporation and Chemical Shareholders Services Group, Inc.
as Rights Agent
- -------------------------------------------------------------------------------------------------------------------
10.35 Agreement and Plan of Merger by and between American Ecology Form S-4 dated 12-24-92
Corporation and Waste Processor Industries, Inc.
- -------------------------------------------------------------------------------------------------------------------
10.36 Settlement Agreement dated September 24, 1993 by US Ecology, Inc., 1993 Form 10-K
the State of Nevada, the Nevada State Environmental Commission, and
the Nevada Dept. of Human Resources
- -------------------------------------------------------------------------------------------------------------------
10.37 Settlement Agreement dated as of January 19, 1994 by and among US 1993 Form 10-K
Ecology, Inc., Staff of the Washington Utilities and Transportation
Commission, Precision Castparts Corp., Teledyne Wah Chang, Portland
General Electric Company, the Washington Public Power Supply System
and Public Service Company of Colorado.
- -------------------------------------------------------------------------------------------------------------------
10.38 Agreement dated January 28, 1994 between American Ecology Form 8-K Form 8-K dated 2-3-94
dated 2-3-94 Corporation, Edward F. Heil, Edward F. Heil as trustee
for Edward F. Heil, Jr., Sandra Heil, and Karen Heil Irrevocable
Trust Agreement #2, Thomas W. McNamara and Thomas W. McNamara as a
trustee of
the Jenner & Block Profit Sharing Trust No. 082.
- -------------------------------------------------------------------------------------------------------------------
10.39 Agreement of Purchase and Sale dated as of April 7, 1994 by and 1st Quarter 1994 Form 10-Q, 3rd
among American Ecology Corp., American Ecology Recycle Center, Inc., Quarter 1994 Form 10-Q
Quadrex Environmental Company and Quadrex Corporation, as amended by
Amendments dated June 14, 1994 and August 22, 1994.
- -------------------------------------------------------------------------------------------------------------------
10.40 Stock Purchase Agreement dated as of May 10, 1994 by and between 1st Quarter 1994 Form 10-Q, 3rd
American Ecology Corporation and Mobley Environmental Services,
Quarter 1994 Form 10-Q Inc., as amended by Amendment dated September
21, 1994.
- -------------------------------------------------------------------------------------------------------------------
10.41 Second Amended Restated Credit Agreement between American Ecology 1995 Form 10-K
Corporation , its subsidiaries and Texas Commerce Bank National
Association dated June 30, 1995
- -------------------------------------------------------------------------------------------------------------------
10.42 Security Agreement dated June 30, 1995 by American Ecology 1995 Form 1995 Form 10-K
10-K Corporation in favor of Texas Commerce Bank National
Association.
- -------------------------------------------------------------------------------------------------------------------
10.43 Security Agreement dated June 30, 1995 by subsidiaries of American 1995 Form 10-K
Ecology Corporation in favor of Texas Commerce Bank National
Association.
- -------------------------------------------------------------------------------------------------------------------
10.46 Rights Offering and Prospectus with American Ecology Corporation and Form S-3 dated 9-9-97
Form S-3 dated 9-9-97 ChaseMellon Shareholder Services as Rights
Agent.
- -------------------------------------------------------------------------------------------------------------------
10.47 Amended Rights Offering and Prospectus with American Ecology Form Form S-3/A dated 12-30-97
S-3/A dated 12-30-97 Corporation and ChaseMellon Shareholder
Services as Rights Agent.
- -------------------------------------------------------------------------------------------------------------------
10.50 Increase Additional Number of Share Options to Directors Plan of 1992 Form S-8 dated 12-30-98
- -------------------------------------------------------------------------------------------------------------------
21 List of Subsidiaries 1994 Form 10-K
- -------------------------------------------------------------------------------------------------------------------
23.2 Consent of Balukoff, Lindstrom & Co., P.A.
- -------------------------------------------------------------------------------------------------------------------
27 Financial Data Schedule
- -------------------------------------------------------------------------------------------------------------------
50
51
Management contract or compensatory plan.
(b) REPORTS ON FORM 8-K
- -------------------------------------------------------------------------------------------------------------------
16.1 Change of Auditors Letter - November 25, 1996 Form 8-K
- -------------------------------------------------------------------------------------------------------------------
10.44 Series E Redeemable Convertible Preferred Stock - November 27, 1996 Form 8-K
- -------------------------------------------------------------------------------------------------------------------
10.45 Third Amended & Restated Credit Agreement - February 18, 1997 Form 8-K
- -------------------------------------------------------------------------------------------------------------------
10.48 Court Judgement Houston 88-January 26, 1998 Form 8-K
- -------------------------------------------------------------------------------------------------------------------
10.49 Bank Restructure-Chase Bank of Texas N.A. November 19, 1998 Form 8-K
- -------------------------------------------------------------------------------------------------------------------
51
52
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, Registrant has duly caused this annual report to be signed
on its behalf by the undersigned, thereunto duly authorized.
AMERICAN ECOLOGY CORPORATION
Dated: March 30, 1999 By: /s/ Jack K. Lemley
-----------------------------------
Jack K. Lemley
Chairman of the Board, Chief
Executive Officer and President
SIGNATURE TITLE DATE
- --------- ----- ----
/s/ Jack K. Lemley Chairman of the Board, Chief March 30, 1999
- --------------------------- Executive Officer and President -----------------
JACK K. LEMLEY
/s/ Robert S. Thorn Chief Accounting Officer March 30, 1999
- --------------------------- -----------------
ROBERT S. THORN
/s/ Rotchford L. Barker Director March 30, 1999
- --------------------------- -----------------
ROTCHFORD L. BARKER
/s/ Paul Bergson Director March 30, 1999
- --------------------------- -----------------
PAUL BERGSON
/s/ Patricia M. Eckert Director March 30, 1999
- --------------------------- -----------------
PATRICIA M. ECKERT
/s/ Edward F. Heil Director March 30, 1999
- --------------------------- -----------------
EDWARD F. HEIL
53
SIGNATURE TITLE DATE
- --------- ----- ----
/s/ Paul F. Schutt Director March 30, 1999
- --------------------------- -----------------
PAUL F. SCHUTT
/s/ John J. Scoville Director March 30, 1999
- --------------------------- -----------------
JOHN J. SCOVILLE
/s/ Keith D. Bronstein Director March 30, 1999
- --------------------------- -----------------
KEITH D. BRONSTEIN
54
INDEX TO EXHIBITS
- -------------------------------------------------------------------------------------------------------------------
Exhibit No. Description Incorporated by Reference from
Registrant's
- -------------------------------------------------------------------------------------------------------------------
23.2 Consent of Balukoff, Lindstrom & Co., P.A.
- -------------------------------------------------------------------------------------------------------------------
27 Financial Data Schedule
- -------------------------------------------------------------------------------------------------------------------