1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 8-K/A
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): February 01, 2001
Commission File Number 0-11688
AMERICAN ECOLOGY CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 95-3889638
- --------------------------------------- -------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
805 W. Idaho
Suite. # 200
Boise, Idaho 83702-8916
- ---------------------------------------- ------------------------------------
(Address of principal executive offices) (Zip Code)
(208) 331-8400
----------------------------------------------------------
(Registrants telephone number, including area code)
Indicate by a check mark whether Registrant (1) has filed all reports required
to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days.
YES [X] NO [ ]
- --------------------------------------------------------------------------------
EXPLANATION OF AMENDMENT
The Registrant, American Ecology Corporation ("The Company"), filed an initial
report on Form 8-K on February 2, 2001 with the Securities and Exchange
Commission. This report amends Item2 and Item 7., Financial Statements and
Exhibits, to include the historical, pro forma, and other required financial
statements for the purchase of Envirosafe Services of Idaho, Inc. within 60 days
of February 15, 2001 the date the initial report on Form 8-K was required to be
filed.
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AMERICAN ECOLOGY CORPORATION
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS.
On February 2, 2001, American Ecology Corporation, ("AEC" or "the Company")
announced the acquisition of all the capital stock of Envirosafe Services of
Idaho, Inc. a Delaware corporation ("ESII"). The acquisition was pursuant a
Stock Purchase Agreement (the "Agreement") by and among the Company, its
wholly-owned subsidiary American Ecology Environmental Services Corporation, a
Texas corporation, Envirosource Technologies Inc., a Delaware corporation whose
main offices are located at 1155 Business Center Drive, Horsham, Pennsylvania
19044, (the "Seller") and Envirosource, Inc., a Delaware corporation, and parent
company of Envirosource Technologies Inc. The purchase agreement is dated
February 1, 2001.
Under the terms of the Agreement, the Company paid One Thousand and 00/100
dollars ($1,000.00) in cash for all of the outstanding capital stock of ESII, a
subsidiary of Envirosource Technologies Inc. Through the acquisition of all of
the capital stock of ESSI, the Company acquired assets and assumed liabilities
totaling approximately $20.4 million. The acquisition was accounted for using
the purchase accounting method. The respective board of directors of each
company approved the acquisition. The purchase price was paid from the Company's
working capital. There was no prior business relationship between the Company
and the Seller.
Pursuant to the Agreement, the Company acquired all of the authorized and issued
stock of ESII, thereby obtaining ownership of all ESII assets and liabilities.
The principal ESII assets are a Resource Conservation and Recovery Act
("RCRA")and Toxic Substances Control Act ("TSCA")permitted waste treatment and
disposal facility located in Grandview, Idaho, a contract to operate a hazardous
waste treatment facility located at an Illinois steel mill site in Sterling,
Illinois ("Sterling"), exclusive rights to use a patented hazardous waste
treatment process for steel mill electric arc furnace dust waste within a
defined service territory in the western United States, and a hazardous waste
disposal facility near Bruneau, Idaho previously closed in accordance with RCRA.
The assets acquired totaled approximately $20.4 million on February 2, 2001.
ITEM 7. FINANCIAL STATEMENTS, PRO-FORMA INFORMATION AND EXHIBITS.
(a) Pro Forma Combined Financial Statements
Pro Forma Combined Balance Sheet December 31, 2000............ II-2
Pro Forma Combined Statement of Operations at December 31,
2000.......................................................... II-3
Notes to Pro Forma Combined Financial Statement............... II-4
(b) Financial Statements for Envirosafe Services of Idaho
Report of Independent Public Accountants...................... II-5
ESII Balance Sheet as of December 31, 1999 and
2000.......................................................... II-6
ESII Statements of Operations for December 31, 1999 and
2000.......................................................... II-7
ESII Statements of Shareholder's Equity for December 31,
1999 and 2000................................................. II-8
ESII Statements of Cash Flows for December 31, 1999 and
2000.......................................................... II-9
Notes to Financial Statements of ESII......................... II-10
(c) Exhibits
23.1 Consent of Balukoff, Lindstrom & Co., P.A.
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II-1
These financial statements do not purport to represent the combined results of
operations of the Company and ESII that might have occurred had the ESII
acquisition been completed on such dates, nor are they indicative of future
results of operations. The pro forma adjustments relate to the purchase
allocation of ESII and give effect to marking certain assets to fair market
value. AEC has made reclassifications to certain liabilities of ESII consistent
with the purchase method of accounting. Other adjustments may be recorded based
upon information received in the future. Such adjustments may have a significant
impact on total assets and liabilities, cost of operations, depreciation and
amortization, and other expense accounts.
These pro forma adjustments do not reflect possible costs related to
environmental matters, litigation liabilities, regulatory compliance matters,
integration or certain abandonment of assets, all of which could result in
additional future charges. Any purchase accounting adjustments, or related costs
and possible charges arising from the purchase of ESII, may materially impact
the Company's future combined financial position and combined financial results
of operations. These pro forma financial statements also do not give effect to
possible future sales of assets or certain of the operations or to any cost
savings or other benefits of the business combination that may result from the
integration of ESII and AEC.
The unaudited pro forma combined financial statements should be read in
conjunction with the notes to the unaudited pro forma combined financial
statements, the historical consolidated financial statements of AEC and related
notes as previously filed with the Securities and Exchange Commission and
incorporated herein.
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II-2
AMERICAN ECOLOGY CORPORATION
PRO FORMA COMBINED BALANCE SHEET
($ in 000's as of December 31, 2000)
Pro Forma
Adjustments
Related to
the Pro Forma
AEC ESII ESII Combined
HISTORICAL HISTORICAL Acquisition AEC and
(Note 1) (Note 2) (Note 3) ESII
- --------------------------------------------------------------------------------------------------------------------
CURRENT ASSETS
Cash $ 4,122 $ 4 $ -- $ 4,126
Investments -- 3,011 -- 3,011
Intercompany receivable -- 14,296 (14,296) (a) --
Accounts receivable 9,839 2,521 -- 12,360
Income taxes receivable or deferred 740 -- 740
Inventory -- 198 -- 198
Prepaid expenses & other 1,316 129 -- 1,445
------- ------- -------- -------
Total current assets $16,017 $20,160 $(19,801) $21,880
Cash and investment securities
pledged 235 -- -- 235
Property, plant and equipment, net 18,488 9,211 6,230 (c)(e) 33,929
Facility development costs 27,430 -- -- 27,430
Deferred taxes -- 5,505 (5,505) (b) --
Intangible assets 366 -- -- 366
Other assets 3,214 109 3,323
------- ------- -------- -------
Total assets $65,750 $34,984 $(13,571) $87,163
======= ======= ========= =======
LIABILITY AND SHAREHOLDERS' EQUITY
Current Liabilities
Current portion of long term debt $ 1,094 $ -- $ -- $ 1,094
Accounts payable 2,680 1,463 -- 4,143
Accrued liabilities 9,149 1,004 -- 10,153
Accrued closure and post closure 700 -- -- 700
obligations
Income tax payable 115 55 -- 170
------- ------- -------- -------
Total current liabilities 13,738 2,522 16,260
--
Long term debt 10,775 -- -- 10,775
Accrued closure and post closure 15,253 9,874 -- 25,127
obligations
Bond payable -- 8,500 -- 8,500
Shareholders' equity 25,984 14,088 (13,571) (e)(f) 26,501
------- ------- -------- -------
Total Liabilities and Shareholders'
Equity $65,750 $ 34,984 $(13,571) $ 87,163
======= ======== ======== ========
The accompanying notes are an integral part of these financial statements.
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II-3
AMERICAN ECOLOGY CORPORATION
PRO FORMA COMBINED STATEMENT OF OPERATIONS
($ in 000's except per share amounts)
Year ended December 31, 2000
Pro Forma
Adjustments
Related to
the
AEC ESII ESII Pro Forma
HISTORICAL HISTORICAL Acquisition Combined
(Note 1) (Note 2) (Note 3) AEC and ESII
----------------------------------------------------------------------
Revenue $ 41,958 $ 14,232 $ -- $ 56,190
Direct operating costs 21,832 7,136 -- 28,968
-------- -------- ------- --------
Gross profit 20,126 7,096 -- 27,222
Selling, general and administrative expenses 16,665 4,169 320 (e) 21,154
Income (loss) from operations 3,461 2,927 (320) 6,068
Investment income 435 160 -- 596
Gain on sale of assets 92 -- -- 92
Interest Expense (350) (701) -- (1,052)
Other income 841 2 843
-------- -------- ------- --------
--
Income before taxes and extraordinary item 4,479 2,388 (320) 6,547
Income tax expense (benefit) $ (12) $ 892 (837)(f) $ 43
-------- -------- ------- --------
Income before extraordinary item $ 4,491 $ 1,496 517 $ 6,504
Extraordinary gain - early extinguishments of
debt 206 -- $ -- 206
-------- -------- ------- --------
Net income $ 4,697 $ 1,496 -- $ 6,710
Preferred stock dividends 398 -- -- 398
Net income available to common shareholders
$ 4,299 $ 1,496 $ 517 $ 6,312
======= ======== ======= ========
Basic earnings per share $ .31 $ -- $ .15 $ .46
======= ======== ======= ========
Diluted earnings per share $ .26 $ -- $ 11 $ .37
======= ======== ======= ========
Dividends paid per common share $ -- $ -- $ -- $ --
======= ======== ======= ========
Weighted average shares outstanding-
Common shares outstanding at year end 13,711 -- 13,711
Effect of dilutive shares 3,157 -- 3,157
-------- ------- --------
The accompanying notes are an integral part of these financial statements
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II-4
AMERICAN ECOLOGY CORPORATION
NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS
NOTE 1. AMERICAN ECOLOGY CORPORATION HISTORICAL.
The historical balances represent the balance sheet and results of operations
for AEC as of each period indicated as previously reported in the historical
consolidated financial statements of AEC.
NOTE 2. ENVIROSAFE SERVICES OF IDAHO HISTORICAL.
The historical balances represent the balance sheet and results of operations
for ESII, the acquired contract of Sterling, Illinois operations and the closed
facility at Bruneau, Idaho as of December 31, 2000 and each period indicated as
reported.
NOTE 3. PRO FORMA ADJUSTMENTS.
The pro forma adjustments were made to reflect the purchase price paid for the
assets by AEC and to reflect the acquisition as if it had occurred on January 1,
2001. The pro forma adjustments related to the purchase allocation of ESII give
effect to marking to fair market value of certain assets that were previously
impaired under FASB 121 Impairment of Long-Lived Assets by the Seller. See Note
4. AEC has made these adjustments, principally the marking of certain assets to
fair market value, consistent with the purchase method of accounting. AEC will
consider future operational activities and results to determine if appraisals to
both asset and liability accounts are required due to circumstances which may
arise in the ordinary course of business. Other adjustments may be recorded
based upon information to be received in the future and may have a significant
impact on total assets, total liabilities, cost of operations, depreciation and
amortization, and other expense accounts.
These pro forma adjustments do not reflect possible costs related to
environmental matters, litigation liabilities, regulatory compliance matters,
integration or certain abandonment of assets, all of which could result in
additional future charges. Any purchase accounting adjustments, or related costs
and possible charges arising from the purchase of ESII may materially impact the
Company's future combined financial position and combined financial results of
operations. These pro forma financial statements do not give effect to possible
future sales of assets or certain of the operations or to any cost savings or
other benefits of the business combination, which may result from the
integration of ESII and AEC.
The pro forma adjustments reflected in the pro forma combined financial
statements give effect to the following (in thousands):
- -----------------------------------------------------------------------------------------------------------
a) Intercompany Receivables To eliminate all intercompany accounts for the
combined financial statement position between ESII and
the Seller. $14,296
- -----------------------------------------------------------------------------------------------------------
b) Deferred Income Taxes AEC has a valuation allowance for income taxes and
therefore this deferred tax asset is eliminated, as
well as the corresponding deferred tax credit. $5,505
- -----------------------------------------------------------------------------------------------------------
c) Property, Plant and Equipment To mark acquired assets up to current fair market $6,550
value
- -----------------------------------------------------------------------------------------------------------
d) Shareholder's Equity To eliminate prior owners equity. $14,088
- -----------------------------------------------------------------------------------------------------------
e) Depreciation Expense To record one year's depreciation and amortization for
assets that were marked up to their fair market value
using an estimated 20 year life. $320
- -----------------------------------------------------------------------------------------------------------
f) Income Tax Expense To reduce income tax expense since AEC has loss carry
forwards that would reduce the amount of federal
income tax expense. $837
- -----------------------------------------------------------------------------------------------------------
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NOTE 4. PROPERTY PLANT AND EQUIPMENT.
In December 1999, the Seller recorded an impairment loss on ESII of $9,599,361
to reduce the long-lived assets related to the estimated fair value of landfill
site. The write-down of assets included $6,505,999 of property, plant and
equipment, $3,084,986 of landfill permits, and $8,376 related to other
long-lived assets. In addition, the estimated lives of certain remaining assets
at the Company's landfill sites were reviewed and subsequently reduced,
corresponding to the estimates of future cash flows used to calculate their fair
value. At December 31, 2000, the facility had approximately four years of
capacity remaining at the current fill rates. However, in late January 2001 ESII
received approval of a facility expansion siting application by the State of
Idaho Department of Environmental Quality that provides in excess of 25 years of
future disposal capacity based on current fill rates. This material extension of
the useful life of ESII permits and facility requires the Company to revalue
certain assets to their current fair market value. Using the requirements of
FASB 121 and 71 the Company made an evaluation of the future income from
operations of the ESII facility and the related assets of business, and related
expenses of operation to determine there was no impairment at these values.
While the Company did not have appraisals performed for the assets, the
estimated fair market value was used in valuing the following items to restore
these values of total property, plant and equipment:
Part B Permit and A/A Permit with Permitted Land $ 3,085,000
Landfill Development 1,269,000
Land 622,000
Buildings 1,574,000
-----------
Total Increase in Property, Plant and Equipment $ 6,550,000
Capitalized landfill costs include expenditures for land and related airspace,
permitting costs, and cell development costs. Landfill permitting and
preparation costs represent only direct costs related to these activities
including, legal fees, engineers fee, construction costs, and Company personnel
dedicated to these efforts. The Company will use the same accounting treatment
with ESII cell development amortization, and permit amortization as it does with
other owned facilities.
NOTE 5. INSURANCE AND FINANCIAL ASSURANCE MATTERS.
AEC obtained insurance for ESII consistent with those insurance policies carried
at its other facilities and consistent with industry standards. These insurance
policies include a property, casualty, environmental, and closure/post closure
policies. ESII had previously maintained a bond to secure closure and post
closure financial assurance for the Idaho facility until about March 9, 2001.
This bond was collateralized with $2.5 million in cash held at a commercial
bank. Simultaneous with closing, AEC arranged an acceptable financial assurance
for the ESII facility through its insurance carrier. Subsequent to closing, the
Idaho Department of Environmental Quality ("IDEQ") issued a letter releasing the
Frontier Surety Bond in the amount of $15 million. After the release of this
bond by the IDEQ, the $2.5 million in cash, held as collateral for the bond, was
released to the Company.
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NOTE 6. EARNINGS PER SHARE.
ESII was a wholly owned subsidiary of its parent company Envirosource
Technologies, Inc. and therefore had no shares traded in the market place. Since
ESII was acquired for cash and assumed debt rather than stock or convertible
debt, the pro forma combination of both basic and diluted earnings per share
only has a change in the total net income and no change in the weighted average
number of common shares outstanding.
(000's except per share amounts)
Year Ended December 31, 2000
Pro Forma
------------------------------------------
Combined
Historical Historical AEC and
AEC ESII ESII
---------------------------------------------------
Income before extraordinary item $ 4,491 $1,496 $ 5,987
Net Income 4,697 1,496 6,193
Preferred stock dividends 398 -- 398
------- ------
Net income available to
Common shareholders $ 4,299 $1,496 $ 5,795
Weighted average shares outstanding-
Common shares outstanding at year end 13,711 -- 13,711
Effect of dilutive shares 3,157 -- 3,157
Basic earnings per share $ .31 $ .11 $ .42
======= ====== =======
Diluted earnings per share $ .26 $ .08 $ .34
======= ====== =======
NOTE 7. DEFERRED INCOME TAXES.
Prior to the acquisition, ESII was wholly owned subsidiary of Envirosource
Technologies, Inc., which is a wholly owned subsidiary of Envirosource, Inc.
Under consolidation policies of Envirosource, Inc. the amount of income tax
expense (benefit) was not shown on the ESII's books either as income tax payable
or deferred tax asset. These amounts were recorded as intercompany transactions
and were reported on a consolidated basis at a straight statutory rate of 35%.
No tax provision or M-1 reconciling items were used to determine federal and
state deferred and current tax expense or benefit reported on ESII's books. For
the purpose of presenting ESII separately, the deferred and current tax expenses
were calculated and any corresponding entries were recorded through the
intercompany accounts as though Envirosource, Inc. has recorded the income tax
amounts on ESII's books.
AEC has not reported a deferred tax asset as a result of recording a valuation
allowance against the assets. For the pro forma financial statement
presentation, the deferred tax asset for ESII was reduced to reflect AEC's
valuation allowance.
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II-5
INDEPENDENT AUDITORS' REPORT
To the Shareholders and Board of Directors
Envirosafe Services of Idaho, Inc.
We have audited the accompanying balance sheets of Envirosafe Services of Idaho,
Inc. as of December 31, 2000 and 1999, and the related statements of operations,
shareholders' equity and cash flows for the years ended December 31, 2000 and
1999. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards
in the United States of America. 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 financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Envirosafe Services of Idaho,
Inc. as of December 31, 2000 and 1999, and the results of their operations and
their cash flows for the years ended December 31, 2000 and 1999 in conformity
with generally accepted accounting principles in the United States of America.
Balukoff, Lindstrom & Co., P.A.
Boise, Idaho
March 15, 2001
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II-6
ENVIROSAFE SERVICES OF IDAHO, INC.
BALANCE SHEETS
($ in 000's)
As of December 31,
------------------
2000 1999
---- ----
ASSETS
Current Assets:
Cash $ 4 $ 4
Investments
3,011 15,575
Intercompany receivable (payable)
14,297 (780)
Accounts receivable 3,049 2,059
Less: Allowance for bad debts (528) (11)
Inventory 198 150
Prepaid expenses & Other 129 161
------- -------
Total current assets 20,160 17,158
Property and equipment, at cost 20,989 21,542
Accumulated depreciation (11,778) (10,375)
------- -------
9,211 11,167
Deferred taxes 5,505 5,432
Other assets 108 182
------- --------
Total assets $34,984 $ 33,939
======= ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,463 $ 1,100
Income tax payable 55 --
Other a/p and accrued 1,004 1,350
------- --------
Total current liabilities 2,522 2,450
Long-term liabilities:
Accrued closure and post-closure obligations 9,874 10,397
Bond payable 8,500 8,500
------- --------
Total liabilities 20,896 21,347
Shareholder's Equity 14,088 12,592
------- --------
Total Liabilities and Shareholder's Equity $34,984 $ 33,939
======= ========
The accompanying notes are an integral part of these financial statements.
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II-7
ENVIROSAFE SERVICES OF IDAHO, INC.
STATEMENTS OF OPERATION
($ in 000's)
Year ended December 31,
2000 1999
---- ----
Revenue $ 14,232 $ 11,613
Cost of goods sold 7,136 5,825
---------- ----------
Gross profit 7,096 5,788
Selling, general and administrative expenses 4,169 5,887
---------- ----------
2,927 (99)
Other income
Loss on Impairment -- (9,599)
Other income 2 3
Investment income 160 618
Interest expense (701) (701)
---------- ----------
(539) (9,679)
Net income before taxes $ 2,388 $ (9,778)
---------- ----------
Income taxes 892 (3,421)
---------- ----------
Net income (loss) $ 1,496 $ (6,357)
========== ==========
The accompanying notes are an integral part of these financial statements.
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II-8
ENVIROSAFE SERVICES OF IDAHO, INC.
STATEMENTS OF SHAREHOLDER'S EQUITY
DECEMBER 31, 2000 AND 1999
($ in 000's)
Additional Accumulated
Common Paid-In Earnings
Stock Capital (Deficit) Total
----- ------- ---------- -----
Balance, December 31, 1998 $ 1 $ 27,165 $ (8,217) $ 18,949
Net Income - - (6,356) (6,357)
- -------------------------------------------------------------------------------------------------------------
Balance, December 31, 1999 $ 1 $ 27,165 $ (14,574) $ 12,592
Net Income - - 1,496 1,496
- -------------------------------------------------------------------------------------------------------------
Balance, December 31, 2000 $ 1 $ 27,165 $(13, 078) $ 14,088
- -------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
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II-9
ENVIROSAFE SERVICES OF IDAHO, INC.
STATEMENTS OF CASH FLOWS
($ in 000's)
Year ended December 31,
------------------------
2000 1999
---- ----
Cash flows from operating activities:
Net income (loss) $ 1,496 $ (6,357)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities
Depreciation and amortization 2,121 2,894
Loss on disposal of assets 215 74
Realized loss on investments - 366
Loss on impairment - 9,599
Changes in operating assets and liabilities
Receivables (474) 1,389
Intercompany receivables (15,076) (3,792)
Inventory (48) 22
Deferred tax asset (72) (3,200)
Prepaid expenses 32 (150)
Accounts payable and accrued expenses (551) 860
Income tax payable 55 --
------- ---------
Net cash provided by (used in) operating activities (12,302) 1,705
Cash flows from investing activities
Purchase of equipment and vehicles (204) (1,350)
Purchase of other asset (57) (140)
Purchases of investments (2,808) (26,583)
Proceeds from the sale of investments 15,371 26,375
------- ---------
Net cash provided by (used in) investing activities 12,302 (1,698)
Net increase in cash -- 7
Cash at beginning of year 4 (3)
Cash at end of year $ 4 $ 4
======= ========
Supplemental disclosure of cash flow information:
Interest paid $ 701 $ 701
The accompanying notes are an integral part of these financial statements.
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II-10
ENVIROSAFE SERVICES OF IDAHO, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1. NATURE OF BUSINESS.
Envirosafe Services of Idaho, Inc. ("ESII") owns approximately 1,760 acres of
land about 50 miles southeast of Boise, Idaho where it operates a hazardous
waste treatment and disposal facility. The site is licensed to provide services
for handling and disposing of PCB and hazardous waste, and certain naturally
occurring radioactive materials ("NORM"). ESII also owns and operates a rail
transfer station located approximately 30 miles from the site. The Idaho
facilities receive waste from various customers located across the United
States. One of the major services provided is a patented US EPA-approved steel
mill waste treatment technology to stabilize and delist certain hazardous wastes
generated by steel mills, allowing economical disposal as non-hazardous
industrial waste. A second major market for ESII is accepting certain NORM waste
under a five year renewable contract with the U.S. Army Corps of Engineers. The
Idaho facilities operate under regulations and permits issued by the IDEQ and
the U.S. Environmental Protection Agency ("US EPA").
ESII is also licensed to use the patented delisting technology at a dedicated
use treatment facility operated under contract to a steel mill in Sterling,
Illinois. The facility is regulated by the Illinois Environmental Protection
Agency.
The accompanying statements of operations have been prepared from the books and
records maintained by the Company and Envirosource, Inc. The statements of
operations may not necessarily be indicative of the results of operations that
would have been obtained if the Company had been operated as an independent
entity. The statements of operations include allocation of certain expenses,
which are material in amount. Such expenses are allocations for corporate
services, overhead and interest.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES.
Cash equivalents.
Cash equivalents are highly liquid investments with maturities of three months
or less when acquired.
Revenue Recognition.
Generally, revenues are recognized as services are performed, and as waste
materials are buried or processed.
Inventory.
Inventory is stated at the lower of cost (first in first out method) or market.
Property and Equipment.
Property and equipment are recorded at cost and depreciated on straight-line and
declining balance methods over estimated useful lives. See Note 4 for major
categories of property and equipment. Lease obligations for which ESII assumes
or retains substantially all the property rights and risks of ownership are
capitalized. Replacements and major repairs of property and equipment are
capitalized and retirements are made when the useful life has been exhausted.
Minor components and parts are charged to expense as incurred.
Land is comprised of property 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. AEC engaged certified engineers
and surveyors to make independent surveys and measure remaining cell volume.
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Permitting Costs.
Landfill permit costs to acquire and maintain landfill permits are deferred and
amortized based on the ratio of cubic yards of disposal capacity utilized to
total cubic yards of disposal capacity.
Accrued Closure and Post-Closure.
The estimated costs of future closure and post-closure monitoring and
maintenance of landfills are amortized or accrued based on the ratio of cubic
yards of disposal capacity utilized to total cubic yards of disposal capacity.
Closure costs are similar to landfill development costs, but are generally
incurred for above ground construction.
Landfill closure costs and post-closure obligations (accrued as liabilities in
the balance sheet) at the ESII landfill were previously secured by an IDEQ
controlled trust fund that invested in U.S. government and government agency
securities. At December 31, 1999 this trust fund totaled $15.2 million. However,
in 1999 ESII obtained permission from the IDEQ to replace this trust fund with a
surety bond obtained from a surety company. The entire $15.2 million balance of
the trust fund was recovered in the first quarter of 2000. Accordingly, the
trust fund was classified as short-term on the accompanying balance sheet at
December 31, 1999. However, the surety company required that ESII pledge $2.5
million in support of the bond. These investments, totaling $2.6 million and
$15.2 million at December 31, 2000 and 1999 were classified as
"available-for-sale," and were carried at amortized cost, which approximates
market value. Interest income and realized gains and losses were recognized in
earnings.
Insurance.
Prior to the acquisition, AEC obtained insurance for ESII consistent with those
insurance policies carried at its other facilities, consistent with industry
standards and meeting applicable regulatory requirements. These insurance
policies include a property, casualty, environmental, and closure/post closure
policies. ESII had previously maintained a bond to secure closure and post
closure financial assurance for the Idaho facility until about March 9, 2001.
This bond was collateralized with $2.5 million in cash held at a commercial
bank. Simultaneous with closing, AEC was able arranged an acceptable financial
assurance for the ESII facility through its insurance carrier. Subsequent to
closing, the Idaho Department of Environmental Quality ("IDEQ") issued a letter
releasing the Frontier Surety Bond in the amount of $15 million. After the
release of this bond by the IDEQ, the $2.5 million in cash, held as collateral
for the bond, was released to AEC.
Use of Estimates.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the financial statements as
well as the reported amounts of revenue and expenses during the reporting
period. ESII used significant estimates in the accompanying financial statements
primarily related to a determination of closure and post closure obligation
costs and recoverability of property and equipment assets. Actual results could
differ from these estimates.
Major Customers.
ESII's major customers, which accounted for more than 10% of revenue for the
year 2000 and 1999 as follows:
- --------------------------------------------------------------------------------------------------------------
2000 1999
---- ----
- --------------------------------------------------------------------------------------------------------------
U.S. Army Corps of Engineers $ 1,751,000 $ --
- --------------------------------------------------------------------------------------------------------------
Nucor Steel $ -- $1,758,000
- --------------------------------------------------------------------------------------------------------------
Environmental Chemical Corporation $ -- $2,160,000
- --------------------------------------------------------------------------------------------------------------
Northwest Steel and Wire $ 2,500,000 $2,500,000
- --------------------------------------------------------------------------------------------------------------
Credit Risk Concentration.
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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 ESII's credit evaluation process. Typically, ESII has not required
collateral for such obligations.
New Accounting Pronouncements.
The Financial Accounting Standards Board has recently issued Statement of
Financial Accounting Standards 137 "Deferral of the Effective Date of FASB
Statement 133." FASB 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. FASB No. 133 is deferred until fiscal quarters
beginning after June 15, 2000. Management believes the adoption of this
statement will have no material impact on ESII's financial statements.
NOTE 3. CASH AND INVESTMENT SECURITIES.
Cash and investment securities at December 31, 2000 and 1999 were as follows (in
thousands):
Market Unrealized
December 31, 2000 Cost Value Gain/(loss)
---- ----- -----------
Cash and cash equivalents $ 4 $ 4 $ --
Securities available for sale 3,011 3,011 --
------------ ----------- -----------
Total $ 3,015 $ 3,015 $ --
============ =========== ===========
December 31, 1999
Cash and cash equivalents $ 4 $ 4 $ --
Securities available for sale 15,575 15,575 --
------------ ----------- -----------
Total $ 15,579 $ 15,579 $ --
============ =========== ===========
Investments in securities available for sale at December 31, 2000 and 1999
consisted of the following (in thousands):
2000 1999
---- ----
Corporate Bonds/Commercial Paper $ 406 $ 371
Treasury Strips 2,573 --
Money market accounts and other 32 15,204
------ -------
$3,011 $15,573
====== =======
2000 1999
---- ----
Investment income is made up of the following components:
Interest revenue $ 160 $ 984
Realized losses -- (366)
------ -------
$ 160 $ 618
====== =======
NOTE 4. PROPERTY AND EQUIPMENT.
Property and equipment at December 31, 2000, and 1999, were as follows (in
thousands):
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2000 1999
---- ----
Construction in progress $ 45 $ 138
Land 160 83
Plant Equipment 18,286 18,823
Buildings and improvements 1,812 1,812
Office equipment 621 621
Vehicles 65 65
20,989 21,542
Less: Accumulated depletion, depreciation and amortization (11,778) (10,375)
------- -------
Property and Equipment, net $ 9,211 $11,167
======= =======
Depreciation expense was $2,121,000 and $2,894,000 for 2000 and 1999
respectively.
NOTE 5. ACCRUED CLOSURE AND POST CLOSURE OBLIGATION.
Closure and post closure obligation accruals at December 31, 2000 and 1999 were
as follows (in thousands):
2000 1999
---- ----
Accrued costs associated with open facilities $8,794 $ 9,317
Accrued costs associated with closed facilities 1,080 1,080
------ -------
Total $9,874 $10,397
====== =======
Closure and post closure obligation includes the accruals associated with
obligations and liabilities of ESII's operating and closed disposal sites and
for corrective actions and remediation. ESII 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. Third party engineering companies make these
estimates.
NOTE 6. LONG TERM DEBT.
Long term debt at December 31, 2000 and 1999 consisted of the following (in
thousands):
2000 1999
---- ----
Industrial revenue bond financings $ 8,500 $ 8,500
Aggregate maturity of future minimum payments under revenue bonds is as follows
(in thousands):
Year Ended
December 31,
2001 $ --
2002 8,500
------
TOTAL $8,500
======
The $8.5 million industrial revenue bond financing carries an effective interest
rate of 8.25% with semi-annual interest payments and principal due November 1,
2002.
NOTE 7. INCOME TAXES.
The components of the income tax provision (benefit) were as follows (in
thousands):
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Year Ended December 31,
2000 1999
---- ----
Current - Federal $ 909 $ (221)
- State 55 --
------ -------
964 (221)
------ -------
Deferred - Federal (72) (3,200)
------ -------
$ 892 $(3,421)
------- -------
The following reconciles between the effective income tax (benefit) rate and the
applicable statutory federal and state income tax (benefit) rate:
Year Ended December 31,
2000 1999
---- ----
Income tax (benefit) - statutory rate $ 836 $(3,422)
State taxes 36 --
Other, net 19 1
------ -------
Federal and state taxes $ 892 $(3,421)
------ -------
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)
Deferred
December 31, 2000 Provision December 31, 1999
----------------- --------- -----------------
Deferred tax assets
Environmental compliance and other site related
costs, principally due to accruals for financial
reporting purposes $ 2,788 $ 290 $ 2,498
Depreciation and amortization
2,258 (97) 2,355
Other 621 (132) 753
--------- -------- ---------
Total gross deferred tax assets $ 5,667 $ 61 $ 5,606
Deferred tax liability
Permitted land (162) 12 (174)
--------- -------- ---------
Total gross deferred tax liabilities (162) 12 (174)
--------- -------- ---------
Net deferred tax assets $ 5,505 $ 73 $ 5,432
========= ======== =========
ESII is a wholly owned subsidiary of Envirosource Technologies, Inc. Under
consolidation policies of Envirosource, Inc., the parent of Envirosource
Technologies, Inc., the amount of income tax expense (benefit) was not shown as
a income tax payable or deferred tax asset on ESII's books. These amounts were
recorded as intercompany transactions and were reported on a consolidated basis
at a straight statutory rate of 35%. No tax provision or M-1 reconciling items
were used to determine the federal and state deferred and current tax expense or
benefit reported on ESII's books. For the purpose of presenting ESII separately,
the deferred and current tax expenses were calculated and any corresponding
entries were recorded through the intercompany accounts as though Envirosource,
Inc. had recorded the income tax amounts on ESII's books.
NOTE 8. SUBSEQUENT EVENT.
On February 2, 2001, American Ecology Corporation, ("AEC" or the "Company")
announced the acquisition of all the capital stock of Envirosafe Services of
Idaho, Inc. a Delaware corporation ("ESII").The acquisition was pursuant a Stock
Purchase Agreement (the "Agreement") by and among the
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Company, its wholly-owned subsidiary American Ecology Environmental Services
Corporation, a Texas corporation, Envirosource Technologies Inc., a Delaware
corporation whose main offices are located at 1155 Business Center Drive,
Horsham, Pennsylvania 19044, (the "Seller") and Envirosource, Inc., a Delaware
corporation, and parent company of Envirosource Technologies Inc. The purchase
agreement is dated February 1, 2001.
Under the terms of the Agreement, the Company paid One Thousand and 00/100
dollars ($1,000.00) in cash for all of the outstanding capital stock of ESII, a
subsidiary of Envirosource Technologies Inc. Through the acquisition of all of
the capital stock of ESSI, the Company acquired assets and assumed liabilities
totaling approximately $20.4 million. The acquisition was accounted for using
the purchase accounting method. The respective board of directors of each
company approved the acquisition. The purchase price was paid from the Company's
working capital. There was no prior business relationship between the Company
and the Seller.
Pursuant to the Agreement, the Company acquired all of the authorized and issued
stock of ESII, thereby obtaining ownership of all ESII assets and liabilities.
The principal ESII assets are a Resource Conservation and Recovery Act ("RCRA")
and Toxic Substances Control Act ("TSCA") permitted waste treatment and disposal
facility located in Grandview, Idaho, a contract to operate a hazardous waste
treatment facility located at an Illinois steel mill site in Sterling, Illinois
("Sterling"), exclusive rights to use a patented hazardous waste treatment
process for steel mill electric arc furnace dust waste within a defined service
territory in the western United States, and a hazardous waste disposal facility
near Bruneau, Idaho previously closed in accordance with RCRA. The assets
acquired totaled approximately $20.4 million on February 2, 2001.
NOTE 9. 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. Based on the
Seller's attempts to sell the facility and not pursuing additional capacity,
ESII and Seller management deemed an impairment review of the ESII's long-lived
assets was required, and performed such a review. The resulting estimate of
undiscounted future cash flows of the ESII's businesses indicated an impairment
of the long-lived assets in use at the ESII waste landfill site. Envirosource
Inc.s' management estimated the fair value of these assets using the estimated
future cash flows, discounted at a rate commensurate with it's long-term
borrowing rates. Accordingly, in December 1999 ESII recorded an impairment loss
of $9,599,361 to reduce the long-lived assets related to the landfill site to
their estimated fair value. The write-down included $6,505,999 of property,
plant and equipment, $3,084,986 of landfill permits, and $8,376 related to other
long-lived assets. In addition, the estimated lives of certain remaining assets
at the Seller's landfill sites were reviewed and subsequently reduced,
corresponding to the estimates of future cash flows used to calculate their fair
value.
NOTE 10. COMMITMENTS AND CONTINGENCIES.
In the ordinary course of conducting business, ESII becomes involved in judicial
and administrative proceedings involving federal, state and local governmental
authorities. There may also be actions brought by individuals or groups in
connection with permitting of planned facilities, alleging violations of
existing permits, or alleging damages suffered from exposure to hazardous
substances purportedly released from ESII or AEC operated sites, and other
litigation. ESII and AEC maintain insurance intended to cover property and
damage claims asserted as a result of its operations.
Periodically management reviews and considers establishing reserves for legal
and administrative matters, or fees expected to be incurred in connection
therewith. At this time, management believes the resolution of these matters
will not have a material adverse effect on ESII's financial position, results of
operations or cash flows.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AMERICAN ECOLOGY CORPORATION
(Registrant)
Date: April 13, 2001 By: /s/ Jack K. Lemley
------------------
Jack K. Lemley
Chairman, Chief Executive Officer, & President
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EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
23.1 Consent of Balukoff, Lindstrom & Co., P.A.