1 ================================================================================ SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-K/A ANNUAL REPORT UNDER SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR FISCAL YEAR ENDED DECEMBER 31, 1996 COMMISSION FILE NUMBER 0-11688 AMERICAN ECOLOGY CORPORATION (Exact name of registrant as specified in its charter) DELAWARE 95-3889638 (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.) 805 W. IDAHO, SUITE #200, BOISE, IDAHO 83702-8916 (Address of Principal Executive Offices) (Zip Code) Registrant's telephone number, including area code: (208) 331-8400 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 November 14, 1997, Registrant had outstanding 8,379,813 shares of its Common Stock. ================================================================================ 2 EXPLANATION OF AMENDMENT The Registrant, American Ecology Corporation (the "Company"), filed a Registration Statement on Form S-3 on September 9, 1997 with the Securities and Exchange Commission. In the course of reviewing such Registration Statement, the Commission made comments on the Form 10-K as filed with the Commission on March 25, 1997. Based on these comments, the Company is hereby amending Part I, Items 7 and 8 of its Form 10-K. All amended items are stated as of December 31, 1996. 2 3 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. CAPITAL RESOURCES AND LIQUIDITY The Company has incurred recurring losses from operations, had a working capital deficit of $16,693,000 and $16,115,000 as of December 31, 1996 and December 31, 1995, and continues into a second year experiencing difficulty paying its on-going obligations as they become due. While the Company cannot be certain about its ability to improve short-term operating results, the Company is confident that the reduction in operating expenses other than interest which it anticipates from the actions discussed below plus its new bank loan terms providing for accrual of interest during 1997 and 1998 will enable the Company to meet its obligations as they become due for the balance of 1997. The new bank loan terms described below and in note 7 to the Consolidated Financial Statements reduce the Company's cash requirements in 1997 by approximately $5.0 million. The Company's financial statements as of December 31, 1996, contain adjustments to the asset carrying amounts for the Winona facility for asset liquidation and the accounting for the impairment of the Winona facility. Management's actions and plans to address these issues are as follows: Credit Agreement A Third Amended and Restated Credit Agreement was executed on December 31, 1996, but dated effective October 31, 1996 between the Company and its bank lender, Texas Commerce Bank. This Credit Agreement extends the maturity of the credit agreement to December 31, 2000, and modifies certain other terms. A description of the Credit Agreement as so amended is set forth in Note 7 to the Consolidated Financial Statements. As of December 31, 1996, the Company had borrowed all amounts available under its Credit Agreement except for $6.9 million in interest to be accrued in 1997 and 1998 and added to the loan balance. Equity Investments Effective October 31, 1996 the Company completed a definitive agreement for $3,000,000 in Series E, Redeemable Convertible Preferred Stock. Two of the Company's directors and shareholders agreed to purchase the 300,000 non-voting preferred shares with a stated value and liquidation preference of $10.00 per share, with a right to receive dividends in common shares of the Company at 11.25% per annum. This was an equity condition prescribed by the Third Amended and Restated Credit Agreement. In order to meet the second equity condition and give all common shareholders an ability to participate in increased equity, the Company will use its best efforts to register a Rights Offering on or before June 1, 1997. A description of the preferred stock and Rights Offering is set forth in Note 8 to the Consolidated Financial Statements. National Stock Market Exchange On March 24, 1997 the Company announced it has appealed a ruling by the NASDAQ Stock Market, Inc., the exchange on which the Company's common stock is traded, that the Company needed prior approval of its shareholders before issuing its Series E Preferred Stock to directors of the Company in November 1996. The Series E Preferred Stock was issued to the directors as a central part of the debt restructuring agreement reached with the Company's lender, Texas Commerce Bank, also in 1996. The NASDAQ ruling provided that the Company's stock would be de-listed from the NASDAQ National Market effective March 21, 1997. Under NASDAQ rules, the Company's appeal will stay, or prevent, de-listing from the National Market until the appeal is heard and decided. The Company believes that the NASDAQ ruling was erroneous and has appealed to a committee of the NASDAQ Board of Governors in accordance with NASDAQ rules and has requested an oral hearing in the matter. 3 4 Additionally, as previously planned, the Company intends to submit the Series E issuance to a vote of its shareholders at its May 22, 1997 annual shareholders meeting to be held in Boise, Idaho. Strategic Plan The Company has adopted a strategic plan focusing on its low-level radioactive waste disposal and processing operations and its hazardous waste disposal and processing operations as separate operations. The Company is continuing to improve as reorganized under those respective operating divisions. The reorganization was to facilitate potential strategic alliances with other companies that may provide additional sources of capital and open greater opportunities. Senior Management Changes The Company has continued to make substantial senior management changes. These include installation of a new Chief Operating Officer for US Ecology, a new General Counsel, and new managers to head both Chemical and the LLRW and hazardous waste operations. Measures to Reduce Costs Management has been implementing a very aggressive plan since 1995, where the Company has sized up its position to the surrounding market, where customer potentials have been measured, where managing the Company can be improved and as a result, unprofitable divisions have been either eliminated or reorganized to be efficient and effective. The reorganized divisions have been dissected and analyzed to measure break-even points, maximum revenues from customers, and optimum operating levels to maximize profitability. These variables of operation for the Company have been adjusted and measured to fit the changing times of the environmental industry. As discussed in Item 1. Business, the waste generators are generating less waste now due to both Federal and State constricting the areas in the regulations where generators were relaxed about disposal practices. These environmental proceedings and regulations have forced all of the environmental companies to evaluate their part in the industry. The outcome in many areas is difficult to forecast, but the management of the Company and the strategic plans include the flexibility to adapt to these industry changes. The plan has required personnel reductions, and some individuals have also been reassigned to other projects. The most significant cost reducing measure recently taken was the closure of the Winona facility. There is a significant impact to both the income for 1996 as well as a reduction to equity for the accounting of this site closure. The plan provides for the writedown of property, plant, and equipment for $4.4 million, a writedown of permits for $2.4 million and closure of the site by proper application of both Federal and State environmental regulations determined to be $1.5 million. The total cost for closing the Winona facility is estimated to be $7.4 million. It is estimated that the future cost savings by closing this site will be about $3.5 million per year. Since the acquisition of this site, December 31, 1994, this facility has incurred operating losses of $11.4 million and $8.5 million for the years ended December 31, 1996 and December 31, 1995. In carrying out the disposal of the Winona facility, the Company will complete all of its legal obligations for the site closure and post closure. The Company will make every effort to clean the site and the equipment to maximize the proceeds from the sale of these assets. There can be no assurance that the sale of the assets will result in a favorable outcome, and there may still be a need for the Company to supply additional funding for the Winona site through the closure and post-closure periods. The Company continues to evaluate the viability of certain other operations, and their current potential to perform at an acceptable level of profitability. In the plan, capital expenditures were limited in 1996 to the development of the Ward Valley Project, certain regulatory obligations, and required operational repairs. Again, in 1997, capital expenditures will be limited in the 4 5 same way, with the addition of the new cell constructed at TECO in Robstown, Texas for non-hazardous industrial waste. The Company believes its plan will improve both cost structure and operating results. However, considering the Company's recent losses and insufficient cash flow from operations, there can be no assurance that this plan will resolve the Company's liquidity problem in a timely fashion. The Company intends to raise additional capital through a Rights Offering to its shareholders on or before June 1, 1997. There can be no assurance, however, that any such rights offering will provide sufficient capital to support operations. In any event, the Company may experience increasing cash flow problems that could cause the Company to materially reduce the current level of its operating activities. For the year ended December 31, 1996, the Company raised $3,000,000 in cash from the sale of Series E Redeemable Convertible Preferred Stock, generated cash from operations of $5,170,000, spent $1,677,000 for capital expenditures excluding site development costs, invested $2,107,000 in site development costs for the Ward Valley facility and incurred capitalized interest of $3,558,000 related to the Ward Valley and Butte facilities. Future Considerations As a result of the changes to its management and operations in 1996, and the implementation of the business plan, the Company believes that the future operating results of its existing businesses will improve, although no assurances can be given that such improvements will occur. The Company has completed negotiations for the insurance claims relating to the July 1994 fire at the Recycle Center in Oak Ridge, Tennessee. In May 1996, the Company received $1,811,000 as the final portion of the claim, which is being used to replace property and equipment damaged in the fire. In April 1996, the Company received a letter from the State of Tennessee Department of Environment and Conservation division of Radiological Health. This letter specified that they had accepted the Company's plan to dispose of the legacy waste on site at the Oak Ridge, Tennessee facility by December 31, 1997. The Company signed a contract February 24, 1997 with another disposal company that is licensed to accept this waste. This arrangement will provide for a considerable cost savings to dispose of the legacy waste, however, it is still estimated that this cost will be $6.2 million. In addition, the Company expects to receive federal income tax refunds of approximately $740,000 during the third quarter of 1997. A Rights Offering will be made on or before June 1, 1997. This offering will offer each shareholder the opportunity to buy an additional share of stock for each one owned at one dollar. This will make available, by full subscription, the possibility to raise an additional $8,000,000 of capital. The Company is exploring as many avenues as possible to increase its market share. It was just awarded a contract with the Midwest Compact in Ohio which has potential to grow to an attractive size. The Company offered an unsolicited proposal in the second quarter of 1995 to the Department of Energy ("DOE") to dispose of large volumes of LLRW from the DOE's Hanford site into the Company's Richland, Washington facility which is located on the Hanford Reservation. Although the Company believed and still believes the economics of its proposal should be very attractive to the DOE, the DOE rejected the Company's proposal. The Company will continue to pursue this opportunity. 5 6 RESULTS OF OPERATIONS - 1996 VS. 1995 The Company reported a net loss of $11,407,000 for the year ended December 31, 1996 compared to net loss of $48,903,000 for 1995. The 1996 results included pre-tax charges totaling $7,563,000 for unusual events and non-recurring adjustments of which $7,451,000 related to the Winona facility. During 1996 the Company began clean-up work at the Winona facility and expended approximately $750,000 for this effort. Exclusive of material unusual events and non-recurring accounting adjustments in both periods, the Company had a pre-tax loss of $3,329,000 in 1995 compared to a pre-tax loss of $4,042,000 in 1996. Approximately $14,015,000 of the adjusted loss from operations for 1996, as compared to $35,959,000 for 1995, is attributable to the operating results of the Recycle Center and Winona facility that were acquired in September and December 1994, respectively. These losses have been offset by the profitability of the other site facilities. The Winona facility incurred major losses since the acquisition, therefore, management recorded an impairment loss in accordance with FASB 121. The Company will follow both Federal and State environmental regulations for the closure of the Winona facility. The following table sets forth items in the Statements of Operations for the three years ended December 31, 1996, as a percentage of revenue: Percentage of Revenues for the Year Ended December 31, ----------------------- 1996 1995 1994 ---- ---- ---- Revenues 100.0% 100.0% 100.0% Operating costs 92.2 104.8 75.4 -------- -------- -------- Gross profit (loss) 7.8 (4.8) 24.6 Selling, general and administrative expenses 23.4 24.2 17.2 Impairment losses on long-lived assets 14.9 48.7 -- -------- -------- -------- Income (loss) from operations (30.5) (77.6) 7.4 Other (income) expense, net 4.6 2.4 (0.4) Interest expense 0.0 0.0 0.0 -------- -------- -------- Income (loss) before income taxes (25.9) (80.0) 7.8 Income tax expense (benefit) (3.0) (8.0) 2.5 -------- -------- -------- Preferred stock dividends 0.9 0.1 -- -------- -------- -------- Net income (loss) to common shareholders (23.8)% (72.1)% 5.3% ======== ======== ======== Revenues Revenues for 1996 were $49,972,000, a 26% decrease from 1995 revenues of $67,895,000. In 1996, there were two operating divisions; chemical and LLRW. The chemical division revenues were $23,734,000 in 1996 compared to $41,272,000 in 1995. A major reason for this decrease is a result of Winona facility revenues decreasing 47% compared to 1995, and Winona being in a state of suspended operations from August 1996. Even though there was a loss in revenue, the result is a savings by not incurring the high operation costs that have always prevented operating with a profit at the Winona site. The Winona site was purchased from Gibraltar Chemical on December 31, 1994 and has never had a profitable month. The Beatty, Nevada site is the other major factor in the decrease in revenues, which tumbled by 57% from 1995 as a result of the high Nevada State disposal and burial fees. Management has negotiated a lower fee schedule for 1997, and every attempt is being made to win back customers who found lower priced disposal in California and Arizona. 6 7 The LLRW division revenues were $26,238,000 in 1996, compared to $26,623,000 for 1995. Revenues of the LLRW division should increase when the Butte, Nebraska facility is licensed. The Company's current contract with the CIC specifies certain project milestones to be achieved in order for generator funding of development to proceed. The first milestones, which were under control of the Company, were completed by July 1995. The remaining four milestones are actions by the State of Nebraska. The Company anticipates that notice of the state's intent to issue a license decision will occur in the fall of 1997. The remaining three milestones are issuance of a draft license decision, a final license decision and completion or termination of the project, whichever occurs first. The Company anticipates that a final license decision will be made by the end of 1999. After a construction period of approximately 18 months, the facility would begin accepting waste and generating revenue. This is currently estimated to occur in 2001. The CIC currently reimburses the Company for its expenses in regard to the project monthly. Revenues from the CIC were $5.7 million, $8.1 million, and $9.8 million in 1996, 1995, and 1994, respectively. Revenues for 1996 from the CIC decreased because the Company ceased including in revenues reimbursements of State of Nebraska costs that were billed to the Company and reimbursed to it by CIC. Starting in 1996, the Company viewed itself as merely a pass through conduit for these revenues and costs. LLRW disposal revenues decreased 8% in 1994 due principally to the implementation of the Federal Low-Level Radioactive Waste Policy Amendments Act of 1985 (the "Low-Level Act") on January 1, 1993. The Low-Level Act together with state regulatory initiatives resulted in the inactivity of the Beatty, Nevada LLRW facility and the regulatory restrictions placed on the Richland, Washington facility and caused unusually large volumes of waste receipts at the end of 1992 which were not buried and recognized as revenues until the first quarter of 1993. Exclusive of the carryover effect of volumes received in 1992, 1994 disposal revenues increased by approximately 37% compared to 1993 due to penetration of the NARM (naturally occurring or accelerator produced radioactive materials) waste disposal market. When the Company entered into this market in 1992, there was no cost effective competitor for NARM business. In 1994 Envirocare began accepting NARM for disposal at costs less than the Company's due to lower disposal fees and shipping and packaging costs. In 1994, the Company entered the LLRW on-site remediation business generating approximately $1,900,000 of revenues by providing technical and remedial services for several projects in various regions of the country. Additionally, the acquisition of the Recycle Center in September 1994, contributed approximately $2,800,000 in treatment, processing, and recycling revenues. While the revenues have declined in both 1996 and 1995, the Company has been following closely its plan to clean up the non-profitable businesses and focus on new strategic alliances with other companies that will increase both revenues and profitability in the future. The last two years have resulted in decreases in revenue, but every effort is now being focused on winning new customers, and regaining the confidence of current and previous customers. Operating Costs Operating costs in fiscal 1996 decreased $25,053,000, or 35%, as compared to 1995, including a decrease of $2.8 million in nonrecurring adjustments listed in the table on the following page. A large portion of the decrease related to the decrease in revenues at the Winona facility, which was closed in 1996, and at the Beatty facility. The operating costs of these two facilities decreased by $13.5 million. However, even though overall revenues decreased 26% from 1996 to 1995, there is a larger drop in the actual operating expenses of 35% for the same period. Aside from the large decreases in operating costs for the Beatty and Winona facilities, there was marked improvement from the site managers making conscious decisions for the Company. These decisions were considering how they could best manage their site location and be accountable for the activities there., which had previously been the responsibility of the corporate office. In addition corporate headquarter expenses allocated to the operating divisions were decreased by $1.5 million in 1996 from 1995. Both variable and fixed operating costs were reduced in 1996 from 1995. The fixed costs in 1996 were $4,543,000, a decrease of $1,409,000 from 1995 at $5,952,000. Variable costs decreased dramatically also. In 1996, variable costs were $20,701,000 compared to $34,656,000 in 1995. Variable costs were trimmed in every area possible. The managers of each site analyzed and corrected items such as idle vehicle and equipment rental, use of disposal supplies, lab equipment and supplies, parts, consulting, and subcontracted costs including 7 8 transportation. As a percentage of revenues, operating costs were 92%, 105%, and 75% for 1996, 1995, and 1994, respectively. The following table sets forth unusual events and non-recurring accounting adjustments which affected operating costs for 1996, 1995, and 1994, respectively. Increase (Decrease) in Operating Costs (in thousands) -------------- 1996 1995 1994 ---- ---- ---- Deferred site maintenance accrual adjustments due to changes in current cost estimates $ -- $ -- $ (3,202) Settlements of environmental insurance claims on closed -- -- (505) sites Deferred site maintenance accrual reversal, settlement with the Commonwealth of Kentucky, and estimated PRP settlements all regarding remedial liability and indemnity for the closed Maxey Flats site -- -- (518) Writedowns of certain permitting costs and airspace cost 135 76 413 Deferred site maintenance accrual adjustment due to change in the discount rate used to compute present value -- 1,396 -- Writedowns of design fees/facility costs due to abandonments -- 320 -- Cell development cost amortization adjustment due to changes in cell utilization -- 204 -- Settlement of variances from collective bargaining agreement - Recycle Center -- 447 -- Remedial investigation costs - Beatty, Nevada site -- 491 -- ------------ --------- ---------- Total unusual events and non-recurring adjustments included in operating costs $ 135 $ 2,934 $ (3,812) ============ ========= ========== Exclusive of these unusual events and non-recurring adjustments, operating costs for 1996, 1995, and 1994 would have been $46,211,000, $68,195,000, and $57,993,000, or 92%, 81% and 84% of revenues, respectively. In 1995, exclusive of these unusual events and non-recurring adjustments, the operating costs as a percentage of revenues for the Recycle Center and the Winona facility were 126% and 124%, respectively, and all other locations combined were 89%. Selling, General and Administrative Expenses Selling, general and administrative expenses ("SG&A") for 1996 were $11,682,000 compared to $16,411,000 for 1995. Included in SG&A for the 1996 period are charges for several unusual events and non-recurring accounting adjustments which increased SG&A by $372,000. In 1995 the $16,411,000 of SG&A included $2,942,000 of unusual and non-recurring expenses. Of these nonrecurring expenses, $1,163,000 was severance pay for the management personal replaced in the 1995 change in management, $1,241,000 related to the net loss on the Houston office space lease due to movement of the Company's headquarters from Houston to Boise, and $621,000 was the write-off of deferred costs and a claim for retirement plan restitution which the Company's new management could not verify the validity of. These items were offset by an $83,000 valuation adjustment in 8 9 securities held by the Company's insurance subsidiary. On a site by site study many of the SG&A costs remained too high for the decrease of revenues. In 1996, the Beatty facility revenues were only 43% of 1995 revenues, while SG&A costs remained at 66% of 1995 SG&A costs. The other sites' percentage of SG&A is not as high as the Beatty facility, but they are all too high in proportion to the decrease of revenues. Exclusive of these charges, SG&A was $11,682,000 in 1996 compared to $13,469,000 in 1995, a decrease of $1,787,000 from 1995. The corporate SG&A was reduced considerably from $13,710,000 in 1995 to $7,712,000 in 1996. Both years include SG&A legal costs. However, the legal fees were reduced considerably in 1996. Included in SG&A costs for 1996 are $1,559,000 of corporate legal costs. Excluding the $2,942,000 in nonrecurring SG&A costs in 1995 discussed above, the SG&A costs increased in 1995 from 1994 by $1,787,000 due to an $861,000 increase in legal fees and a $420,000 increase in insurance premiums, which were only partially offset by a decrease in other items. Investment Income Net investment income is comprised of interest income earned on various debt securities, certificates of deposit and other interest bearing deposits, and dividend income and capital gains and losses earned on the Company's preferred stock portfolio. This portfolio is principally the Company's captive insurance investments reinsuring the present value of certain long-term closure and post-closure liabilities. The amount of investment income in 1996 decreased $200,000 from 1995 due principally to a lower weighted average of outstanding investments in 1996 as compared to 1995, and in December 1996, the Company terminated the trustee of the Company's captive insurance investment portfolio, and appointed a new trustee, Merrill Lynch Trust Company of America. This change of trustees was an immediate cost of approximately $80,000 but will provide savings in fees of about $220,000 per year in the future. Interest Expense Interest Expense Interest expense is the total interest expense incurred by the Company on outstanding indebtedness less capitalized amounts. In 1996, 1995, and 1994, the Company incurred $3,558,000, $3,281,000, and $968,000, respectively, in interest cost, all of which was capitalized for the development of the Company's LLRW facilities in California in accordance with Statement of Financial Accounting Standards No. 34, Capitalization of Interest Cost. Substantially all of the interest cost incurred for 1996, 1995, and 1994 related to borrowings under the Company's Credit Agreement with its bank lender. Income Taxes The Company's effective income tax (benefit) rates were (12)%, (10)%, and 32%, for the fiscal years 1996, 1995, and 1994, respectively. The effective benefit rate of (12)% in 1996 does not reflect any recognition of future tax benefits on timing differences or net operating loss carryforwards. Financial Assurance and Site Maintenance The Company operates its hazardous waste disposal sites under RCRA of 1976 ("RCRA") permits. The LLRW sites are operated under licenses from state and, in some cases, federal agencies. When these facilities reach capacity, or lease or license termination dates, as the case may be, they must be closed and maintained for a period of time prescribed by law or by license. In the case of the RCRA-permitted hazardous sites, federal regulation requires that operators demonstrate the financial capability to close sites on an immediate, unscheduled (worst-case) basis. The estimated costs of such a closure are set forth in the operator's RCRA closure/post-closure plan. To secure closure/post-closure obligations of its hazardous waste disposal sites under federal and state regulations, the Company has provided letters of credit, certificates of insurance, and corporate guarantees as financial assurance. Cash and investment securities totaling $16,394,000 and $13,770,000 at December 31, 1996 and 1995, respectively, have been pledged as collateral for the Company's closure/post-closure obligations, performance of a Remedial Investigation and Feasibility Study ("RI/FS") and performance of corrective action at the closed Sheffield, Illinois chemical waste facility, compliance with the TNRCC requirements related to a deepwell at the Company's Robstown, Texas hazardous disposal site, closure costs for the Beatty, Nevada LLRW 9 10 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 1996, the Company spent approximately $138,000 on remediation at the closed Sheffield hazardous disposal site. The nature of the hazardous material handled by the Company and its subsidiaries could give rise to substantial damages if spills, accidents or migration of hazardous material occurs. The occurrence of such events could have a material adverse effect upon the Company's liquidity and operating results. Corporate Development Considerations See "Business - Low-Level Radioactive Waste Services - Disposal Services Proposed Ward Valley, California Facility" and "Proposed Butte, Nebraska Facility" for a description of the Company's facilities, and the impact of such facilities and other future considerations on the Company's consolidated financial condition and results of operations. 10 11 INDEPENDENT AUDITORS' REPORT To the Shareholders and Board of Directors American Ecology Corporation We have audited the accompanying consolidated balance sheet of American Ecology Corporation and subsidiaries as of December 31, 1996, and the related consolidated statements of operations, shareholders' equity, and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of American Ecology Corporation and subsidiaries as of December 31, 1996, and the results of their operations and their cash flows for the year then ended in conformity with generally accepted accounting principles. The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the Company has suffered recurring losses from operations and writedowns of assets and had a working capital deficiency of $16.7 million as of December 31, 1996. During 1996, the Company obtained capital contributions from certain directors and restructured its Credit Agreement with the Bank; however, the Company continues to have limited cash resources available and has substantial obligations that are due in the future. Under the terms of the Credit Agreement, the bank may accelerate the maturity of the debt in the event of violation of any covenant or of any occurrence of a default of the Credit Agreement. If the Company is unable to remain in compliance with the terms of the Credit Agreement or obtain waivers in the event of a default and the bank accelerates maturity of the Credit Agreement, the Company does not have adequate financial resources to extinguish the loan and the Company's operations may be negatively impacted. The Company is involved in various significant permitting efforts, claims, lawsuits and other administrative matters which are uncertain at this time. The foregoing matters raise substantial doubt about the Company's ability to continue as a going concern. Management's plans regarding those matters also are described in Note 1. The accompanying consolidated financial statements do not include any adjustments relating to the recoverability and classification of asset carrying amounts or the amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern, or adjustments, if any, that may be necessary as a result of the outcome of the matters discussed above. Balukoff, Lindstrom & Co., P.A. Boise, Idaho March 17, 1997 11 12 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To American Ecology Corporation: We have audited the accompanying consolidated balance sheet of American Ecology Corporation (a Delaware Corporation) and subsidiaries as of December 31, 1995, and the related consolidated statements of operations, shareholders' equity and cash flows for each of the two years in the period ended December 31, 1995. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of American Ecology Corporation and subsidiaries as of December 31, 1995, and the results of their operations and their cash flows for the two years in the period ended December 31, 1995, in conformity with generally accepted accounting principles. The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the Company has incurred significant losses from operations and writedowns of assets. At December 31, 1995, the Company had a working capital deficiency of $16.1 million. During 1995, the Company obtained capital contributions from certain of its directors and others and restructured its Credit Agreement with the bank; however, the Company continues to have limited cash resources available and has substantial obligations that are due in the future. Under the terms of the Credit Agreement, the bank may accelerate the maturity of the debt in the event of violation of any covenant of the Credit Agreement or if a material adverse event is deemed by the bank to have occurred. If the Company is unable to remain in compliance with the terms of the Credit Agreement or obtain waivers in the event of a default and the bank accelerates maturity of the Credit Agreement, the Company does not have adequate financial resources to extinguish the loan and the Company's operations may be negatively impacted. As discussed in Note 13 to the consolidated financial statements, the Company is involved in various significant permitting efforts, claims, lawsuits and other administrative matters which are uncertain at this time. The foregoing matters raise substantial doubt about the Company's ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 1. The accompanying consolidated financial statements do not include any adjustments relating to the recoverability and classification of asset carrying amounts or the amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern, or adjustments, if any, that may be necessary as a result of the outcome of the matters discussed above. ARTHUR ANDERSEN LLP Houston, Texas April 11, 1996 12 13 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA AMERICAN ECOLOGY CORPORATION CONSOLIDATED BALANCE SHEETS ($ IN 000'S EXCEPT PER SHARE AMOUNTS) As of December 31, ------------------ 1996 1995 ---- ---- ASSETS Current Assets: Cash and cash equivalents $ 185 $ 229 Investment securities 410 523 Receivables, net of allowance for doubtful accounts of $1,155 and $1,322, respectively 10,396 16,938 Income taxes receivable 740 5,339 Insurance claim receivable -- 2,538 Prepayments and other 949 1,675 -------------- -------------- Total current assets 12,680 27,242 Cash and investment securities, pledged 16,394 13,770 Property and equipment, net 14,255 21,764 Deferred site development costs 53,030 47,364 Intangible assets relating to acquired businesses, net 462 486 Other assets 2,206 3,499 -------------- -------------- Total Assets $ 99,027 $ 114,125 ============== ============== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Revolving credit loan $ -- $ 6,416 Current portion of long term debt 503 780 Accounts payable 10,470 13,376 Accrued liabilities 16,876 21,022 Deferred site maintenance, current portion 1,524 1,763 -------------- -------------- Total current liabilities 29,373 43,357 Long term debt, excluding current portion 36,202 28,357 Deferred site maintenance, excluding current portion 19,848 20,387 Commitments and contingencies (Note 13) Shareholders' equity: Convertible preferred stock, $.01 par value, 1,000,000 shares authorized, none issued -- -- Series D cumulative convertible preferred stock, $.01 par value, 105,264 authorized, 105,264 shares issued and outstanding 1 1 Series E redeemable convertible preferred stock, $10.00 par value, 300,000 authorized, 300,000 and 0 shares issued and outstanding 3,000 -- Common stock, $.01 par value, 20,000,000 authorized, 8,010,017 and 7,825,628 shares issued and outstanding, respectively 80 78 Additional paid-in capital 46,971 46,762 Unrealized gain (loss) on securities available-for-sale (477) (718) Retained earnings (deficit) (35,971) (24,099) -------------- -------------- Total shareholders' equity 13,604 22,024 -------------- -------------- Total Liabilities and Shareholders' Equity $ 99,027 $ 114,125 ============== ============== The accompanying notes are an integral part of these financial statements. 13 14 AMERICAN ECOLOGY CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS ($ IN 000'S EXCEPT PER SHARE AMOUNTS) Year Ended December 31, ----------------------- 1996 1995 1994 ---- ---- ---- Revenues $ 49,972 $ 67,895 $ 71,891 Operating costs 46,076 71,129 54,181 -------------- -------------- -------------- Gross profit (loss) 3,896 (3,234) 17,710 Selling, general and administrative expenses 11,682 16,411 12,362 Impairment loss on long-lived assets 7,451 33,048 -- -------------- -------------- -------------- Income (loss) from operations (15,237) (52,693) 5,348 Investment income (932) (582) (287) (Gain) or loss on sale of assets (55) 1,836 -- Other expense (1,326) 821 -- Interest expense -- -- -- -------------- ------------- -------------- Income (loss) before income taxes (12,924) (54,318) 5,635 Income tax expense (benefit) (1,517) (5,415) 1,785 -------------- -------------- -------------- Net income or (loss) (11,407) (48,903) 3,850 Preferred stock dividends 465 88 -- -------------- ------------- -------------- Net income (loss) available to common shareholders $ (11,872) $ (48,991) $ 3,850 ============== ============= ============== Net income (loss) per share, primary $ (1.50) $ (6.26) $ .49 ============== ============= ============== Dividends paid per common share $ -- $ .025 $ .10 ============== ============= ============== The accompanying notes are an integral part of these financial statements. 14 15 AMERICAN ECOLOGY CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS ($ 000'S) Year Ended December 31, ----------------------- 1996 1995 1994 ---- ---- ---- Cash flows from operating activities: Net income (loss) $ (11,407) $ (48,903) $ 3,850 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Impairment loss on long-lived assets 7,451 33,048 -- Depletion, depreciation and amortization 5,383 7,319 6,279 Deferred income taxes -- 816 3,044 (Gain) loss on sale of assets (58) 1,386 (65) Debt restructure fees 265 -- -- Realized loss on sales of securities available-for-sale -- 101 -- Changes in assets and liabilities, excluding effects of acquisitions: Receivables 6,542 12,655 (4,534) Income taxes receivable 4,599 (5,339) -- Proceeds from insurance claim 2,538 -- -- Investment securities classified as trading (582) (354) 472 Other assets (850) (1,016) (411) Deferred site maintenance (778) (40) (7,041) Other liabilities (7,933) 2,923 (3,394) ---------- ------------ ------------ Total adjustments 16,577 51,499 (5,650) ---------- ------------ ------------ Net cash provided by (used in) operating activities 5,170 2,596 (1,800) ---------- ------------ ------------ Cash flows from investing activities: Capital expenditures, excluding site development costs (1,677) (2,320) (3,714) Site development costs, including capitalized interest (3,982) (6,125) (4,321) Payments for businesses acquired -- -- (27,871) Proceeds from sales of assets 31 1,080 299 Net proceeds from sales of investment securities (1,993) 214 -- Transfers to (from) cash and investment securities, pledged 384 (241) 885 ---------- ------------ ------------ Net cash used in investing activities (7,237) (7,392) (34,722) ---------- ------------ ------------ Cash flows from financing activities: Proceeds from issuances and indebtedness 29,008 26,640 56,555 Payments of indebtedness (29,985) (26,430) (23,739) Proceeds from common stock issued -- 98 301 Proceeds from preferred stock issued, net 3,000 4,759 -- Liquidation of shareholders' rights -- (78) -- Payment of cash dividends -- (195) (780) ---------- ------------ ------------ Net cash provided by (used in) financing activities 2,023 4,794 32,337 ---------- ------------ ------------ Decrease in cash and cash equivalents (44) (2) (4,185) Cash and cash equivalents at beginning of year 229 231 4,416 ---------- ------------ ------------ Cash and cash equivalents at end of year $ 185 $ 229 $ 231 ========== ============ ============ $ 123 Supplemental disclosures of cash flow information: Cash paid during the year for: Interest, net of amounts capitalized $ -- $ -- $ -- Income taxes $ -- $ -- $ 123 The accompanying notes are an integral part of these financial statements. 15 16 AMERICAN ECOLOGY CORPORATION CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY ($ IN 000'S) 8.375% 11.25% SERIES D SERIES E UNREALIZED CUMULATIVE REDEEMABLE GAIN (LOSS) CONVERTIBLE CONVERTIBLE ADDITIONAL SECURITIES RETAINED PREFERRED PREFERRED COMMON PAID-IN AVAILABLE- EARNINGS STOCK STOCK STOCK CAPITAL FOR-SALE (DEFICIT) ----- ----- ----- ------- -------- --------- Balance, December 31, 1993 $ -- $ -- $ 78 $ 41,469 $ -- $ 22,017 Net income -- -- -- -- -- 3,850 Common stock issuances -- -- -- 301 -- -- Income tax benefit of stock options exercised -- -- -- 67 -- -- Dividends - common stock -- -- -- -- -- (780) Unrealized gain on securities available-for-sale -- -- -- -- 43 -- -------- -------- ------- -------- -------- -------- Balance, December 31, 1994 $ -- $ -- $ 78 $ 41,837 $ 43 $ 25,087 Net loss -- -- -- -- -- (48,903) Preferred stock issuances 1 -- -- 4,898 -- -- Common stock issuances -- -- -- 98 -- -- Income tax benefit of stock options exercised -- -- 7 -- -- -- Liquidation of shareholders' rights -- -- -- -- -- -- Dividends - common stock -- -- -- -- -- (195) Dividends - preferred stock -- -- -- -- -- (88) Unrealized loss on securities available-for-sale -- -- -- -- (761) -- -------- -------- -------- -------- -------- -------- Balance, December 31, 1995 $ 1 $ -- $ 78 $ 46,762 $ (718) $(24,099) Net loss Preferred stock issuances -- 3,000 -- -- -- (11,407) Common stock issuances -- -- 2 209 -- -- Income tax benefit of stock options exercised -- -- -- -- -- -- Liquidation of shareholders' rights -- -- -- -- -- -- Dividends - common stock -- -- -- -- -- -- Dividends - preferred stock -- -- -- -- -- (465) Unrealized gain (loss) on securities available-for-sale -- -- -- -- -- -------- -------- -------- -------- -------- -------- Balance, December 31, 1996 $ 1 $ 3,000 $ 80 $ 46,971 $ (477) $(35,971) ======== ======== ======== ======== ======== ======== Note: Convertible Preferred Stock is not shown above because no shares have been issued. The accompanying notes are an integral part of these financial statements. 16 17 AMERICAN ECOLOGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Organization and Business American Ecology Corporation (a Delaware Corporation) and its subsidiaries ("the Company") provide processing, packaging, transportation, remediation and disposal services for generators of hazardous waste and low-level radioactive waste. The Company services the needs of hazardous waste generators nationally, but larger market shares in the Gulf and West Coast regions of the country at its hazardous waste landfill disposal sites in Robstown, Texas and Beatty, Nevada and until August 1996, a commercial deepwell disposal facility in Winona, Texas. The Company services the needs of low-level radioactive waste (LLRW) generators in the Northwest region and Rocky Mountain Compact at its rate regulated LLRW facility located near Richland, Washington and provides LLRW processing and recycling services to LLRW waste generators in the Mid-West and East Coast regions of the country at its Oak Ridge, Tennessee facility. Business Conditions. The Company has incurred significant losses from operations during the last two years, 1996 and 1995, had a working capital deficit of $16.7 million as of December 31, 1996. Furthermore, as a result of the above conditions and other circumstances discussed in Note 4, the Company recorded a $7.4 million impairment loss on long-lived assets of the Winona facility during 1996. The estimated unaudited results for the first quarter of 1997 is a net loss of approximately $1.8 million. Although the Company obtained capital contributions of approximately $3.0 million from certain of its directors and others, restructured its bank Credit Agreement extending its maturity to December 2000, and received certain new waivers for financial and other covenants in the Credit Agreement, from the bank, for 1996 the Company continues to have very limited cash resources available and is currently experiencing difficulty paying its on-going obligations as they become due. As discussed in Note 7, available borrowings under the Credit Agreement were approximately $6.9 million as of December 31, 1996. Under the terms of the Credit Agreement, the bank may accelerate the maturity of the debt in the event of violation of any financial covenant of the Credit Agreement or if a material adverse event is deemed by the bank to have occurred. If the Company is unable to remain in compliance with the terms of the Credit Agreement or obtain waivers in the event of a default and the bank accelerates maturity of the Credit Agreement, the Company does not have adequate financial resources to extinguish the loan and the Company's operations may be negatively impacted. Management has taken aggressive steps to improve the Company's financial status. Last year the Company implemented a business plan and a long-term strategy to substantially reduce operating expenses and enhance revenues from low-level radioactive waste disposal and processing. Actions taken to date include reductions in personnel, decentralization of responsibilities, and analysis of operations to improve operating efficiency and reduce operating costs within each operating division. Furthermore, the Company has limited future capital expenditures. The Company anticipates raising additional financing through either a stock rights offering on or before June 1, 1997 or sale of assets. There can be no assurance, however, that any such financing arrangement or asset sales will be consummated. In the event the Company does not meet its business plan objectives or the Company is unable to obtain alternative financing, there can be no assurance that the Company will be able to meet its obligations as they become due or obtain further forbearance from the bank. As discussed in Note 13 to the consolidated financial statements, the Company is involved in various significant permitting efforts, claims, lawsuits and other administrative matters which are uncertain at this time. The accompanying consolidated financial statements do not include any adjustments relating to the recoverability and classification of asset carrying amounts or the amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern, or adjustments, if any, that may be necessary as a result of the outcome of the matters discussed above. 17 18 Principles of Consolidation. The accompanying financial statements present the consolidated accounts of American Ecology Corporation and its subsidiaries. All significant intercompany accounts and transactions have been eliminated. Revenue Recognition. Generally, revenues are recognized as services are performed and as waste materials are buried or processed. Cash Equivalents. Cash equivalents consist of short-term, highly liquid investments with original maturities of three months or less, which are readily convertible into cash. Investments in Debt and Equity Securities. The Company adopted Statement of Financial Accounting Standards No. 115 (SFAS 115), "Accounting for Certain Investments in Debt and Equity Securities", effective January 1, 1994. Debt and equity securities that the Company has the intent and ability to hold to maturity are classified as "securities held-to-maturity" and reported at amortized cost. Debt and equity securities that are held for current resale are classified as "trading securities" and reported at fair value with unrealized holding gains and losses included in earnings. Debt and equity securities not classified as either "securities held-to-maturity" or "trading securities" are classified as "securities available-for-sale" and reported at estimated fair value with net unrealized holding gains and losses reported as a component of shareholders' equity. The adoption of SFAS 115 did not have a material effect on the Company's financial position or results of operations. The Company uses the specific identification method to determine the cost basis used in computing realized gains or losses. Property and Equipment. Property and equipment are recorded at cost and depreciated on straight-line and declining balance methods over estimated useful lives. Land is comprised of land owned at the processing and disposal sites. Land owned at disposal sites is depleted over the estimated useful life of the disposal site on a straight-line basis. Cell development costs represent waste disposal site preparation costs which are capitalized and charged to operating costs as disposal space is utilized. Cell development costs include direct costs related to site preparation, including legal, engineering, construction, and the direct cost of company personnel dedicated for these purposes. The estimated useful lives of buildings and improvements is fifteen to thirty-one years. The estimated useful lives of vehicles, decontamination, processing and other equipment is three to ten years. See Note 3 for major categories of property and equipment. Expenditures for major renewals and betterments are capitalized and expenditures for maintenance and repairs are charged to expense as incurred. During 1996, 1995, and 1994, maintenance and repairs expense was $982,000, $1,224,000, and $750,000, respectively. Deferred Site Development Costs. The Company has been selected to locate, develop and operate the low-level radioactive waste ("LLRW") facilities for the Southwestern Compact ("Ward Valley facility") and the Central Interstate Compact ("Butte facility"). The license application for the Southwestern Compact was approved by the California Department of Health Services ("DHS") in September 1993. All costs related to the development of the Ward Valley facility have been paid and capitalized by the Company. As of December 31, 1996, the Company had deferred $45,884,000 (46% of total assets) of pre-operational facility development costs of which $6,753,000 was capitalized interest. These deferred costs relating to the development of the Ward Valley facility are expected to be recovered during the facility's first 30 years of operating from future waste disposal revenues based upon disposal fees approved by the DHS in accordance with existing state rate-base regulations. The disposal fee approval process is expected to include an independent prudency review of all the pre-operational costs incurred by the Company prior to their inclusion in the rate-base. The Company expects all of the costs which it has deferred for this facility, plus additional unrecognized project interest costs to be included as a component of the rate-base; however, there can be no assurance that all of the costs will be approved by the DHS. Allowable costs incurred by the Company for the development of the Butte facility are reimbursed under a contract with the Central Interstate LLRW Compact Commission ("CIC") and are recognized as revenues. Such revenues totaled $5,711,000, $8,100,000, and $9,800,000 in 1996, 1995, and 1994, respectively. Substantially all funding to develop the Butte facility is being provided by the major generators of waste in the CIC. As of December 31, 1996 the Company has contributed and deferred approximately $7,146,000 (7% of total assets), of 18 19 which $1,054,000 was capitalized interest, toward the development of the Butte facility and no additional capital investment is expected to be required from the Company prior to the granting of the license. The Company expects all costs which it has deferred for this facility, plus additional unrecognized project interest costs, to be included as a component of the rate-base. The agreed contract interest cost reimbursement as part of the rate-base may yield an additional $15 million in revenue, however, there can be no assurance that all of these amounts will be approved. In addition, the CIC has the option to terminate the contract, upon ten (10) days written notice, in the event it has expended the additional $31.1 million provided under the last contract amendment, and the State of Nebraska's licensing decision has not been made, and the major generators in the compact region have either ceased funding the project or thereafter notified the CIC, pursuant to amendment No. 5 of its contract with the CIC, that the major generators intend to cease funding of the project. As of December 31, 1996, approximately $25.2 million had been expended under the last contract amendment. If the CIC elects to terminate the contract, then the Company has no further claim or right to reimbursement of its contributions or accrued interest unless the CIC and the Company agree to go forward with the facility, in which event the Company retains its rights to recover its contribution together with any accrued interest. The construction and operation of the Ward Valley and Butte facilities are currently being delayed by various political and environmental opposition toward the development of the sites and by various legal proceedings as further discussed under "Business - Low-Level Radioactive Waste Services - Disposal Services - Proposed Ward Valley, California Facility" and "-Proposed Butte, Nebraska Facility". At this time, it is not possible to assess the length of these delays or when, or if, the Butte facility license will be granted, and when, or if, the land for the Ward Valley facility will be obtained. Although the timing and outcome of the proceedings referred to above are not presently determinable, the Company continues to actively urge the conveyance of the land from the federal government to the State of California so that construction may begin, and to actively pursue licensing of the Butte facility. The Company believes that the Butte facility license will be granted, operations of both facilities will commence and that the deferred site development costs for both facilities will be realized. In the event the Butte facility license is not granted, operations of either facility do not commence or the Company is unable to recoup its investments through legal recourse, the Company would suffer losses that would have a material adverse effect on its financial position and results of operations. In 1994, the Company began to capitalize interest in accordance with Statement of Financial Accounting Standards No. 34, Capitalization of Interest Cost, on the site development projects while facilities being developed are undergoing activities to ready them for their intended use. Interest capitalized was $3,558,000 in 1996, $3,281,000 in 1995 and $968,000 in 1994. Intangible Assets. Intangible assets relating to acquired businesses consist primarily of the cost of purchased businesses in excess of fair value of net assets acquired ("goodwill"). Intangible assets are being amortized on the straight-line method over periods not exceeding 40 years with the majority being amortized over 25 years. The accumulated amortization of intangible assets amounted to $288,000, $314,000 and $962,000 at December 31, 1996, 1995, and 1994, respectively. Amortization of intangible assets was $24,000, $742,000, and $520,000, in 1996, 1995, and 1994, respectively. On an ongoing basis, the Company measures realizability of intangible assets. In the event that facts and circumstances indicate intangible or other assets may be impaired, an evaluation of recoverability would be performed. If an evaluation was required, the estimated future undiscounted cash flows associated with the assets would be compared to the asset's carrying amount to determine if a write-down to market value or discounted cash flow value was necessary. Permitting Costs. Permitting costs, which are primarily comprised of outside engineering and legal expenses, are capitalized and amortized over the life of the applicable permits. At December 31, 1996 and 1995, there were $1,360,000 and $2,057,000, respectively, of such unamortized costs included in other assets in the accompanying consolidated balance sheets. The Company operates its various sites under the regulations of, and permits issued by various state and federal agencies. Several of the Company's existing sites are currently seeking permit renewals and/or expansion permits. There is no assurance of the outcome of any permitting efforts. The permitting process is subject to regulatory approval, time delays, local opposition and potential stricter governmental regulation. Substantial losses which 19 20 would have a material adverse effect on the Company's consolidated financial position, could be incurred by the company in the near term in the event a permit is not granted, if facility construction programs are delayed or changed, or if projects are otherwise abandoned. The Company reviews the status of permitting projects on a periodic basis to assess realizability of related asset values. As of December 31, 1996, management believes that assets which could currently be affected by permitting efforts are recoverable at their recorded values. Deferred Site Maintenance. Deferred site maintenance includes the accruals associated with obligations for closure and post-closure of the Company's operating and closed disposal sites and for corrective actions and remediation. The portion of these obligations expected to be spent within the following twelve month period is classified as deferred site maintenance, current portion in the accompanying consolidated balance sheets. The Company generally provides accruals for the estimated costs of closures and post-closure monitoring and maintenance as permitted airspace of such sites is consumed. Liabilities are recorded when environmental assessments and/or remedial efforts are probable, and the costs can be reasonably estimated. The Company performs routine periodic reviews of closed operating sites and revises accruals for estimated post-closure, remediation or other costs related to these locations as deemed necessary. The Company's recorded liabilities are based on best estimates of current costs and are updated periodically to include the effects of existing technology, presently enacted laws and regulations, inflation and other economic factors. The Company estimates its future cost requirements for closure and post-closure monitoring and maintenance for operating chemical disposal sites based on RCRA and the respective site permits. RCRA requires that companies provide financial assurance for the closure and post-closure care and maintenance of their chemical sites for at least thirty years following closure. Where both the amount of a particular environmental liability and the timing of the payments are reliably determinable, the cost is discounted to present value at a discount rate of 2.5%, net of inflation. See the discussion of Operating Costs included in Management's Discussion and Analysis of Financial Condition and Results of Operations for information concerning certain adjustments recorded in 1996, 1995, and 1994. Net Income (Loss) Per Share. The calculation of net income (loss) per common and common equivalent share is in accordance with the treasury stock method for 1996, 1995, and 1994. (000's except per share amounts) Year Ended December 31, ----------------------- 1996 1995 1994 ---- ---- ---- Net income (loss) $ (11,407) $ (48,903) $ 3,850 Adjustments to net income (loss): Preferred stock dividends 465 88 -- ---------- ----------- --------- Adjusted net income (loss) available to common shareholders $ (11,872) $ (48,991) $ 3,850 Weighted average shares outstanding- Common shares outstanding at year end 8,010 7,826 7,819 Effect of using weighted average common and common equivalent shares outstanding (114) (4) (6) Effect of shares issuable under stock option plans based on the treasury stock method -- -- 38 ---------- ----------- --------- Shares used in computing earnings (loss) per share 7,896 7,822 7,851 ---------- ----------- --------- Net income (loss) per common and common equivalent share, primary $ (1.50) $ (6.26) $ .49 ========== =========== ========= There was no difference between the primary and fully diluted earnings per share calculations in 1996, 1995, and 1994. 20 21 New Accounting Principles. In October 1995, Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" was issued. This statement establishes a fair value based method of accounting for stock-based compensation plans. The Company currently accounts for its stock-based compensation plans under Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to Employees". (See Note 11). Effective December 31, 1994, the Company adopted Statement of Financial Accounting Standards No. 107, "Disclosures about Fair Value of Financial Instruments". This statement requires disclosure of fair market value information for financial instruments. The book values of investment securities, excluding investments in common and preferred stocks, receivables, accounts payable and financial instruments included in other assets and accrued liabilities approximate their fair values principally because of the short-term nature of these instruments. Investments in common and preferred stocks are stated at fair market values. The quoted market price was used to determine the fair market value of the investment in common stock and estimated market values were used to determine the fair market value of the investments in preferred stocks. The carrying value of long-term debt approximates fair value principally because of the variable interest rate terms set forth in the bank credit facility agreement. See Note 2. Use of Estimates. The preparation of financial statements in conformity with generally accepted accounting principles requires the company to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and affect the reported amounts of revenues and expenses during the reporting period. The significant estimates used by the company in the accompanying consolidated financial statements primarily relate recoverability of deferred site development costs, waste processing and burial, deferred site maintenance, and commitments and contingencies as discussed in Notes 5, 6 and 13, respectively. Actual results could materially differ from the Company's estimates. Major Customers. Revenues resulting from the cost reimbursement contract with the Central Interstate Low-Level Radioactive Waste Commission were approximately $5,711,000 in 1996, or 11% of the Company's consolidated revenues. No other single customer accounted for 10% of the Company's consolidated revenues for 1996. Reclassification. Only minor reclassifications have been made to prior year financial statements to conform to the fiscal 1996 presentation. NOTE 2. CASH AND INVESTMENT SECURITIES Cash and investment securities at December 31, 1996 and 1995, were as follows (in thousands): 1996 1995 ---- ---- Cash and cash equivalents $ 788 $ 1,246 Trading securities 7,576 6,993 Securities held-to-maturity 7,383 5,760 Securities available-for-sale 1,242 523 -------- -------- $ 16,989 $ 14,522 ======== ======== Investments in trading securities consist principally of preferred stocks, which are held by a captive insurance company wholly-owned by the Company. The change in net unrealized holding gains on trading securities was $115,000 in 1996 and $114,000 in 1995 each of which has been included in earnings. Investments in securities available-for-sale consist of common stock of Perma-Fix, Inc. (see Note 12) which has an original cost value of $1,719,000, fair value of $1,242,000 and a gross unrealized holding loss of $477,000 at December 31, 1996. The change in net unrealized holding loss on securities available-for-sale was $477,000 which has been included as a separate component of shareholders' equity during the period. In 1996, investment securities were purchased and held, there was no gain or loss realized, interest earned on holding these investment securities was $222,000. In 1995, proceeds of $214,000 received on sales of securities available-for-sale during 1995 resulted in realized losses 21 22 of $101,000. Investments in securities held-to-maturity mature over various dates during 1996 and are reported at their amortized cost basis, which approximates fair value at December 31, 1995. Investments in securities held-to-maturity at December 31, 1996 and 1995, consisted of the following (in thousands) all of which mature in 1997: 1996 1995 ---- ---- U.S. Government securities $ 7,156 $ 5,547 Certificates of deposit 69 138 Money market accounts and other 158 75 ---------- --------- $ 7,383 $ 5,760 ========== ========= Certain cash accounts and substantially all investments in securities held-to-maturity and trading securities totaling $16,394,000, and $13,770,000 at December 31, 1996 and 1995, respectively, have been classified as non-current assets as cash and investment securities, pledged. The pledged cash and investment securities represent collateral for the Company's closure/post-closure obligations, performance of a Remedial Investigation and Feasibility Study ("RI/FS") and performance of corrective action at the closed Sheffield, Illinois facility, compliance with Texas Natural Resource Conservation Commission ("TNRCC") requirements related to the Company's non-commercial use deepwell at the company's Robstown, Texas, facility, closure costs for the Beatty, Nevada LLRW site, test borings at the proposed LLRW facilities in Nebraska and California, settlement with generators of waste at the Richland, Washington facility, and various performance bonds. Also, a portion of the pledged cash and investment securities at December 31, 1996 is pledged as collateral for closure costs relating to the two facilities acquired in 1994 (see Note 12). The amounts pledged by the Company generally equal the present value of its estimated future closure and post-closure obligations. NOTE 3. PROPERTY AND EQUIPMENT Property and equipment at December 31, 1996 and 1995, was as follows (in thousands): 1996 1995 ---- ---- Land $ 1,819 $ 1,484 Cell development costs 10,540 10,452 Buildings and improvements 6,425 7,673 Decontamination and processing equipment 2,155 2,131 Vehicles and other equipment 17,944 22,112 -------- -------- 38,883 43,852 Less: Accumulated depletion, depreciation and amortization (24,628) (22,088) -------- -------- $ 14,255 $ 21,764 ======== ======== NOTE 4. ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS In March 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of", which is intended to establish more consistent accounting standards for measuring the recoverability of long-lived assets. The Company adopted this statement during 1995 in conjunction with recording a substantial writedown of goodwill and certain property and equipment. There was an impairment of long-lived assets in 1996 at the Winona, Texas facility and the Company determined operations should be discontinued. The Winona facility has had on-going losses and with periodic reviews the adjustments to correct the short-comings have not proven profitable, therefore, the decision was made to close this site location. 22 23 1996 1995 ---- ---- Writedown of the carrying amount of goodwill resulting from the acquisition of the Recycle Center (Note 12) $ -- $ 22,165 Writedown of the carrying amount of goodwill resulting from the acquisition of Waste Processor Industries, Inc. -- 5,744 Writedown of the plant assets carrying value, 7,451 -- permits and estimated site closure cost Writedown of the carrying amount of goodwill resulting from the acquisition of the Winona facility (Note 12) -- 3,458 Writedown of property and equipment at the Winona facility (Note 12) -- 1,681 ----------- ---------- Total impairment losses $ 7,451 $ 33,048 =========== ========== The circumstances leading to the impairment losses include an accumulation of costs significantly in excess of the amount of acquisition costs originally expected for the Recycle Center and to a lesser degree, the Winona facility in 1995, but increased in 1996. Contributing factors include a current period operating and cash flow loss, a recent history of operating losses, and the Company's inability to achieve the operating results anticipated prior to the respective acquisitions. Changes in the marketplace and competitive situations in certain service lines, particularly at the Recycle Center and the Winona facility, have contributed to the Company's inability to achieve anticipated operating results. The Winona facility was a 620 acre fuels blending and solvent recycling facility with two hazardous waste deepwells and waste brokerage services. In August of 1996, the Company made a decision to suspend further receipts of waste at the Winona facility. This decision was made based on the adverse impact on the business base of the Winona facility caused by inaccurate public statements and other actions of persons opposed to the Facility. The litigation strategy being pursued by persons opposed to the Facility includes numerous and duplicative lawsuits filed in several jurisdictions. The Company believes that the number of suits as well as the discovery and motion practices used in each is designed to overwhelm the financial resources of AEESC, an American Ecology wholly owned subsidiary. Based on the current regulatory and litigation morass under which the Winona facility was forced to operate, management concluded that it was not economically feasible for the Winona facility to continue. Also, during the period of suspended waste receipts AEESC was in the process of removing from inventory all waste materials which it believes would require the continued operation of the facility's FTIR ambient air monitoring system as well as the Thermal Oxidizer air emission control equipment. It is the facility's intent to discontinue the use of this equipment as soon as regulatory permission is received. The Winona facility operation costs have been high and very difficult to control. As a result of the operation costs exceeding revenues every month, the Winona site has never been profitable. Management has made many efforts to preserve the site as a possible profitable operation, using different business techniques, yet none have succeeded. As a result of these efforts it has been determined that the site should be closed under Federal and State regulations. At March 17, 1997 management agreed to a plan for closing the site under RCRA rules, and other substantive environmental regulations. The estimates for the environmentally correct closure under those environmental laws has been estimated at $1,500,000. The results of operations for the Winona Facility since acquisition December 31, 1994: 1996 1995 ---- ---- Revenues $ 6,834 $ 11,587 Net loss before impairment (4,040) (3,349) Net loss before income taxes $(11,491) $ (8,488) 23 24 NOTE 5. ACCRUED LIABILITIES Accrued liabilities at December 31, 1996 and 1995 were as follows (in thousands): 1996 1995 ---- ---- Waste processing and burial $ 6,240 $ 7,008 State disposal fees and taxes 2,359 1,994 Regulated rate settlements 1,643 2,123 Compensation costs 1,010 1,778 Deferred revenue 674 1,064 Other 4,950 7,055 ---------- ---------- $ 16,876 $ 21,022 ========== ========== The Company has recorded a liability of $6,240,000 for the waste processing and burial of waste now on-site at the Recycle Center. The liability is based on management estimates of anticipated waste treatment methods, associated volume reductions and burial fees. The Company has signed agreements for the disposal of this waste. This waste will be disposed of at two locationS licensed for such disposal services. Should estimated volume reductions or proposed disposal methods not be attainable, the costs for processing and burial could increase materially in the near term. NOTE 6. DEFERRED SITE MAINTENANCE Deferred site maintenance accruals at December 31, 1996 and 1995 were as follows (in thousands): 1996 1995 ---- ---- Accrued costs associated with open facilities $ 10,714 $ 10,568 Accrued costs associated with closed facilities 10,658 11,582 ---------- ----------- Sub-total 21,372 22,150 Less: current portion (1,524) (1,763) --------- ---------- Deferred site maintenance, excluding current portion $ 19,848 $ 20,387 ========= ========== Accrued costs associated with open facilities principally relate to closure and post-closure for the permitted and developed portion of the Robstown, Texas facility, groundwater contamination remediation at the Robstown and Winona, Texas facilities, and to capping of active cells at the chemical waste disposal facilities in Robstown, Texas and Beatty, Nevada and the LLRW facility in Richland, Washington. The Company is in process of re-permitting the Robstown facility to include development of an additional portion of the site. The Company's current estimate of the Robstown site's closure and post-closure costs of $5,419,000 includes the closure and post closure costs for the portions of the site now open and either filled or in use at this time. The estimated additional cell capping costs to be expensed over the remaining developed cell space at the Company's disposal facilities was approximately $2,500,000 at December 31, 1996. The Company is in the process of addressing corrective action plans at the Robstown, Texas site. A 1978 analysis showed the presence of chemical contamination in the shallow, non-potable aquifer underlying the site. The Company operates a deep-injection well for the disposal of contaminated groundwater and leachate generated at the facility. The Company has recorded an accrual ($1,826,000 balance at December 31, 1996) for the estimated costs of the groundwater remediation program based upon a compliance plan agreed to with the state's regulatory authority in 1992. Based on the results obtained from the compliance monitoring plan, the contamination levels in the surficial water bearing zone are decreasing. The plume is still contained within the property boundaries of the Robstown facility. The Company is proposing a modification plan which will enhance environmental protection and substantially mitigate future groundwater remediation costs. This plan is currently being analyzed by the regulating agency. 24 25 Even though the Winona facility is closed, it has on-site, underground chemical contamination for which the facility developed a corrective action plan that is still ongoing. Groundwater is recovered and disposed of in the facility's deep-injection well. The current estimated cost of the remediation of $815,000 is included in the Company's deferred site maintenance accruals at December 31, 1996. The State of Nevada and the State of Washington have collected money for the costs of closure and post-closure care and maintenance of the respective Beatty, Nevada and Richland, Washington sites. The Company currently submits waste volume-based fees to state maintained funds. Such fees are periodically negotiated with, or established by, the states and are based upon engineering cost estimates provided by the Company and approved by the state. Accrued costs associated with closed facilities relate to remediation, closure and post-closure of the Sheffield, Illinois chemical facility and maintenance of the Sheffield LLRW facility. The Company is in the process of remediating the closed chemical waste disposal facility in Sheffield, Illinois under a final corrective measures implementation plan issued by the U.S. EPA in 1990 pursuant to the Remedial Investigation and Feasibility Study completed by the Company. The Company has submitted for approval a closure/post-closure plan for the site to the Illinois EPA and to the U.S. EPA. The plan has not been approved by the agencies pending further implementation of the The estimated costs of the remediation and closure program, maintenance and post-closure monitoring of the LLRW facility with the expected timing of future payments at December 31, 1996 were as follows (in thousands): 1997 $ 435 1998 62 ------ Total estimated costs 497 Discount amount at 2.5% (12) ------ $ 485 Amount accrued, net of discount ====== The Company's estimates of future deferred site maintenance costs are subject to change in the near term in the event amendments are made to current laws and regulations governing the Company's operations or if more stringent implementation thereof is required, or if additional information regarding required remediation activities is obtained. Such changes could have a material adverse effect on the Company's consolidated results of operations and financial position in the near term and require substantial capital expenditures. NOTE 7. REVOLVING CREDIT LOAN AND LONG TERM DEBT Long term debt at December 31, 1996 and 1995 consisted of the following (in thousands): 1996 1995 ------- ------- Secured bank credit facility $36,116 $28,079 Acquisition note payable -- 550 Capital lease obligations and other ------- ------- 589 508 ------- ------- Less: Current maturities 36,705 29,137 ------- ------- (503) (780) Long term debt ------- ------- $36,202 $28,357 ======= ======= 25 26 Aggregate maturities of long-term debt and the future minimum payments under capital leases are as follows (in thousands): Year Ended December 31, ------------ 1997 $ 503 1998 86 1999 5,000 2000 30,613 ---------- Total $ 36,202 ========== On October 31, 1996 the Company renegotiated its prior bank debt under the terms of a Third Amended and Restated Credit Agreement ("Credit Agreement"). The new term loans, subject to satisfaction of certain conditions, extend the maturity of the Company's existing bank debt to December 31, 2000 (the maturity date). Interest on this debt will accrue at a rate of 7% through 1998. Thereafter, interest is to be paid quarterly at the rate of 10% or prime, whichever is greater. Principal repayments will commence on December 31, 1999 with $5,000,000 due on that date and quarterly payments of $250,000 thereafter. The total debt balance remaining at the maturity date will be due and payable on that date. The secured debt now consists solely of a Term Loan and a Revolving Credit Loan. Subject to the terms and conditions of the Credit Agreement, the Company's bank agrees to lend the Company an advancing term loan, in a series of advances, up to a maximum of $38,000,000. The Revolving Credit loan portion of this loan is represented by a single revolving promissory note in the original principal sum of $5,000,000 (the "Revolving Credit Note"). No further advances of any Revolving Credit Loans shall occur after the Maturity Date. Under the terms of the Credit Agreement the Company increased long-term debt by $1,684,000. Included in the total long-term debt balance is the debt restructuring fees of $265,000. As of December 31, 1996, the outstanding balances of the Term Loan and the Revolving Credit loan were $32,004,576 and $3,931,180, respectively. The Company also had incurred $180,071 in accrued interest and fees at that date. In exchange for extending the terms, the bank received warrants, excercisable only upon maturity or the occurrence of a monetary default, to purchase up to 10% of the Company's then outstanding shares for $1.50 per share. However, the Company can eliminate these warrants by the payment on maturity of additional interest equal to the difference between the interest accrued through 1998 and interest for the same period at the rate of the greater of 10% or prime. The bank eliminated its existing conversion feature on the Fee Capitalization portion of the outstanding debt. In addition to the changes in economic terms, the Company's financial covenants were restructured to match the Company's current situation and financial plan. The bank has also agreed to allow the Company to use capital freed up by its debt restructuring as a working capital. The terms of the bank loan prohibit dividend payments on the Company's common stock until the bank debt is fully retired. As part of the new arrangements regarding the secured credit facility with its bank, the Company obtained $3,000,000 in new equity from two of its directors and shareholders, Rotchford Barker and Edward Heil, who in exchange for this amount agreed to purchase 300,000 shares of new Class E Redeemable Convertible Preferred Stock. The new Preferred Stock is nonvoting, has a stated value and preference in liquidation of $10 per share, and has the right to receive dividends, payable solely in common shares of the Company, at the rate of 11.25% per annum. As a condition to the extension of these terms, and in addition to the $3,000,000 in equity already raised, the Company is required to use its best efforts to raise an additional $2,000,000 in equity on or before June 30, 1997. In order to meet this second equity condition and to give all common shareholders the ability to participate in the Company's increased equity base, the Company will use its best efforts to register on or before June 1, 1997 a rights 26 27 offering to holders of the Company's common stock. In the rights offering, which will be made only by means of a prospectus, the Company would offer each common shareholder, as of a record date expected to be on or about the second business day before the registration statement for the rights offering is declared effective by the Securities and Exchange Commission (SEC), the right to purchase for $1 one share of newly issued common stock for each share of common stock held on such record date. The rights would expire unless exercised within 30 days after the offer commences. As of December 31, 1996, the Company had 8,010,017 shares of common stock outstanding. On February 7, 1996 the Company entered into an agreement (First Amendment to Second Amended and Restated Credit Agreement) with its bank for the issuance of a note, the Advance Note, in the amount of $4,000,000. This note, issued to provide the Company working capital funds, was paid in full before its maturity, June 30, 1996. The acquisition note payable matured on December 31, 1995 and represented a note payable to Mobley Environmental Services, Inc. ("Mobley"). This non-interest bearing note was incurred as part of the Company's acquisition of Gibraltar Chemical Resources, Inc. ("Gibraltar") on December 31, 1994. The note has not been paid by the Company because of the offsetting costs that the Company paid on behalf of Gibraltar combined with the Tolling Agreement removed the Company's obligation for settlement of this note payable. At December 31, 1996 the Company had issued letters of credit with an outstanding face value of $4,675,848, including $1,872,000 issued under the bank credit facility, of which the most significant relate to site operating permits for the Company's sites. The issued letters of credit are secured by cash and investment securities. The Company is required to pay fees ranging from 1/2 of one percent to one percent on letters of credit drawn. The letters of credit expire no more than one year after December 31, 1998. NOTE 8. PREFERRED STOCK Effective October 31, 1996, and executed on November 13, 1996, was the Certificate of Designation, Preferences and Rights of Series E Redeemable Convertible Preferred Stock. The Board of Directors duly authorized and adopted, by all necessary action on the part of the Company, the resolution creating this Series E of 300,000 shares of preferred stock. The Company sold all 300,000 shares of this 11.25% Series E Redeemable Convertible Preferred Stock, $10 par value with a $10 per share liquidation preference, principally to two members of the Board of Directors of the Company. The Company received cash proceeds of $3,000,000 for the issuance of these 300,000 preferred shares. By redemption, each share shall be redeemed by the Company on the first business day following the issuance of Common Stock in a Rights Offering (which Rights Offering the Company believes will occur on or before June 1, 1997), to the extent that the purchase price of the Common Stock sold in the Rights Offering plus the stated amount of the Series E Preferred outstanding on the redemption date is in excess of $5,000,000. If less than all of the Series E Preferred Stock outstanding is redeemed, the Series E Preferred Stock to be redeemed shall be determined pursuant to the agreement for the initial purchase of the Series E Preferred Stock. Any Rights Offering shall be an offer, to all holders of record of the Company's Common Stock on or about the second business day preceding the date the registration of the Rights Offering is declared effective by the SEC, to purchase one share of Common Stock held on the record date at a purchase price of $1 per share, payable within 30 days after the Rights Offering. By conversion, if there is a Rights Offering and less than 5,000,000 shares of Common Stock are sold, one share of Series E Preferred Stock shall be converted into 10 shares of fully paid and non-assessable Common Stock for each 10 shares or portion thereof of Common Stock less than 5,000,000 sold in the Rights Offering. Such conversion shall occur on the first business day following the expiration of the Rights Offering. Each share of this 11.25% Series E Preferred Stock includes 10 warrants to purchase Common Stock for an exercise price of $1.50 per share. There shall be no voting rights or powers attached to this 11.25% Series E Preferred Stock. 27 28 In September 1995, the Board of Directors of the Company authorized 105,264 shares of preferred stock designated as 8 3/8% Series D Cumulative Convertible Preferred Stock ("8 3/8% Preferred Stock") and authorized the issuance of 105,264 of such shares and warrants to purchase 1,052,640 shares of the Company's common stock. During September through December 1995, the Company sold 105,264 of 8 3/8% Preferred Stock with warrants in a private offering to a group comprised principally of members of the company's directors ("the Investing Group") and received cash proceeds of $4,759,000 which is net of offering expenses of $101,000 and $140,000 in settlement of liabilities to two members of the Investing Group. Each 8 3/8% Preferred Stock share is convertible at any time at the option of the holder into 8.636 shares of the Company's common stock, equivalent to a conversion price of $5.50 on the $47.50 total per share offering price. Dividends on the 8 3/8% Preferred Stock are cumulative from the date of issuance and payable quarterly commencing on October 15, 1995. Accrued unpaid dividends totaled $514,000 and $88,000 at December 31, 1996 and 1995, respectively. The 8 3/8% Preferred Stock shares are not redeemable and the liquidation preference is $47.50 per share plus unpaid dividends. Each share of the 8 3/8% Preferred Stock issued includes ten warrants to purchase shares of the Company's common stock. Each warrant entitles the holder to purchase on share of common stock for an exercise price of $4.75. The $4.75 warrants are exercisable at any time and expire September 12, 1999. No value was assigned to the warrants in the accompanying consolidated financial statements as the value is deemed to be de minimis. NOTE 9. INCOME TAXES Effective January 1, 1993, the Company prospectively adopted Financial Accounting Standards No. 109, Accounting for Income Taxes ("Statement 109"). The effect of the adoption was not material to the Company's financial position or results of operations. The components of the income tax provision (benefit) were as follows (in thousands): Year Ended December 31, 1996 1995 1994 ---- ---- ---- Current - Federal $ (1,552) $ (6,061) $ (1,184) - State 35 (170) (75) ------------ ------------ ------------ (1,517) (6,231) (1,259) ------------ ------------ ------------ Deferred - Federal -- 816 3,044 ------------ ------------ ------------ $ (1,517) $ (5,415) $ 1,785 ============ ============ ============ The following is a reconciliation between the effective income tax (benefit) rate and the applicable statutory federal income tax (benefit) rate: Year Ended December 31, 1996 1995 1994 ---- ---- ---- Income tax (benefit) - statutory rate (34.0)% (34.0)% 34.0% State income taxes, net of federal tax benefit -- (.3) (.1) Dividend income excluded from taxable income -- (.1) (2.2) Non-deductible goodwill amortization -- 5.3 1.6 Valuation allowance for deferred tax assets 14.9 18.0 -- Tax refund 5.7 -- -- Other, net 1.4 1.1 (1.6) ------ ------ ----- Total effective tax (benefit) rate (12.0)% (10.0)% 31.7% ====== ====== ===== 28 29 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, 1996 Provision 1996 ---- --------- ---- Deferred tax assets: Environmental compliance and other site related costs, principally due to accruals for financial reporting purposes $ 8,212 $ 95 $ 8,307 Depreciation and amortization 6,396 1,969 8,365 Net operating loss carryforward 2,701 4,444 7,145 Other 2,101 (1,210) 891 ------------- ------------ ------------- Total gross deferred tax assets 19,410 5,298 24,708 Less valuation allowance (14,709) (5,679) (20,388) ------------ ------------ ------------- Net deferred tax assets 4,701 (381) 4,320 ------------ ------------ ------------- Deferred tax liabilities: Site development costs (2,633) 591 (2,042) Insurance claim (1,000) 1,000 -- Other (1,068) (1,210) (2,278) ------------ ------------ ------------ Total gross deferred tax liabilities (4,701) 381 (4,320) ------------ ------------ ------------- Net deferred tax assets $ 0 $ 0 $ 0 ============ ============ ============= The Company has established a valuation allowance for certain deferred tax assets due to realization uncertainties inherent with the long-term nature of deferred site maintenance costs, uncertainties regarding future operating results and for limitations on utilization of acquired net operating loss carryforwards for tax purposes. The realization of a significant portion of net deferred tax assets is based in part on the company's estimates of the timing of reversals of certain temporary differences and on the generation of taxable income before such reversals. The net operating loss carryforward of approximately $19,740,000 at December 31, 1996, begins to expire in the year 2006 and utilization of $2,745,000 of this carryforward is limited pursuant to the net operating loss limitation rules of Internal Revenue Code Section 382. This $2,745,000 expires $793,000 in 2006, $1,029,000 in 2007 and $872,000 in 2008. The remaining unrestricted net operating loss carryforward expires $4,680,000 in 2010 and $12,315,000 in 2011. The Company's federal income tax returns are currently under examination due to net operating loss carrybacks in amended returns filed in 1996. As of December 3, 1996, $740,000 the refund claimed had not been received and were reflected as income taxes receivable. NOTE 10. EMPLOYEE'S BENEFIT PLANS Retirement Plan. The Company's defined contribution retirement plan (the Plan) was amended effective December 31, 1995. The amendment changes provided for employees not earning a benefit or having new eligibility to participate, and no company contributions are being made. Prior to December 31, 1995, the Plan covered all full-time employees of American Ecology and its subsidiaries (the Company) hired in a job category which would result in 1,000 hours of service during any consecutive 12-month period and who had attained the age of 21. The Company made basic contributions equal to 5% of compensation below the prior year's FICA wage base plus a contribution equal to 10% of compensation above the prior year's FICA wage base, and a past service contribution as defines. Effective November 20, 1996, the Company merged the Retirement Plan with the 401(k) Plan into a single plan to be known as the American Ecology Corporation 401(k) Savings Plan. Effective February 10, 1997 the basic contributions as described above were reinstated for the bargaining unit in Oak Ridge, TN, in accordance with the agreement between Local No. 3-983 of the Oil, Chemical and Atomic 29 30 Workers International Union and the Company's subsidiaries, Nuclear Materials Management Center and Nuclear Equipment Service Center. The plan was reconstructed as equal to the company's previous retirement plan. 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 minimum of 0% up to the IRS limits. The Company's contribution matches 55% of participant contributions up to 6% of deferred compensation or a maximum of 3.3% of an employees qualified earnings. The Company's contribution was changed to cash instead of AEC stock, from September 1996. The Company's total contribution for both the retirement plan and 401(k) plan was $829,000 and $946,000 for 1995 and 1994, respectively. The Company contribution for the 401(k) plan was $268,907 for 1996. The Company has no post-retirement or post-employment benefit plan. NOTE 11. STOCK OPTION PLANS The Company presently maintains these stock option plans affording employees and outside directors of the Company the right to purchase shares of its common stock. The exercise price, term and other conditions applicable to each option granted under the Company's plans are generally determined by the Compensation Committee of the Board of Directors at the time of the grant of each option and may vary with each option granted. No option may be granted at a price less than the fair market value of the shares when the option is granted, and no options may have a term longer than ten years. The 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 1996, 1995, and 1994. Had compensation cost for the plans been determined consistent with FASB Statement No. 123, "Accounting for Stock-Based Compensation", the Company's 1996 and 1995 net loss would have been increased by $49,118 and $683,375 respectively on a pro forma basis. Primary loss per share would have increased $.05 and $.31 for 1996 and 1995, respectively. Fully diluted loss per share would have been increased by $.02 per share above the primary earnings per share amount for 1996. The effect on fully diluted loss per share for 1995 would have been anti-dilutive. The FASB Statement No. 123 method of accounting has not been applied to options granted prior to January 1, 1995. The pro forma compensation cost may not be representative of that to be expected in future years. The weighted average remaining life of the options is seven years at December 31, 1996. 1996 1995 1994 ---- ---- ---- Under option: Options outstanding, beginning of year 1,186,600 691,950 611,450 Granted -- 706,000 125,000 Exercised -- (6,800) (35,000) Canceled (644,000) (204,550) (9,500) ----------- ----------- ----------- Options outstanding, end of year 542,600 1,186,600 691,950 =========== =========== =========== Price range per share of outstanding options $ 4.00- $ 4.00- $ 2.79- $ 14.75 $ 14.75 $ 14.75 =========== =========== =========== Price range per share of options exercised $ -- $ -- $ 8.00- $ -- $ 2.79 $ 8.58 =========== ============= =========== Price range per share of options canceled $ 4.62- $ 6.38- $ 10.13- $ 14.25 $ 14.75 $ 11.00 =========== ============ =========== Options exercisable at end of year 417,070 721,340 521,660 =========== ============ ========== Options available for future grant at end of year 383,900 383,900 710,900 =========== ============ ========== 30 31 NOTE 12. ACQUISITIONS On September 19, 1994, the Company acquired the assets of Quadrex Recycle Center, ("Recycle Center"), a business segment of Quadrex Corporation ("Quadrex") that provides recycling, decontamination, volume reduction of radioactive waste and related equipment rental services to government, commercial and nuclear power industries. The purchase consideration was comprised of payments by the Company for assumed liabilities and working capital for the Recycle Center through the closing date, additional unpaid liabilities assumed as of the closing date, and direct acquisition costs, all of which total approximately $28,000,000. The purchase method of accounting was used for this asset acquisition, therefore, the Recycle Center's results of operations are consolidated with the Company's since September 19, 1994. The excess of acquisition cost over fair value of net tangible assets of the Recycle center of approximately $22,165,000 was written down during 1995 as discussed in Note 4. The acquisition cost was reduced by the estimated fair value of 545,000 common shares of Perma-Fix, Inc. ("Perma-Fix") which Quadrex transferred to the company effective September 30, 1994. On December 31, 1994, the Company acquired Gibraltar Chemical Resources, Inc. ("the Winona facility"), a wholly-owned subsidiary of Mobley. The Winona facility provides fuels blending, solvent recycling, and deepwell injection services to the hazardous and industrial waste disposal markets with a fixed base facility in Winona, Texas and collections and technical operations in El Paso, Texas and Laredo, Texas. The total acquisition cost of $10,628,000 included cash, a $550,000 note payable to Mobley, assumed liabilities, and direct acquisition costs. The excess of cost over fair market of net assets of the Winona facility of approximately $3,458,000 was written down during 1995 as discussed in Note 4. Since the acquisition, the Company has been faced with both legal confrontations and operational difficulties. The operation costs have been high and very difficult to control. As a result of the operation costs exceeding revenues every month, the Winona site has never been profitable. Management has made many efforts to preserve the site as a possible profitable operation, using different business techniques, yet none have succeeded. As a result of these efforts it has been determined that the site should be closed under Federal and State regulations. The date of the closure was set at March 17, 1997 when management agreed to a plan for closing the site under RCRA rules, and other substantive environmental regulations. The estimates for the environmentally correct closure under those environmental laws have been estimated at $1,500,000. NOTE 13. COMMITMENTS AND CONTINGENCIES The Company's business inherently involves risks of unintended or unpermitted discharge of materials into the environment. In the ordinary course of conducting its business activities, the Company becomes involved in judicial and administrative proceedings involving governmental authorities at the federal, state and local levels. In the majority of the situations where regulatory enforcement proceedings are commenced by governmental authorities, the matters involved relate to alleged technical violations of licenses or permits pursuant to which the Company operates, or, of laws or regulations to which its operations are subject, or, are the result of different interpretations of the applicable requirements. In addition to the litigation described below, the Company and certain of its subsidiaries are involved in other civil litigation and administrative matters, including permit application proceedings in connection with the established operation, closure and post-closure activities of certain sites. Management has not established reserves for the matters discussed below, other than for certain anticipated legal fees, based on management's estimates of the outcome. During the course of legal proceedings, management's estimates with respect to such matters may change. While the outcome of any particular action or 31 32 administrative proceeding cannot be predicted with certainty, management is unable to conclude that the ultimate outcome, if unfavorable, of the litigation and other matters described below, will not have a material adverse effect on the operations or financial condition of the Company. Paul Stephenson, et al v. American Ecology Recycle Center, Inc., US District Court, Eastern District, Tennessee, Civil Action No. 94-CV-650. The Company's subsidiary, AERC, purchased the assets of Quadrex Environmental Company's Recycle Center in Oak Ridge, Tennessee on September 19, 1994. In November 1994, AERC was named as a defendant in what has become a class action lawsuit by former employees of Quadrex who are claiming unpaid medical benefits and for payment into an underfunded pension plan. The purchase agreement between AERC and Quadrex excluded and provided for indemnification by Quadrex of such claims, but Quadrex subsequently filed for protection under Chapter 11 of the Bankruptcy Act and adopted a liquidating reorganization plan under which unsecured creditors will likely receive no payment. In November 1996, approximately $1.2 million of insurance proceeds payable as a result of a fire at the Recycle Center in July 1994 were paid into the Federal District Court to be held pending the outcome of the litigation. The Plaintiffs' claims, as currently understood, are substantially less than the amount held by the court. A determination of the likelihood of an unfavorable outcome or an estimate of the amount or range of potential loss, if the outcome is unfavorable, cannot be made at this time. Management intends to continue to defend this matter. US Ecology, Inc. v. Barbara Wagner, Benton County Assessor, Board of Tax Appeals, State of Washington, Docket Nos. 92-63--92-65 and 95-43--95-45. In 1992, the Benton County (Washington) assessor issued property tax assessments on improvements owned by the Company and located on the Company's leasehold at the US Department of Energy's Hanford Reservation. The retroactive property tax increases totaled $1.7 million for the years 1989, 1990 and 1991. Prior to 1989, annual taxes had been about $5,400. The company sued Benton County, the Assessor and Treasurer to enjoin them from collecting the increased taxes. An injunction was granted by the Benton County Superior Court, but was reversed by the Washington Court of Appeals which ruled that the Company had not exhausted available administrative remedies. Accordingly, the Company prosecuted its appeal to the Washington Board of Tax Appeals and a hearing was held in November 1995. The Company has recently been assessed an additional $1.9 million in taxes for 1992, 1993 and 1994. On July 1, 1996, the Board of Tax Appeals issued an Interim Decision that the Company's concession right to operate a low-level radioactive waste disposal site at the Hanford Reservation is subject to property tax, but that the hearing will be re-opened to allow the parties to submit additional evidence regarding the fair market value of the concession right. The Company believes that Washington law does not provide for taxation of "concession rights" and that, in any event, since its permits and licenses may not be freely transferred, the market value thereof is minimal. The Company intends to continue to contest the matter. Boston Edison Company v. US Ecology, Inc., U.S. District Court for Massachusetts, Civil Action No. 95-12173. In October 1995, Boston Edison filed a complaint against USE, a subsidiary of the Company, in the U.S. District Court of Massachusetts alleging claims related to USE's alleged refusal to indemnify Boston Edison for various costs arising out of the shipping and burial of waste materials at the Maxey Flats Nuclear Disposal Site. USE had entered into a series of contracts with Boston Edison to provide radioactive waste disposal services at this site. Boston Edison alleges that USE breached the contracts because USE failed to indemnify Boston Edison for its costs. Boston Edison also alleges that USE committed an unfair and deceptive trade practice in the State of Massachusetts because of its failure to indemnify Boston Edison as required by these contracts. Finally, Boston Edison seeks a declaratory judgment that would set forth the contractual rights and liabilities of the parties. Boston Edison claims $600,000 in past and future costs for the alleged breach of the contracts. It also seeks to treble damages under the Massachusetts Deceptive Trade Practices Act. USE has successfully moved the case from Massachusetts to federal court in Kentucky. The Company believes USE has contractual defenses to the indemnity claims and intends to contest this matter. Additionally, USE has counterclaimed against Boston Edison seeking contribution for its response costs at Maxey Flats. It is not possible at this time to predict whether the outcome of this matter will be favorable or unfavorable. Ally Capital Corporation v. American Ecology Recycle Center, Inc., et al, U.S. District Court, Southern District of Texas, Houston Division, Civil Action No. H-96-3117. This complaint is for breach of an equipment lease resulting from AERC's, the Company's subsidiary, failure to make monthly lease payments on leased equipment. 32 33 The equipment is essential to the continued operations of the Oak Ridge facility. By December 1996, the unpaid payments exceeded $255,000. The remaining balance on the equipment lease, including the $255,000, is approximately $618,000. Plaintiff has filed a motion for summary judgment seeking the entire lease balance of $667,680, per diem interest, attorneys fees and possession of the equipment. The parties are near settlement in the matter. Houston Office 88, Inc. v. American Ecology Corporation v. Altra Energy Technologies, L.L.C. , District Court of Harris County, Texas, Case No. 96-47050. Plaintiffs filed this case in September 1996 seeking more than $4.1 million in rent, interest, costs and attorneys fees, alleging breach of the office lease agreement by the Company for vacating its former corporate headquarters in Houston, Texas. The Company has filed a counterclaim against Plaintiff based on its wrongful refusal to allow the Company's leasing agent to show the premises to potential sublessees. Also, the Company has filed a third-party claim against sublessee, Altra Energy Technologies, L.L.C., for failure to consummate a sublease agreement between Altra and the Company. The Company intends to vigorously contest the case, but will remain open to a favorable settlement in advance of trial scheduled for December 8, 1997. In the Matter of the Applications of American Ecology Environmental Services Corp., Permit Nos. AQ-9429, HW-50368, WDW-186, and WDW-229 (SOAH Docket ###-##-####). This matter is a contested proceeding before the Texas State Office of Administrative Hearings wherein AEESC, a wholly owned subsidiary of the Company, is seeking to renew operation permits for its hazardous waste treatment, storage, and disposal facility in Winona, Texas. A locally (Winona, Texas) based organization known as "Mothers Organized to Stop Environmental Sins" ("MOSES") has appeared in the matter seeking to have the permits revoked. As a result of the activities of MOSES and certain individuals, AEESC has determined it cannot continue operation of the facility. Virgie Adams, et al v. American Ecology Environmental Services Corporation, et al, Cause No. 236-165224-6, Tarrant County, Texas District Court. On August 30, 1996, Plaintiffs amended their August 6 complaint naming over 677 additional plaintiffs and 87 defendants, including the Company, several of its subsidiaries and customers of its Winona, Texas facility. The Plaintiffs are seeking damages, punitive damages and pre- and post-judgment interest based on claims of negligence, negligence as a matter of law, fraudulent concealment, assault and battery, intentional infliction of emotional distress, res ipsa loquiter and intentional tort. Plaintiffs allege the Company "...failed to handle, treat, store, blend, inject, and otherwise dispose of extremely hazardous and highly toxic substances in a manner...constitut(ing)...compliance with basic health, safety and environmental standards." The case is in the early stages of discovery. The Company believes it has conducted its operations in accordance with applicable laws and regulations, that the lawsuit is without merit and intends to vigorously defend the action. American Ecology American Ecology Environmental Services Corp., et al v. Mildred Krueger, et al, U. S. District Court for the Northern District of Texas, Dallas Division, Civil Action No. 3-96-CV-2670-D. The Company and two of its subsidiaries, AEESC and USE, filed suit in the U.S. District Court for the Northern District of Texas against the Defendants seeking an award of actual and punitive damages proven at trial and treble damages, costs and attorneys fees as allowed under the federal racketeering statutes and for appropriate injunctive relief including an order compelling Defendants to cease their improper activities, retract their defamatory statements and to refrain from similar improper activities. The Complaint alleges that the Defendants: violated the RICO statute, defamed AEESC, USE and the Company through various publications and statements; tortuously interfered with existing contractual rights and prospective business relations of AEESC, USE and the Company; disparaged the businesses of AEESC, USE and AEC; engaged in a civil conspiracy for improper purposes to cause the closure of AEESC's Winona, Texas facility; and abused both the administrative and judicial processes within Texas. The case is based on the past and continuing activities of Phyllis Glazer and a non-profit corporation (M.O.S.E.S.) organized by Glazer, her husband and mother, all of whom are defendants. The action alleges that Defendants fraudulently sought to deprive Plaintiffs of their property by spreading misleading and defamatory statements about Plaintiffs and their business operations, and that the Defendants have conspired among themselves to force the closure of the Winona facility for their own pecuniary gain by engaging in a pattern of maliciously disseminating clearly false and defamatory statements concerning the Plaintiffs' businesses and by repeatedly abusing judicial proceedings solely for the purpose of damaging the reputation and financial health of Plaintiffs. Defendants have answered the complaint denying liability and counter-claiming for damages for abuse of process in attempting to deny Plaintiffs' 33 34 right of free speech. MOSES claims actual and punitive damages in excess of $1 million based on alleged reputational damage, reduced income (in the form of reduced contributions) and costs of legal representation. Notwithstanding the decision to close the Winona facility, the Company intends to vigorously prosecute this case to its conclusion. Phyllis Glazer and M.O.S.E.S. v. Gibraltar Chemical Resources, Inc., et al, U.S. District Court Eastern District, Texas, Case No. 6:94-CV-708. This lawsuit, which is a citizen suit brought under the federal Reserve Conservation and Recovery Act and the Clean Air Act, alleges that the Winona facility violated certain permits and regulations, and contributed to the handling, storage, treatment, transportation and disposal of solid and hazardous waste in a manner that presents an imminent and substantial endangerment to health and the environment. The Plaintiffs have requested that the facility be shut down and unspecified civil penalties imposed on the Company. The Company has been granted a partial summary judgment, but the core claims remain subject to indemnity provisions. In April 1995, management learned that one of its subsidiaries had not always complied with the tranit time limitations allowed for hazardous waste being transferred from generators to final disposal sites. These requirements are under the regulatory supervision of the TNRCC and the Company promptly reported the situation to the TNRCC. As a result of an internal review of this matter, the Company determined that there was a substantial number of instances where the transit time limitations were exceeded over approximately eight months from June 1994 through February 1995. As a direct result of this circumstance, the Company has reorganized the operations of the subsidiary, including the replacement of a number of personnel, and the adoption of stronger internal systems for monitoring the movement of boxes and transportation vehicles. At this time, the Company does not know whether the TNRCC will ultimately assess any fines against the Company for exceeding transit time limitations. While the Company believes the steps that it has taken are appropriate and responsible, it is possible that the TNRCC may seek to impose a fine on the Company in connection with the matter. The Company is not in a position to assess the amount of such a fine. However, a fine of sufficient magnitude could have a material adverse effect upon the consolidated financial position of the Company. James D. Moncrief, et al v. Gibraltar Chemical Resources, Inc., et al, District Court of Smith County, Texas, Civil Action No. 92-1942-C. Marian Steich, et al v. Gibraltar Chemical Resources, Inc., et al, District Court of Smith County, Texas, Civil Action No. 93-054309. Michael Williams, et al v. Gibraltar Chemical Resources, Inc., et al, District Court of Smith County, Texas, Civil Action No. 93-2304-C. Tangee E. Daniels, et al v. Atrium Doors and Windows, Inc., et al, District Court of Dallas County, Texas, Civil Action No. 95-091459-L. Each of the above-identified cases, together with the Glazer and Adams cases discussed above, involve AEESC, a subsidiary of the Company, Winona, Texas facility. As discussed elsewhere herein, AEESC has decided to close that facility permanently. Each of these cases seeks unspecified damages for various causes of action, including trespass, nuisance, negligence, gross negligence, and in some cases, fraudulent concealment and fraud. The Plaintiffs claim that they suffered personal injuries and property devaluation as a result of alleged releases of toxic or harmful chemical substances into the environment from the facility. The Moncrief case was tried to a jury in October 1996. The jury awarded damages in the amount of $18,000 on the Plaintiffs' nuisance claim only. Plaintiffs have stated they intend to appeal the verdict and have requested a new trial. All the other cases are in various stages of pre-trial discovery. In the Moncrief, Steich, Williams and Daniels cases, AEESC is relying upon its predecessor parent corporation's insurance coverage for defense and indemnity purposes. With respect to each of the cases, the Company believes it has conducted its operations in accordance with applicable laws and regulations, that each of the lawsuits is without merit and intends to vigorously defend each. ENVIRONMENTAL MATTERS: In the Matter of American Ecology Environmental Services Corporation, SOAH Docket No. ###-##-####. In this matter, the Texas Natural Resources Conservation Commission ("TNRCC"), alleges violations of certain provisions of the Winona Facility's air and surface facilities hazardous waste permits and relevant statutory provisions. The Complaint proposes an administrative penalty assessment of $71,700. An answer has been filed with the TNRCC and settlement discussions are ongoing. The Company will continue to contest this matter if settlement discussions prove unfruitful. 34 35 In re American Ecology Environmental Services Corporation, USEPA Region 6. On March 7, 1997, Company representatives attended a meeting with the USEPA regarding compliance by AEESC with notification requirements of the intention to import waste from a foreign based waste generator. The meeting allowed the Company an opportunity to explain its position regarding the matter and to provide additional relevant information. The alleged violations involve reporting requirements only, not release of pollutants from the facility. EPA anticipates filing an enforcement action against the Company seeking a penalty of approximately $67,500. The Company is currently investigating whether proper information was reported to the EPA. In the Matter of American Ecology Recycle Center, Inc., U.S. Environmental Protection Agency, Region 4, Docket No. 96-13-R. Administrative Complaint issued by the USEPA Region 4, Atlanta, alleges AERC, a subsidiary of the Company, failed to make a hazardous waste determination as the generator of hazardous waste, and stored the same for greater than 90 days without a permit. The Complaint seeks civil penalties in the amount of $96,000, disposal of the "wastes" at a permitted facility, and the immediate clean-up of the area in which the materials have been stored. The materials were routinely used in the AERC Chemline Cleaning Process Unit, which was destroyed by a July 1994 fire at the Oakridge facility. AERC is in settlement discussions with the EPA to resolve the matter without a hearing and has submitted a Resolution Plan to the EPA requesting permission to allow processing of the Chemline Residues in the Facility Waste Water Treatment Unit. The Treatment Unit is currently being rebuilt from the fire, and is anticipated to be on-line in April 1997. In re Ramp Industries, Inc. Site (Colorado), U.S. Environmental Protection Agency, Denver, Region VIII. USE responded to a CERCLA 104(e) Information Request in March 1996 sent by USEPA to numerous Potentially Responsible Parties. Thus far, USE has not been named as a responsible party at the CERCLA site, and there has not been any further action with respect to the site. Hazardous substances may have been sent by USE to the site from the Company's former operations warehouse in Pleasanton, California. No determination as to ultimate liability can be made at this time and no formal action has been initiated beyond the information requests. United States Environmental Protection Agency v. US Ecology, Inc., RCRA No. V-W-025-92. In 1992, the USEPA initiated an administrative enforcement action against USE, a subsidiary of the Company, alleging that USE had failed to comply with certain regulatory requirements to provide financial assurance for closure and post-closure costs as well as liability insurance relating to its hazardous waste management of its facility in Sheffield, Illinois. The EPA is seeking a penalty of approximately $1 million and ordering compliance. USE ceased operations at the facility in 1983, which has been undergoing closure and corrective action pursuant to regulatory requirements and a RCRA Consent Order since that time. Because the Sheffield facility had not been an interim status facility under the RCRA regulations since November 1985, the Company responded that the interim status regulatory requirements for financial assurance and liability insurance do not apply and objected to the penalty as entirely unwarranted. The administrative law judge ruled that the Sheffield facility is subject to the RCRA regulatory requirements for financial assurance and liability insurance. The Company has appealed that decision to the Environmental Appeals Board and is negotiating a reduction of the penalty with the EPA and alternatively seeking to apply the penalty to construction of a supplemental environmental project elsewhere. In the Matter of U.S. Department of Energy, US Ecology, Inc., RCRA Docket No. WA7 89000 8967. EPA issued Hazardous and Solid Waste Amendments to a Final RCRA Permit No. WA7 89000 8967, issued August 29, 1994 to the U.S. Department of Energy for the Hanford Federal Reservation, which purports to impose obligations on various parties, including, potentially, USE. USE has sought review of permit condition III.B., identifying certain disposal units operated by USE as Solid Waste Management Units subject to investigation and corrective action. USE also sought review of all other conditions of the HSWA portion of the permit, including definition "g" to the extent that it defines "facility" or "site" to include leased lands, and including Attachments A-F, to the extent that they set forth the requirements that would be applicable to the USE site. After negotiations with the EPA, the appeal was dismissed at the joint request of USE and the EPA, without prejudice to either party's right to reinstate the appeal if settlement is not achieved. USE has submitted an Investigatory Plan to Washington Department of Ecology for the investigation of hazardous constituents. The Plan is pending. It is not possible at this time to predict the outcome of this matter. 35 36 NOTE 14. SHAREHOLDER RIGHTS PLAN During December 1993, the Company adopted a Shareholder Rights Plan (the "Plan"). Pursuant to the Plan each outstanding share of the Company's Common Stock on December 17, 1993, received one Right as a dividend that becomes exercisable upon certain triggering events. On March 29, 1995, the Company terminated the Plan and authorized the redemption of all outstanding Rights issued under the Plan. The redemption price was $.01 per Right, totaling $78,000 and was paid on April 15, 1995 to shareholders of record on April 10, 1995. 36 37 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: November 14, 1997 By: /s/ Jack K. Lemley ---------------------- Jack K. Lemley Chief Executive Officer Date: November 14, 1997 By: /s/ R. S. Thorn ----------------------- R. S. Thorn Vice President of Administration Chief Accounting Officer 37