UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT
OF 1934
For the Quarterly Period Ended June 30, 2002
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT
OF 1934
For the transition period from ______________ to ______________
Commission File Number 0-11688
AMERICAN ECOLOGY CORPORATION
----------------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 95-3889638
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
Lakepointe Centre I,
300 E. Mallard, Suite 300
Boise, Idaho 83706
------------ -----
(Address of principal executive offices) (Zip Code)
(208) 331-8400
--------------
(Registrant's telephone number, including area code)
Indicate by a check mark whether the Registrant (1) has filed all reports
required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
At August 12, 2002, Registrant had outstanding 14,423,496 shares of its Common
Stock.
AMERICAN ECOLOGY CORPORATION
QUARTERLY REPORT ON FORM 10-Q FOR THE
THREE MONTHS ENDED JUNE 30, 2002
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
PAGE
Item 1. Financial Statements
Consolidated Balance Sheets
(Unaudited) 4
Consolidated Statements of Operations
(Unaudited) 5
Consolidated Statements of Cash Flows
(Unaudited) 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations 11
Item 3. Quantitative and Qualitative Disclosures About Market Risk 19
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 20
Item 2. Changes in Securities and Use of Proceeds 21
Item 3. Defaults upon Senior Securities 21
Item 4. Submission of Matters to a Vote of Security Holders 21
Item 5. Other Information 22
Item 6. Exhibits and Reports on Form 8-K 22
Signatures 23
2
OFFICERS
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Stephen A. Romano
Chief Executive Officer, President and Chief
Operating Officer
James R. Baumgardner
Senior Vice President, Chief Financial Officer
Treasurer and Secretary
Michael J. Gilberg
Vice President and Controller
DIRECTORS
- ---------
Roger P. Hickey, Chairman
President
Chicago Partners
Rotchford L. Barker
Independent Businessman
John M. Couzens
President and Chief Executive Officer
Qwest Digital Media
Roy C. Eliff
Independent Businessman
Edward F. Heil
Sole Member
E.F. Heil, LLC
Stephen A. Romano
Chief Executive Officer, President and Chief
Operating Officer
Paul F. Schutt
Chairman of the Board
Nuclear Fuel Services, Inc.
CORPORATE OFFICE
- -----------------
Lakepointe Centre I
American Ecology Corporation
300 East Mallard Drive, Suite 300
Boise, Idaho 83706
(208) 331-8400
(208) 331-7900 (fax)
www.americanecology.com
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COMMON STOCK
- -------------
American Ecology Corporation's common stock
trades on the Nasdaq National Market under the
symbol ECOL.
FINANCIAL REPORTS
- ------------------
A copy of American Ecology Corporation
Financial Reports, filed with the
Securities and Exchange Commission,
may be obtained by writing to:
Lakepointe Centre I
300 E. Mallard, Suite 300
Boise, Idaho 83706
or at www.americanecology.com
-----------------------
TRANSFER AGENT
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Mellon Investor Services LLC
Overpeck Centre
85 Challenger Road
Ridgefield Park, New Jersey 07660
(201) 296-4000
or at www.mellon-investor.com
-----------------------
AUDITOR
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Balukoff, Lindstrom & Co., P.A.
877 West Main Street, Suite 805
Boise, Idaho 83702
(208) 344-7150
3
PART I. FINANCIAL INFORMATION
- ---------------------------------------
ITEM 1. FINANCIAL STATEMENTS.
AMERICAN ECOLOGY CORPORATION
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
($ IN 000'S EXCEPT PER SHARE AMOUNTS)
June 30, December 31,
2002 2001
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ASSETS
Current Assets:
Cash and cash equivalents $ 417 $ 4,476
Receivables (trade and other), net of allowance for
doubtful accounts of $702 and $1,176 respectively 13,620 12,674
Income tax receivable 740 740
Prepayments and other 1,209 1,881
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Total current assets 15,986 19,771
Cash and investment securities, pledged 243 243
Property and equipment, net 39,823 34,265
Facility development projects 27,430 27,430
Other assets 3,820 5,115
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Total assets $ 87,302 $ 86,824
========== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long term debt $ 9,813 $ 9,860
Short term line of credit -- 5,000
Accounts payable 2,573 2,408
Accrued liabilities 7,405 12,121
Current portion of accrued closure and post closure obligations 1,016 700
Income taxes payable 190 250
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Total current liabilities 20,997 30,339
Long term accrued liabilities 2,156 1,843
Long term debt, excluding current portion 1,892 2,593
Closure and post closure obligation, excluding current portion 13,787 25,633
Commitments and contingencies
Shareholders' equity:
Convertible preferred stock, $.01 par value,
1,000,000 shares authorized, none issued -- --
Series D cumulative convertible preferred stock, $.01 par value,
100,001 authorized and issued, 5,263 shares converted and retired 1 1
Series E redeemable convertible preferred stock, $10.00 par value,
300,000 authorized and issued, 300,000 shares converted and retired -- --
Common stock, $.01 par value, 50,000,000 authorized, 14,423,496
and 13,766,485 shares issued and outstanding respectively 144 138
Additional paid-in capital 55,630 54,637
Retained earnings (deficit) (7,305) (28,360)
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Total shareholders' equity 48,470 26,416
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Total liabilities and shareholders' equity $ 87,302 $ 86,824
========== ==============
See notes to consolidated financial statements.
4
AMERICAN ECOLOGY CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
($ IN 000'S EXCEPT PER SHARE AMOUNTS)
Three Months Ended June 30, Six Months Ended June 30,
-------------------------------- ------------------------------
2002 2001 2002 2001
-------------- ---------------- ------------ ----------------
Revenue $ 16,781 $ 13,731 $ 35,158 $ 26,597
Direct operating costs 10,858 8,974 20,941 16,449
-------------- ---------------- ------------ ----------------
Gross profit 5,923 4,757 14,217 10,148
Selling, general and administrative expenses 3,441 4,935 8,279 8,996
-------------- ---------------- ------------ ----------------
Income (loss) from operations 2,482 (178) 5,938 1,152
Investment income 5 34 16 208
Interest expense 236 346 524 604
Gain on sale of assets 43 66 83 112
Other income (loss) (119) 788 (584) 1,024
-------------- ---------------- ------------ ----------------
Net income before income taxes 2,175 364 4,929 1,892
Income tax expense -- 38 -- 84
-------------- ---------------- ------------ ----------------
Net income before cumulative effect of accounting change 2,175 326 4,929 1,808
Cumulative effect of accounting change -- -- 16,323 --
-------------- ---------------- ------------ ----------------
Net income 2,175 326 21,252 1,808
Preferred stock dividends 99 99 197 196
-------------- ---------------- ------------ ----------------
Net income available to common shareholders $ 2,076 $ 227 $ 21,055 $ 1,612
============== ================ ============ ================
Basic earnings from continuing operations .14 .02 .34 .12
Basic earnings from cumulative effect of accounting change -- -- 1.15 --
-------------- ---------------- ------------ ----------------
Basic earnings per share $ .14 $ .02 $ 1.49 $ .12
============== ================ ============ ================
Diluted earnings from continuing operations .12 .01 .30 .09
Diluted earnings from cumulative effect of accounting change -- -- 1.04 --
-------------- ---------------- ------------ ----------------
Diluted earnings per share $ .12 $ .01 $ 1.34 $ .09
============== ================ ============ ================
Dividends paid per common share $ -- $ -- $ -- $ --
============== ================ ============ ================
Pro forma results as if FAS 143 was implemented January 1,
2001:
Net income before cumulative effect of accounting change, as $ 2,175 $ 326 $ 4,929 $ 1,808
previously reported
Less pro forma accretion of closure and post closure liability -- (252) -- (504)
Less pro forma amortization of closure asset -- (70) -- (140)
Plus previous closure and post closure liability expenses -- 170 -- 374
-------------- ---------------- ------------ ----------------
Pro forma net income $ 2,175 $ 174 $ 4,929 $ 1,538
============== ================ ============ ================
See notes to consolidated financial statements.
5
AMERICAN ECOLOGY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
($ in 000's)
Six Months Ended June 30,
2002 2001
-------------- ---------------
Cash flows from operating activities:
Net income $ 21,252 $ 1,808
Adjustments to reconcile net income to net cash provided
(used) by operating activities:
Depreciation, amortization, and accretion 3,648 2,659
Cumulative effect of accounting change (16,323) --
(Gain) on sale of assets (83) (112)
Changes in assets and liabilities:
Receivables (946) 1,655
Other assets 137 (2,490)
Accounts payable and accrued liabilities (4,725) (4,611)
Income tax payable (60) 157
Facility closure and post closure obligations (487) 48
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Total adjustments (18,839) (2,694)
-------------- ---------------
Net cash provided (used) by operating activities 2,413 (886)
Cash flows from investing activities:
Capital expenditures (1,806) (3,428)
Proceeds from sales of assets 83 112
Acquisition of Envirosafe Services of Idaho, Inc. -- 2,575
Transfers from cash and investment securities, pledged -- 435
-------------- ---------------
Net cash provided (used) by investing activities (1,723) (306)
Cash flows from financing activities:
Proceeds from issuances and indebtedness 12 4,200
Payments of indebtedness (5,760) (6,396)
Stock options and warrants exercised 999 39
-------------- ---------------
Net cash (used) by financing activities (4,749) (2,157)
Decrease in cash and cash equivalents (4,059) (3,349)
Cash and cash equivalents at beginning of period 4,476 4,122
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Cash and cash equivalents at end of period $ 417 $ 773
============== ===============
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest expense $ 524 $ 604
Income taxes 60 160
Non-cash investing and financing activities:
Acquisition of equipment with notes/capital leases -- 850
Acquisition of Envirosafe Services of Idaho, Inc. -- 18,541
Preferred stock dividends accrued 197 196
Transfer of prepaid assets to settle closure liability 462 --
See notes to consolidated financial statements.
6
AMERICAN ECOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATION
In the opinion of management, the accompanying unaudited consolidated financial
statements contain all adjustments and disclosures necessary to present fairly
the financial position of American Ecology Corporation and its wholly-owned
subsidiaries (the "Company") and the results of operations and cash flows.
These financial statements and notes should be read in conjunction with the
financial statements and notes included in the Company's 2001 Annual Report on
Form 10-K for the year ended December 31, 2001, filed with the Securities and
Exchange Commission.
Certain reclassifications of prior quarter amounts have been made to conform
with current quarter presentation, none of which affect previously recorded net
income.
NOTE 2. EARNINGS PER SHARE
Basic earnings per share are computed based on net income and the weighted
average number of common shares outstanding. Diluted earnings per share reflect
the assumed issuance of common shares for outstanding options and conversion of
warrants. The computation of diluted earnings per share does not assume exercise
or conversion of securities that would have an anti-dilutive effect on earnings
per share.
Three Months Ended June 30, Six Months Ended June 30,
------------------------------- -----------------------------
(in thousands) 2002 2001 2002 2001
--------------- -------------- ------------- --------------
Net income before cumulative effect of accounting change $ 2,175 $ 326 $ 4,929 $ 1,808
Cumulative effect of accounting change -- -- 16,323 --
--------------- -------------- ------------- --------------
Net income 2,175 326 21,252 1,808
Less preferred stock dividends 99 99 197 196
--------------- -------------- ------------- --------------
Net income available to common shareholders $ 2,076 $ 227 $ 21,055 $ 1,612
=============== ============== ============= ==============
Weighted average shares outstanding:
Common shares 14,408 13,749 14,094 13,749
Effect of dilutive shares 2,236 3,696 1,635 3,696
--------------- -------------- ------------- --------------
Weighted average shares outstanding 16,644 17,445 15,729 17,445
=============== ============== ============= ==============
NOTE 3. EQUITY
In 1996, the Company issued 300,000 shares of Series E Redeemable Convertible
Preferred Stock ("Series E") that were retired in 1998. The Series E stock
carried 3,000,000 warrants with a $1.50 per share exercise price, which expire
July 1, 2003.
On March 29, 2002, a Series E warrant holder then serving on the Board of
Directors exercised 650,000 Series E warrants. The Company issued 650,000 shares
of common stock and received cash of $975,000 in this transaction. At June 30,
2002 there were 2,350,000 Series E warrants outstanding, which expire July 1,
2003.
7
NOTE 4. OPERATING SEGMENTS
The Company operates through three segments, Operating Disposal Facilities,
Non-Operating Disposal Facilities, and Processing and Field Services. These
segments reflect the Company's internal reporting structure and services
offered, and is consistent with management's view of the business. The Operating
Disposal Facility segment represents facilities currently accepting hazardous,
non-hazardous and radioactive waste. The Non-Operating Disposal Facility segment
represents facilities that no longer accept waste or require additional
approvals to begin operation. The Processing and Field Services segment
aggregates, volume-reduces, and performs remediation and other services on
radioactive and other hazardous material, but excludes processing performed at
the disposal facilities.
Income taxes are assigned to Corporate. All other items are included in their
originating segment. Inter-company transactions have been eliminated from the
segment information and are not significant between segments.
Quarterly financial information for the Company's reportable segments is
summarized below.
OPERATING NON-OPERATING PROCESSING
($in 000's) DISPOSAL DISPOSAL AND FIELD
FACILITIES FACILITIES SERVICES CORPORATE TOTAL
THREE MONTHS ENDED JUNE 30, 2002
- --------------------------------
Revenue $ 11,089 $ 113 $ 5,579 $ -- $16,781
Direct cost 6,140 277 4,441 -- 10,858
----------- --------------- ------------ ----------- --------
Gross profit (loss) 4,949 (164) 1,138 -- 5,923
S,G&A 1,869 (25) 807 790 3,441
----------- --------------- ------------ ----------- --------
Income (loss) from operations 3,080 (139) 331 (790) 2,482
Investment income -- -- -- 5 5
Gain on sale of assets 43 -- -- -- 43
Interest expense 227 -- 8 1 236
Other income (expense) 7 3 (256) 127 (119)
----------- --------------- ------------ ----------- --------
Income before extraordinary items 2,903 (136) 67 (659) 2,175
and taxes
Extraordinary item and taxes -- -- -- -- --
Net income (loss) $ 2,903 $ (136) $ 67 $ (659) $ 2,175
Depreciation and accretion expense $ 1,548 $ 105 $ 126 $ 12 $ 1,791
Total Assets $ 46,807 $ 27,491 $ 9,282 $ 3,722 $87,302
THREE MONTHS ENDED JUNE 30, 2001
- --------------------------------
Revenue $ 11,014 $ 18 $ 2,699 $ -- $13,731
Direct Cost 5,857 163 2,954 -- 8,974
----------- --------------- ------------ ----------- --------
Gross Profit 5,157 (145) (255) -- 4,757
S,G&A 2,244 139 1,082 1,470 4,935
----------- --------------- ------------ ----------- --------
Income (loss) from operations 2,913 (284) (1,337) (1,470) (178)
Investment income 8 6 -- 20 34
Gain on sale of assets 56 -- 10 -- 66
Interest expense 324 -- 16 6 346
Other income 286 -- -- 502 788
----------- --------------- ------------ ----------- --------
Income before extraordinary items 2,939 (278) (1,343) (954) 364
and taxes
Extraordinary item and taxes -- -- -- 38 38
----------- --------------- ------------ ----------- --------
Net Income $ 2,939 $ (278) $ (1,343) $ (992) $ 326
Depreciation Expense $ 1,281 $ -- $ 107 $ 15 $ 1,403
Total Assets $ 44,268 $ 27,448 $ 6,769 $ 2,775 $81,260
SIX MONTHS ENDED JUNE 30, 2002
- ------------------------------
REVENUE $ 25,065 $ 180 $ 9,913 $ -- $35,158
8
DIRECT COST 12,434 580 7,927 -- 20,941
----------- --------------- ------------ ----------- --------
GROSS PROFIT 12,631 (399) 1,985 -- 14,217
S,G&A 4,707 55 1,920 1,597 8,279
----------- --------------- ------------ ----------- --------
INCOME (LOSS) FROM OPERATIONS 7,924 (454) 65 (1,597) 5,938
INVESTMENT INCOME 8 -- -- 8 16
GAIN ON SALE OF ASSETS 83 -- -- -- 83
INTEREST EXPENSE 460 -- 16 48 524
OTHER INCOME (EXPENSE) 32 (487) (256) 127 (584)
----------- --------------- ------------ ----------- --------
INCOME BEFORE EXTRAORDINARY 7,587 (941) (207) (1,510) 4,929
ITEMS AND TAXES
EXTRAORDINARY ITEM AND TAXES -- -- -- -- --
----------- --------------- ------------ ----------- --------
CUMULATIVE EFFECT OF ACCOUNTING 18,165 1,548 (3,390) -- 16,323
----------- --------------- ------------ ----------- --------
CHANGE
NET INCOME $ 25,752 $ 607 $ (3,597) $ (1,510) $21,252
DEPRECIATION EXPENSE $ 3,118 $ 229 $ 269 $ 32 $ 3,648
TOTAL ASSETS $ 46,807 $ 27,491 $ 9,282 $ 3,722 $87,302
SIX MONTHS ENDED JUNE 30, 2001
- ------------------------------
Revenue $ 21,317 $ 21 $ 5,259 $ -- $26,597
Direct Cost 10,673 554 5,222 -- 16,449
----------- --------------- ------------ ----------- --------
Gross Profit 10,644 (533) 37 -- 10,148
S,G&A 3,825 139 2,201 2,831 8,996
----------- --------------- ------------ ----------- --------
Income (loss) from operations 6,819 (672) (2,164) (2,831) 1,152
Investment income 167 7 -- 34 208
Gain on sale of assets 93 -- 19 -- 112
Interest expense 539 -- 33 32 604
Other income 362 -- -- 662 1,024
----------- --------------- ------------ ----------- --------
Income before extraordinary items 6,902 (665) (2,178) (2,167) 1,892
and taxes
Extraordinary item and taxes -- -- -- 84 84
----------- --------------- ------------ ----------- --------
Net Income $ 6,902 $ (655) $ (2,178) $ (2,251) $ 1,808
Depreciation Expense $ 2,407 $ -- $ 220 $ 32 $ 2,659
Total Assets $ 44,268 $ 27,448 $ 6,769 $ 2,775 $81,260
NOTE 5. CUMULATIVE EFFECT OF ACCOUNTING CHANGE
As previously reported, the Company implemented Statement of Financial
Accounting Standards 143, Accounting for Asset Retirement Obligations (FAS 143)
effective January 1, 2002. FAS 143 requires a liability to be recognized as part
of the fair value of future asset retirement obligations and an associated asset
to be recognized as part of the carrying amount of the asset. Previously, the
Company recorded a Closure and Post Closure Obligation for the pro-rata amount
of disposal space used to the original space available. On January 1, 2002, in
accordance with FAS 143, this obligation was valued at the current closure cost,
increased by a cost of living adjustment for the estimated time of payment, and
discounted back to present value. A previously unrecognized asset was also
recorded.
Liabilities are recorded when environmental assessments and/or remedial efforts
are probable, and the costs can be reasonably estimated consistent with
Statement of Financial Accounting Standards No. 5. The Company performs periodic
reviews of both non-operating and operating sites and revises accruals for
estimated post-closure, remediation and other costs as necessary. The Company's
recorded liabilities are based on best estimates of current costs and are
updated periodically to reflect current technology, laws and regulations,
inflation and other economic factors.
Changes to reported closure and post closure obligations were as follows (in
thousands):
9
December 31, 2001 obligation $ 26,333
January 1, 2002 implementation of FAS 143 (11,130)
Accretion of obligation 550
Payment of obligation (847)
Adjustment of obligation (103)
---------
June 30, 2002 obligation $ 14,803
=========
At June 30, 2002, $243,000 of pledged cash and investment securities were
legally restricted for purposes of settling the closure and post closure
obligation.
Cumulative effect of accounting change is comprised as follows (in thousands):
Reduction in closure and post closure obligation $11,130
Initial recognition of closure and post closure asset 5,193
-------
Cumulative effect of implementation of FAS 143 $16,323
=======
NOTE 6. LINE OF CREDIT
The Company has in place an $8,000,000 revolving line of credit facility with a
financial institution. The line of credit is secured by the Company's accounts
receivable. At June 30, 2002 and December 31, 2001, the outstanding balance on
the revolving line of credit was $0 and $5,000,000, respectively. The Company
borrows and repays according to business demands and availability of cash. On
April 5, 2002 the Company repaid $1,500,000, bringing the balance to $0 and has
not drawn funds since that date. The line of credit is scheduled to mature on
October 15, 2002. The Company is currently negotiating renewal.
NOTE 7. LITIGATION
Significant developments have occurred on the following legal matters since
December 31, 2001:
MANCHAK V. US ECOLOGY, INC., CIVIL ACTION NO. 96-494, U.S. DISTRICT COURT FOR
- -------------------------------
THE DISTRICT OF NEVADA.
On April 24, 2002 the Company filed a motion for summary judgment seeking
dismissal of a patent infringement lawsuit (the "Manchak" case) involving the
Company's Beatty facility. The Company expects to file an additional motion
contesting the patent's validity in the third quarter of 2002. The Company does
not believe it infringed any Manchak patents. No assurance can be given that the
Company will prevail or that this matter can be favorably resolved.
FEDERAL RCRA INVESTIGATION AT THE OAK RIDGE, TENNESSEE FACILITY
- -----------------------------------------------------------------------
On August 8, 2002 counsel for subsidiary American Ecology Recycle Center (AERC)
entered a guilty plea in United States District Court for the Eastern District
of Tennessee to a single felony count of storing hazardous waste without the
necessary permit at the subsidiary's Oak Ridge facility from 1997 to 2000. AERC
also paid a $10,000 fine. The plea agreement recognizes the subsidiary's recent,
voluntary contributions of $12,500 to the Tennessee Wildlife Resources Agency
and $12,500 to the Tennessee Valley Authority Police to support environmental
training and enforcement. The plea agreement resolves all outstanding matters
concerning the Federal RCRA Investigation at the Oak Ridge, Tennessee facility.
US ECOLOGY, INC. V. THE STATE OF CALIFORNIA, ET AL., CASE NO.GIC747562, SUPERIOR
- ---------------------------------------------------
COURT OF THE STATE OF CALIFORNIA FOR THE COUNTY OF SAN DIEGO
Discovery is ongoing in this litigation, which alleges that the State of
California breached its promise to the Company to employ its best efforts to
acquire a site for the Company to construct and operate a low-level radioactive
waste disposal facility in California. Trial is set to begin in January 2003.
The Company is seeking more than $162 million from the State. No assurance can
be given that the Company will prevail or that this matter can be favorably
resolved.
10
ENTERGY ARKANSAS, INC., ET AL, CENTRAL INTERSTATE LOW-LEVEL RADIOACTIVE WASTE
- --------------------------------------------------------------------------------
COMMISSION AND US ECOLOGY, INC. ("PLAINTIFFS") V. STATE OF NEBRASKA, ET AL.,
- --------------------------------------------------------------------------------
CASE NO. 4:98CV3411, U.S. DISTRICT COURT, DISTRICT OF NEBRASKA
The trial in U.S. District Court concluded on August 3, 2002. US Ecology and
other plaintiffs seek monetary damages and are contesting the State of
Nebraska's proposed denial of a license to construct and operate a low-level
radioactive waste facility in Butte, Nebraska, alleging that the state acted in
bad faith in denying the license. Judge Richard Kopf stated his intention at
trial to rule around the end of September 2002. The Company is seeking more
than $6.2 million in this matter. No assurance can be given that the Company
will prevail or that this matter can be favorably resolved.
MATTIE CUBA, ET. AL. V. AMERICAN ECOLOGY ENVIRONMENTAL SERVICES CORPORATION, ET.
- --------------------------------------------------------------------------------
AL., CAUSE NO. 2000-092, 4TH JUDICIAL DISTRICT COURT, RUSK COUNTY, TEXAS
- ----
The Company has filed a no evidence motion for summary judgment in this matter.
On August 7, the judge in the case ruled that the plaintiffs had another 90 days
to complete discovery and depositions in the matter. Although no assurance can
be made, the Company believes the plaintiffs' case is without merit and will
continue to vigorously contest the matter. No assurance can be given that the
Company will prevail or that this matter can be favorably resolved.
GENERAL MOTORS CORPORATION V. AMERICAN ECOLOGY ENVIRONMENTAL SERVICES CORP., ET
- --------------------------------------------------------------------------------
AL., CASE NO. 3-99CV2626-L, U.S. DISTRICT COURT, NORTHERN DISTRICT OF TEXAS.
- ---
On May 10, 2002, the Company settled a long running dispute with General Motors
Corporation ("GM") resolving a claim brought by GM regarding a waste disposal
contract between GM and the Company's Winona, Texas facility in the early 1990s.
Without admitting fault or wrongdoing, the Company paid GM $1,040,000 of which
$300,000 was accrued as of December 31, 2001. The remaining $740,000 was accrued
as of March 31, 2002. This matter is now fully resolved.
ZURICH AMERICAN INSURANCE COMPANY V. NATIONAL UNION FIRE INSURANCE COMPANY OF
- --------------------------------------------------------------------------------
PITTSBURGH, ET AL INCL. AEC, AEESC, AEMC AND AESC, CASE NO. 604662/99, SUPREME
- ---------------------------------------------------
COURT OF STATE OF NEW YORK, COUNTY OF NEW YORK.
On February 12, 2002, the Company settled a dispute with National Union Fire
Insurance Company of Pittsburgh and other entities ("National") related to
indemnification of the above General Motors claim. The Company received a
$250,000 payment and dismissed all claims against National. The $250,000 was
recognized as Other Income during the quarter-ending March 31, 2002. This
matter is now fully resolved.
US ECOLOGY, INC. V. DAMES & MOORE, INC.,CASE NO. CV OC 0101396D, FOURTH JUDICIAL
- ----------------------------------------
DISTRICT COURT, ADA COUNTY, IDAHO
On May 3, 2002, the Company settled a dispute with Dames & Moore, Inc.\URS
("URS") over URS' alleged failure to pay for work performed under contract at
Brookhaven National Laboratory ("BNL"). Pursuant to a settlement agreement, URS
paid the Company $700,000 in May 2002, of which $600,000 was previously recorded
as revenue. This matter is now fully resolved.
On March 20, 2002, the Company settled a related dispute with BNL by which BNL
paid $86,000. This amount was recorded as revenue in the first quarter of 2002.
This matter is now fully resolved.
U.S. ECOLOGY CORPORATION [SIC] AND OIL, CHEMICAL & ATOMIC WORKERS INTERNATIONAL
- --------------------------------------------------------------------------------
UNION, AFL-CIO, CASES 10-CA-30847 AND 10-CA-31149, U.S. SIXTH CIRCUIT COURT OF
- ----------------
APPEALS.
In June 2002, the Company paid $1,027,000 to settle a grievance filed by the
Oil, Chemical & Atomic Workers International Union, AFL-CIO (the "Union")
alleging that US Ecology engaged in unfair labor practices. $871,000 was
previously accrued for settlement. The additional $156,000 was recorded under
Other Expense in June 2002. The past grievance is now fully resolved and the
Company is currently negotiating with the Union on a new collective bargaining
agreement.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
This document contains forward-looking statements that involve known and unknown
risks and uncertainties which may cause actual results in future periods to
differ materially from those indicated herein. These risks include, but are not
11
limited to, compliance with and changes to applicable laws and regulations,
exposure to litigation, access to capital, access to insurance and financial
assurances, new technologies, competitive environment, labor issues, and loss of
major contracts. The audited consolidated financial statements and the notes
thereto filed on Form 10-K for the year ending December 31, 2001 contains
additional risk factors and an expanded disclosure of these risks. When the
Company uses words like "may," "believes," "expects," "anticipates," "should,"
"estimate," "project," "plan," their opposites and similar expressions, the
Company is making forward-looking statements. These terms are most often used in
statements relating to business plans, strategies, anticipated benefits or
projections about the anticipated revenues, earnings or other aspects of our
operating results. The Company makes these statements in an effort to keep
stockholders and the public informed about our business based on our current
expectations about future events. Such statements should be viewed with caution
and are not guarantees of future performance or events. As noted elsewhere in
this report, our business is subject to uncertainties, risks and other
influences, many of which the Company has no control over. Additionally, these
factors, either alone or taken together, could have a material adverse effect on
the Company and could change whether any forward-looking statement ultimately
turns out to be true. The Company undertakes no obligation to publicly release
updates or revisions to these statements. The following discussion should be
read in conjunction with the audited consolidated financial statements and the
notes thereto filed on Form 10-K for the year ending December 31, 2001.
Unless otherwise described, changes discussed relate to the increase or decrease
from the three and six-month periods ended June 30, 2001 to the three and
six-month periods ended June 30, 2002.
INTRODUCTION
- ------------
The Company is a hazardous, non-hazardous, and radioactive waste management
company providing treatment and disposal solutions to commercial and government
entities including, but not limited to nuclear power plants, petro-chemical
refineries, steel mills, the U.S. Department of Defense, biomedical facilities,
universities and research institutions. The majority of its revenues are derived
from fees charged for use of the Company's five fixed waste disposal facilities
and one processing facility. Fees are also charged for field investigations,
waste removal and transportation to fixed facilities operated by the Company and
others. The Company and its predecessors have been in business for 50 years.
In October 2001, new management was appointed and the Company was reorganized to
focus on optimizing performance of its core disposal assets. Management believes
that this restructuring has begun to yield significant benefits including
improved market penetration, clearer organizational accountability, cost savings
through reduced corporate overhead and spending controls, and improved
utilization of operating assets. For the three and six-months ending June 30,
2002, the Company's revenue and earnings have shown significant growth,
principally due to the new management's teams strategy.
On April 18, 2002, the Company entered into a five-year lease for approximately
8,500 square feet of commercial office space in Boise, Idaho, which the Company
moved into on July 1, 2002. Effective July 1 2002, the Company's new address is
Lakepointe Centre I, 300 E. Mallard Drive, Suite 300, Boise, ID 83706.
OVERALL COMPANY PERFORMANCE
- -----------------------------
On a consolidated basis, the Company's financial performance for the three and
six-months ended June 30, 2002 as measured by net income before cumulative
effect of accounting change reflected a material improvement over any first half
financial performance since the Company went public in 1984. Management
believes this improvement is due to the turn-around plan and restructuring
implemented late last year. This plan focused on spending reductions, cost
controls, streamlined reporting, the creation of a national sales organization
and the implementation of a new sales incentive program designed to increase
revenue and earnings.
The Company expects continued profitability in the second half of 2002, but does
not expect it's financial performance in the second half to equal its the record
first half performance. This is mostly due to the completion of a large Army
Corps project and several large Field Services projects that were mostly
completed in the first half. Additionally, the need to enhance operational
performance at the Beatty and Oak Ridge facilities will continue to consume
resources into the fourth quarter of 2002 and most likely continue to be drag on
earnings. However, there are large disposal and field services projects
currently in progress or anticipated that are expected to have a positive impact
on the second half of 2002, particularly at the Company's Grand View facility.
12
A significant portion of the Company's record year financial results revenue is
attributable to discrete clean-ups ("event business"). This variability in
revenue and earnings performance is expected quarter to quarter, depending on
the relative contribution from single event business during the reporting
period. Management's strategy is to secure substantial base or recurring
business while simultaneously pursuing these large event opportunities. This
takes advantage of the high fixed cost nature of the business, since the
incremental event business contribution is expected to produce high margins
assuming fixed costs are covered by the base business.
CRITICAL ACCOUNTING POLICIES
- ------------------------------
In preparing the financial statements, management makes many estimates and
assumptions that affect the Company's financial position and results of
operations. It is unlikely that changes in most estimates and assumptions would
materially change the Company's financial position and results of operations.
Litigation and disposal facility accounting however, requires subjective
judgments, estimates, and assumptions that would likely produce a materially
different financial position and result of operation if different judgments,
estimates, or assumptions were used.
The Company has been involved in litigation requiring estimates of the timing
and loss potential whose timing and ultimate disposition is controlled by the
judicial process. Approximately $900,000 is included as an Other Expense for
litigation where the Company was the defendant in the six-month period ending
June 30, 2002. The Company also has recorded $27,430,000 for facility
development costs, which may not be realizable if the Company does not recover
monetary damages from the State of California and the State of Nebraska or the
disposal projects in these states do not become operational. The decision to
accrue costs or write off assets is based upon the specific facts and
circumstances related to each case and management's evaluation of changing
circumstances.
Accounting for disposal facilities requires numerous subjective and complex
judgments, estimates, and assumptions that materially affect financial position
and results of operations. In general terms, a disposal unit development asset
exists for the cost of building usable disposal space and a closure liability
exists for capping and monitoring the disposal unit once this space has been
filled. Major assumptions and judgments used to calculate disposal unit
development assets and closure liabilities are as follows:
Personnel and equipment costs incurred in construction of a disposal cell are
identified by management and capitalized as the disposal unit development asset.
The disposal unit development asset is depreciated as each available cubic yard
of disposal space is filled. Periodic independent engineering inspection
reports are used to determine the remaining volume available. These take into
account volume, compaction rates, and space reserved for capping the filled
disposal units.
The closure liability is the present value based on a current cost estimate
prepared by an independent engineering firm of the costs to close and monitor
disposal units. Management estimates the timing of payment and then accretes
the current cost estimate by an estimated cost of living, and then discounts the
accreted current cost estimate back to a present value. The final payments of
the closure liability are currently estimated as being paid in 2056.
13
RESULTS OF OPERATIONS
- -----------------------
The following table presents, for the periods indicated, the percentage of
operating line items in the consolidated income statement to revenues:
Three Months Ended Six Months Ended
-------------------------------------- -------------------------------------
($in 000's) June 30, 2002 June 30, 2001 June 30, 2002 June 30, 2001
------------------ ------------------ ------------------ -----------------
$ % $ % $ % $ %
--------- ------- --------- ------- --------- ------- -------- -------
Revenue 16,781 13,731 35,158 26,597
Direct operating costs 10,858 64.7% 8,974 65.4% 20,941 59.6% 16,449 61.8%
--------- --------- --------- --------
Gross profits 5,923 35.3% 4,757 34.6% 14,217 40.4% 10,148 38.2%
SG & A 3,441 20.5% 4,935 35.9% 8,279 23.5% 8,996 33.8%
--------- --------- --------- --------
Income from operations 2,482 14.8% (178) -1.3% 5,938 16.9% 1,152 4.3%
Investment income 5 0.0% 34 .2% 16 0.0% 208 0.8%
Gain on sale of assets 43 0.3% 66 0.5% 83 0.2% 112 0.4%
Interest expense 236 1.4% 346 2.5% 524 1.5% 604 2.3%
Other income (expense) (119) -0.7% 788 5.7% (584) -1.7% 1,024 3.9%
--------- --------- --------- --------
Net income before income taxes 2,175 13.0% 364 2.7% 4,929 14.0% 1,892 7.1%
Income tax expense -- 0.0% 38 0.3% -- 0.0% 84 0.3%
--------- --------- --------- --------
Net income before cumulative 2,175 13.0% 326 2.4% 4,929 14.0% 1,808 6.8%
effect of accounting change
Cumulative effect of accounting -- 0.0% -- 0.0% 16,323 46.4% -- 0.0%
--------- --------- --------- --------
change
Net income 2,175 13.0% 326 2.4% 21,252 60.4% 1,808 6.8%
Preferred stock dividends 99 0.6% 99 0.7% 197 0.6% 196 0.7%
--------- --------- --------- --------
Net income available to common
shareholders 2,076 12.4% 227 1.7% 21,055 59.9% 1,612 6.1%
========= ========= ========= ========
COMPARISON OF THREE MONTHS ENDED JUNE 30, 2002 AND 2001
- ----------------------------------------------------------------
REVENUE
- -------
For the three months ended June 30, 2002, the Company reported consolidated
revenue of $16,781,000, a 22% increase over the $13,731,000 reported for the
same period in 2001. During the three months ending June 30, 2002, $742,000 or
4% of revenue, represented work performed for the U.S. Army Corps of Engineers.
In the fourth quarter of 2001, the Company sold certain under-performing,
non-core business operations that represented $1,166,000 of revenue in the three
months ended June 30, 2001. The Company did not report revenue for these closed
or sold business units in the first or second quarters of 2002. When the
three-month revenue in 2001 is adjusted, comparable revenue for 2002 was 34%
higher over the same period last year.
During the three months ended June 30, 2002, revenue at the Richland, Washington
LLRW disposal facility was $492,000 lower than the same period last year due to
continued reduced usage of the facility.
At the Grand View, Idaho disposal facility, purchased on February 1, 2001,
revenue was also down, dropping $715,000 from the same period last year. During
the second quarter, the facility disposed of 38,000 tons of material with a
smaller percentage representing usage by the Army Corps of Engineers.
During the three months ended June 30, 2002, the Oak Ridge, Tennessee processing
facility contributed $806,000 of the increase in revenue due to increased
throughput of radioactive waste and higher prices. A second shift added during
the fourth quarter of 2001 was continued through May of 2002 to expedite
off-site shipment of previously accumulated customer waste and non-revenue
producing material. An increase in waste processing pricing did affect revenue
during the second quarter of 2002.
14
Field Services, a purely event-driven remediation business, contributed
$3,241,000 of the increase in revenue for the three months ended June 30, 2002.
Four projects were active during the first six months of 2002. Three of these
extended into the second quarter and two are expected to generate revenue in the
third quarter of 2002.
Revenue at the Beatty, Nevada disposal facility was $638,000 lower in the three
months ended June 30, 2002 due to reduced disposal and thermal processing
volumes. In the first quarter of 2002, the Company entered into an
incentive-driven operating agreement with the thermal equipment
manufacturer/patent holder that produced increased second quarter throughput.
However, reduced direct disposal and treatment volumes combined with operational
inefficiencies negatively impacted revenue and earnings at the site during the
quarter just ended.
The Robstown, Texas hazardous disposal facility contributed $2,162,000 to the
Company's increased revenue for the three months ended June 30, 2002. The
increase in revenue reflects disposal of waste from a large steel mill clean-up
project during the second quarter.
DIRECT OPERATING COSTS
- ------------------------
For the three months ended June 30, 2002, the Company reported direct operating
costs of $10,858,000 or a 21% increase compared to $8,974,000 in the same
period in 2001. However, direct operating costs increased at a lower rate than
revenue during the second quarter, reflecting the high fixed cost nature of the
disposal business.
At the Oak Ridge, Tennessee processing facility direct operating costs were
relatively flat for the three months ended June 30, 2002 despite a continued
focus on off-site shipment of both customer and non-revenue producing materials
for disposal.
At the Beatty, Nevada disposal facility direct costs dropped $90,000 during the
three months ended June 30, 2002. In March 2002, the Company entered into an
operating agreement with the thermal equipment manufacturer to maintain and
operate its thermal processing equipment. Throughput has increased due to the
manufacturer/operator's superior knowledge and experience with the equipment,
and their throughput-based royalty incentive.
In June 20, 2002, the State of Nevada issued notices of alleged air quality
violations. On July 17, 2002, the Company entered an administrative stipulation
and order to resolve the matter, including a $2,280 penalty for exceeding
permitted air emission levels.
In July 2002, the state issued a finding of alleged violation and order to
certify compliance with specified hazardous waste regulations following an
inspection of the Beatty facility performed during the second quarter. The
latter matter has not been resolved, however, the Company anticipates that a
penalty will apply and has reserved accordingly.
The Company has instituted a series of measures to further upgrade operational
efficiency and regulatory compliance at the Beatty facility. These actions
include, but are not limited to relieving the former site manager of his
responsibilities at Beatty, terminating other site personnel, and temporarily
assigning experienced staff from Company facilities in Robstown and Winona,
Texas, and Grand View, Idaho to assist at Beatty. The Company's Director of
Hazardous Waste Operations has additionally assumed Beatty facility management
duties and will remain based at that site until a new site manager is hired and
trained. Management will continue applying resources to upgrade the Beatty
facility into the fourth quarter of 2002, which is expected to adversely impact
site operating earnings.
SELLING, GENERAL AND ADMINISTRATIVE COSTS (SG&A)
- -----------------------------------------------------
For the three months ended June 30, 2002, the Company reported SG&A of
$3,441,000 a 30% reduction from the $4,935,000 in the same three months of 2001.
SG&A decreased materially, relative to revenue, as certain SG&A are fixed
expenses and the Company has focused on reducing SG&A since the restructuring
changes instituted after October 2001. Management continues to focus on cost
control and overhead spending containment as a cornerstone of its turn around
strategy.
15
COMPARISON OF SIX MONTHS ENDED JUNE 30, 2002 AND 2001
- --------------------------------------------------------------
REVENUE
- -------
For the six-months ended June 30, 2002, the Company reported consolidated
revenue of $35,158,000, a 32% increase over the $26,597,000 reported for the
six-month period in 2001. During the six-months ending June 30, 2002, $6,871,000
or 20% of revenue represented work performed for the U.S. Army Corps of
Engineers.
In the fourth quarter of 2001, the Company sold certain under-performing,
non-core business operations that represented $1,992,000 of revenue in the six
months ended June 30, 2001. The Company did not report revenue for these closed
or sold business units in the first half of 2002. When the six-month revenue in
2001 is adjusted, comparable revenue for 2002 was 43% higher over the same
period last year.
During the six months ended June 30, 2002, the Richland, Washington LLRW
disposal facility contributed $1,588,000 of the increase in revenue due to the
March 2002 completion of a $3,850,000 contract for the Army Corps of Engineers.
This completed clean-up project represented 86% of revenue at the Richland
facility and 21% of revenue for the Company during the first quarter of 2002.
The Grand View, Idaho disposal facility, purchased on February 1, 2001,
contributed $1,062,000 to the increase in revenue. A record volume of 56,000
tons of material disposed during the first quarter of 2002 reflected increased
utilization by the U.S. Army Corps of Engineers and other Federal agencies, and
the facility's recent regulatory approval to accept exempt level radioactive
materials from private industry in addition to government sources.
During the six-months ended June 30, 2002, the Oak Ridge, Tennessee processing
facility contributed $2,365,000 of the increase in revenue due to increased
throughput of radioactive waste and the implementation of price increases for
LLRW processing services. The pricing increase did not significantly affect
revenue during the first quarter of 2002 due to backlogs of both customer waste
and non-revenue producing materials requiring processing and off-site shipment
for disposal.
Field Services contributed $4,281,000 of the increase in revenue for the
six-months ended June 30, 2002 as four projects were active during the first six
months of 2002.
Revenue at the Beatty, Nevada disposal facility was $1,102,000 lower in the
six-months ended June 30, 2002 due to reduced disposal volumes and thermal
processing inefficiencies experienced in the first quarter of 2002.
The Robstown, Texas hazardous disposal facility contributed $2,162,000 of the
increase in revenue for the six months ended June 30, 2002. The increase in
revenue reflects disposal of waste from a large steel mill clean-up project
during the second quarter. Revenue for the three months ending March 31, 2002
and 2001 was relatively flat for the Robstown facility.
DIRECT OPERATING COSTS
- ------------------------
For the six-months ended June 30, 2002, the Company reported direct operating
costs of $20,941,000 or a 27% increase compared to $16,449,000 in the
corresponding period in 2001. However, direct operating costs increased at a
lower rate than revenue during the six months of 2002, which reflects the high
fixed cost nature of the Company's business.
The Oak Ridge, Tennessee processing facility contributed $963,000 of the
increase in direct operating costs for the six months ended June 30, 2002.
Increases in direct operating costs were principally due to increased labor
costs and off-site shipment of both customer and non-revenue producing materials
for disposal during the first half of 2002. Direct operating costs at the Oak
Ridge facility fell as a percentage of revenue from 112% of revenue last year to
88% of revenue for the six-month period of this year. The backlog of material on
site has been decreased substantially during the first six-months of 2002,
allowing increased processing of more recent backlog materials and new, incoming
wastes. The reduction in direct cost, relative to revenue, from discontinuing
the second shift at the facility was offset by the increase in direct costs from
processing increased volumes of waste.
16
The Beatty, Nevada disposal facility contributed $27,000 of the increase in
direct costs even though revenue fell $1,102,000 during the six-months ended
June 30, 2002. Direct costs were 84% of revenue during the first six months of
2002 versus 65% in 2001. During the six months ended June 30, 2002 the facility
experienced reduced throughput as well as operational inefficiencies that are
being aggressively addressed by management.
SELLING, GENERAL AND ADMINISTRATIVE COSTS (SG&A)
- -----------------------------------------------------
For the six-months ended June 30, 2002, the Company reported SG&A of $8,279,000
or 23.5 % of revenue compared to the $8,990,000 or 33.8% of revenue posted
during the first half of 2001. Of note, 2001 SG&A only reflected 5 months of
SG&A for the Company's Grand View, Idaho facility, which was purchased on
February 1, 2001. A significant first quarter increase in SG&A occurred at the
Richland, Washington disposal facility where $870,000 of State fees was paid on
a large U.S. Army Corps of Engineers contract. Absent these state fees and
adjusting for the addition of Grand View SG&A, total SG&A was substantially
lower during the first half of 2002 than during the same period of 2001 even
though revenue increased by 22% and 32%, respectively. Management continues to
focus on cost control and overhead spending containment as a cornerstone of its
turn around strategy.
Management has resolved several long-standing lawsuits during the first half of
2002. Priority attention continues to be devoted to advancing or resolving other
pending litigation. Timely resolution of pending legal matters should allow the
Company to better focus its resources and energies on core business growth.
COMPARISON OF THREE AND SIX MONTHS ENDED JUNE 30, 2002 AND 2001
- ---------------------------------------------------------------
INVESTMENT INCOME
- ------------------
For the three and six months ended June 30, 2002, the Company earned investment
income of $5,000 and $16,000 or a $29,000 and $192,000 decrease from the
corresponding periods in 2001. Investment income is earnings on cash balances,
restricted investments, and notes receivable of which the Company maintains
minimal amounts. Investment income for the three and six months ended June 30,
2001 was primarily comprised of earnings on investments acquired on February 1,
2001 as part of the Grand View, Idaho acquisition. These investments were
subsequently converted to cash and used in operations during 2001.
INTEREST EXPENSE
- -----------------
For the three and six-months ended June 30, 2002, the Company reported interest
expense of $236,000 and $524,000 or a decrease of $110,000 and $80,000 from the
corresponding periods in 2001. Decreased usage on the Company's line of credit
during the first half of 2002 contributed to the decreased interest expense
during 2002. Interest expense is primarily comprised of the interest payable on
the $8,500,000 industrial revenue bond ("IRB") for the Grand View, Idaho
facility and equals almost $60,000 per month. The Company does not expect
significant borrowings on the credit facility for the remainder of 2002,
although the Company expects to periodically utilize the line of credit in
response to normal fluctuations in cash flow.
The Idaho IRB matures on November 1, 2002. Company management is actively
negotiating a refinancing of the IRB and seeking to obtain access to additional
tax-free funds to construct the next disposal unit at its Grand View facility.
No assurance can be given that the IRB will be refinanced or that the credit
facility will be renewed upon terms acceptable to the Company.
17
GAIN ON SALE OF ASSETS
- --------------------------
For the three and six-months ended June 30, 2002, the Company disposed of an
insignificant amount of assets. The gain on sale of assets primarily relates to
a pro-rated gain on assets sold as part of the August 2000 sale and leaseback
transaction.
OTHER INCOME (LOSS)
- ---------------------
Other Income is composed of the following ($ in thousands):
Three Months Ended June 30, Six Months Ended June 30,
------------------------------- -----------------------------
2002 2001 2002 2001
-------------- --------------- ------------ ---------------
Litigation accrual related to GM settlement $ -- $ -- $ (740) $ --
Payment received on National Union settlement -- -- 250 --
Insurance claim refunds 2 -- 27 --
NLRB settlement (156) -- (156) --
Data processing services 27 -- 27 --
Other miscellaneous income, net 8 4 8 28
Reversal of professional fee accrual -- -- -- 160
Reversal of restructuring charge -- -- -- 52
Adjustment of tax accrual -- 107 -- 107
Reversal of excess bond interest -- 177 -- 177
Reversal of excess burial fee accrual -- 500 -- 500
-------------- --------------- ------------ ---------------
Total other income $ (119) $ 788 $ (584) $ 1,024
============== =============== ============ ===============
INCOME TAXES
- -------------
Income taxes are, and should remain insignificant until the Company has fully
utilized its net operating loss carry-forward of approximately $25,000,000.
State income tax for certain taxing jurisdictions are the only income taxes
expected to be paid during 2002.
CUMULATIVE EFFECT OF ACCOUNTING CHANGE
- ------------------------------------------
On January 1, 2002, the Company implemented SFAS 143 Accounting for Asset
Retirement Obligations. This change is more fully described in Note 5 to the
financial statements with a pro-forma effect as shown on the face of the income
statement.
Compliance with SFAS 143 is mandatory. Implementation is expected to have the
following effects upon the Company:
- A stronger balance sheet through a reduction in liabilities and
increase in the Company reported book net worth. While this offers
numerous benefits that are difficult to quantify, management believes
a stronger balance sheet will improve the Company's access to, and
cost of capital.
- Improved comparability of results with the Company's competitors is
expected to occur as uniform application of the SFAS 143 standard
replaces the diverse practices previously employed in the waste
industry.
- Future expenses will increase on a period basis as the $16,323,000
cumulative effect recognized as of January 1, 2002 flows through
expenses over a currently projected 55 years. The current annualized
estimated expense increase is approximately $750,000 per year.
18
SEASONAL EFFECTS
- -----------------
Operating revenues are generally lower in the winter months than the warmer
summer months when short duration, one-time remediation projects tend to occur.
However, both disposal and processing revenue are more affected by market
conditions than seasonality.
CAPITAL RESOURCES AND LIQUIDITY
- ----------------------------------
On June 30, 2002, cash and cash equivalents totaled $417,000, a decrease of
$4,059,000 from December 31, 2001. The decrease in cash was primarily due to
repayment of debt. The Company expects further reductions in cash balances as
improved cash management procedures allow non-interest earning cash to be
utilized more efficiently, e.g. such as repaying higher cost debt. In addition
to the $5,000,000 that was repaid on the line of credit on April 5, 2002 and
other regularly scheduled debt payments, the Company retired $128,000 of debt in
June 2002 and another $168,000 of debt in July 2002 as part of management
initiatives to improve the Company's balance sheet and reduce high cost debt.
The Company's "days sales outstanding" decreased in the first half of 2002 to 70
days at June 30, 2002, compared to 83 days at December 31, 2001. Further
improvements in cash and receivable balances are expected based on new cash flow
initiatives underway for the second half of 2002.
As of June 30, 2002 the Company's liquidity, as measured by the current ratio,
improved to 0.8 to 1 at June 30, 2002 from 0.7 to 1 at December 31, 2001. The
Company's working capital deficit decreased to $5,011,000 at June 30, 2002 from
$10,568,000 on December 31, 2001. The primary reason for the increase in working
capital was the completion of processing and disposal contracts billed prior to
December 31, 2001.
The Company expects a material improvement in its reported working capital
position with the refinancing of the $8.5 million Idaho IRB, which matures on
November 1, 2002. Company management is actively negotiating a refinancing of
the IRB and seeking to obtain access to additional tax-free funds to construct
the next disposal unit at its Grand View facility. No assurance can be given
that the IRB will be refinanced upon terms acceptable to the Company.
Since December 31, 2001, the Company's leverage has decreased, as evidenced by
debt to equity ratio of .8:1.0 at June 30, 2002, compared to 2.3:1.0 at fiscal
year-end 2001. The debt to equity ratio is defined as total debt divided by
shareholders equity. This decrease in the Company's leverage is principally the
result of the implementation of SFAS 143 as more fully described in Note 5 to
the financial statements and the full retention of earnings.
The Company maintains a banking relationship with Wells Fargo Bank in Boise,
Idaho that provides an $8,000,000 line of credit, secured by the Company's
accounts receivable, expiring in October 2002. As of June 30, 2002, the Company
had not borrowed on the line of credit since it was repaid to a zero balance on
April 5, 2002. The Company is negotiating with the Bank for renewal of the line
of credit. No assurance can be given that the line of credit will be renewed
upon terms acceptable to the Company.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company does not maintain equities, commodities, derivatives, or any other
instruments for trading or any other purposes, and does not enter into
transactions denominated in currencies other than the U.S. Dollar.
The Company has minimal interest rate risk on investments or other assets as the
amount held is the minimum requirement imposed by insurance or government
agencies. At June 30, 2002, $243,000 is held in short term pledged investment
accounts and $740,000 in tax refunds is due from the Federal Government.
Together these items earn interest at approximately 5% and comprise 1.1% of
assets.
The Company has minimal interest rate risk on debt instruments, as management
has preferred fixed rate instruments to the risk incurred by variable rate
instruments. At June 30, 2002, no variable rate debt is owed, and the line of
credit would have been accruing interest at the rate of 5.5%.
19
PART II OTHER INFORMATION.
- -----------------------------
ITEM 1. LEGAL PROCEEDINGS.
Except as described below, there were no material developments with regard to
previously reported legal proceedings:
MANCHAK V. US ECOLOGY, INC., CIVIL ACTION NO. 96-494, U.S. DISTRICT COURT FOR
- -------------------------------
THE DISTRICT OF NEVADA.
On April 24, 2002 the Company filed a motion for summary judgment seeking
dismissal of a patent infringement lawsuit (the "Manchak" case) involving the
Company's Beatty facility. The Company expects to file an additional motion
contesting the patent's validity in the third quarter of 2002. The Company does
not believe it infringed any Manchak patents. No assurance can be given that the
Company will prevail or that this matter can be favorably resolved.
FEDERAL RCRA INVESTIGATION AT THE OAK RIDGE, TENNESSEE FACILITY
- -----------------------------------------------------------------------
On August 8, 2002 counsel for subsidiary American Ecology Recycle Center (AERC)
entered a guilty plea in United States District Court for the Eastern District
of Tennessee to a single felony count of storing hazardous waste without the
necessary permit at the subsidiary's Oak Ridge facility from 1997 to 2000. AERC
also paid a $10,000 fine. The plea agreement recognizes the subsidiary's recent,
voluntary contributions of $12,500 to the Tennessee Wildlife Resources Agency
and $12,500 to the Tennessee Valley Authority Police to support environmental
training and enforcement. The plea agreement resolves all outstanding matters
concerning the Federal RCRA Investigation at the Oak Ridge, Tennessee facility.
US ECOLOGY, INC. V. THE STATE OF CALIFORNIA, ET AL., CASE NO.GIC747562, SUPERIOR
- ---------------------------------------------------
COURT OF THE STATE OF CALIFORNIA FOR THE COUNTY OF SAN DIEGO
Discovery is ongoing in this litigation, which alleges that the State of
California breached its promise to the Company to employ its best efforts to
acquire a site for the Company to construct and operate a low-level radioactive
waste disposal facility in California. Trial is set to begin in January 2003.
The Company is seeking more than $162 million from the State. No assurance can
be given that the Company will prevail or that this matter can be favorably
resolved.
ENTERGY ARKANSAS, INC., ET AL, CENTRAL INTERSTATE LOW-LEVEL RADIOACTIVE WASTE
- --------------------------------------------------------------------------------
COMMISSION AND US ECOLOGY, INC. ("PLAINTIFFS") V. STATE OF NEBRASKA, ET AL.,
- --------------------------------------------------------------------------------
CASE NO. 4:98CV3411, U.S. DISTRICT COURT, DISTRICT OF NEBRASKA
- ---
The trial in U.S. District Court concluded on August 3, 2002. US Ecology and
other plaintiffs seek monetary damages and are contesting the State of
Nebraska's proposed denial of a license to construct and operate a low-level
radioactive waste facility in Butte, Nebraska, alleging that the state acted in
bad faith in denying the license. Judge Richard Kopf stated his intention at
trial to rule around the end of September 2002. The Company is seeking more
than $6.2 million in this matter. No assurance can be given that the Company
will prevail or that this matter can be favorably resolved.
MATTIE CUBA, ET. AL. V. AMERICAN ECOLOGY ENVIRONMENTAL SERVICES CORPORATION, ET.
- --------------------------------------------------------------------------------
AL., CAUSE NO. 2000-092, 4TH JUDICIAL DISTRICT COURT, RUSK COUNTY, TEXAS
- ----
The Company has filed a no evidence motion for summary judgment in this matter.
On August 7, the judge in the case ruled that the plaintiffs had another 90 days
to complete discovery and depositions in the matter. Although no assurance can
be made, the Company believes the plaintiffs' case is without merit and will
continue to vigorously contest the matter. No assurance can be given that the
Company will prevail or that this matter can be favorably resolved.
GENERAL MOTORS CORPORATION V. AMERICAN ECOLOGY ENVIRONMENTAL SERVICES CORP., ET
- --------------------------------------------------------------------------------
AL., CASE NO. 3-99CV2626-L, U.S. DISTRICT COURT, NORTHERN DISTRICT OF TEXAS.
- ---
On May 10, 2002, the Company settled a long running dispute with General Motors
Corporation ("GM") resolving a claim brought by GM regarding a waste disposal
contract between GM and the Company's Winona, Texas facility in the early 1990s.
Without admitting fault or wrongdoing, the Company paid GM $1,040,000 of which
$300,000 was accrued as of December 31, 2001. The remaining $740,000 was accrued
as of March 31, 2002. This matter is now fully resolved.
20
ZURICH AMERICAN INSURANCE COMPANY V. NATIONAL UNION FIRE INSURANCE COMPANY OF
- --------------------------------------------------------------------------------
PITTSBURGH, ET AL INCL. AEC, AEESC, AEMC AND AESC, CASE NO. 604662/99, SUPREME
- ---------------------------------------------------
COURT OF STATE OF NEW YORK, COUNTY OF NEW YORK.
On February 12, 2002, the Company settled a dispute with National Union Fire
Insurance Company of Pittsburgh and other entities ("National") related to
indemnification of the above General Motors claim. The Company received a
$250,000 payment and dismissed all claims against National. The $250,000 was
recognized as Other Income during the quarter-ending March 31, 2002. This
matter is now fully resolved.
US ECOLOGY, INC. V. DAMES & MOORE, INC.,CASE NO. CV OC 0101396D, FOURTH JUDICIAL
- ----------------------------------------
DISTRICT COURT, ADA COUNTY, IDAHO
On May 3, 2002, the Company settled a dispute with Dames & Moore, Inc.\URS
("URS") over URS' alleged failure to pay for work performed under contract at
Brookhaven National Laboratory ("BNL"). Pursuant to a settlement agreement, URS
paid the Company $700,000 in May 2002, of which $600,000 was previously recorded
as revenue. This matter is now fully resolved.
On March 20, 2002, the Company settled a related dispute with BNL by which BNL
paid $86,000. This amount was recorded as revenue in the first quarter of 2002.
This matter is now fully resolved.
U.S. ECOLOGY CORPORATION [SIC] AND OIL, CHEMICAL & ATOMIC WORKERS INTERNATIONAL
- --------------------------------------------------------------------------------
UNION, AFL-CIO, CASES 10-CA-30847 AND 10-CA-31149, U.S. SIXTH CIRCUIT COURT OF
- ----------------
APPEALS.
In June 2002, the Company paid $1,027,000 to settle a grievance filed by the
Oil, Chemical & Atomic Workers International Union, AFL-CIO (the "Union")
alleging that US Ecology engaged in unfair labor practices. $871,000 was
previously accrued for settlement. The additional $156,000 was recorded under
Other Expense in June 2002. The past grievance is now fully resolved and the
Company is currently negotiating with the Union on a new collective bargaining
agreement.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
As of June 30, 2002, the Company had accrued $1,391,000 of dividends on the
Series D Preferred Stock whose payment is prohibited by the Credit Agreement
with the Bank. The accrued dividend is included in long term accrued
liabilities.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The Company held its Annual Meeting of Stockholders on May 30, 2002. On the
record date of April 1, 2002 there were 14,403,985 shares of common stock. At
the meeting the Company's nominees for Director were all elected to the Board
and the selection of Balukoff Lindstrom & Co., P.A. as the Company's independent
auditor was ratified. The voting on the two items was as follows:
Nominee for Director For Withheld
- ---------------------------------------------- ---------- --------
John M. Couzens 13,723,464 232,162
Roy C. Eliff 13,723,959 231,849
Edward F. Heil 13,722,910 232,898
Roger P. Hickey 13,724,460 231,348
Paul F. Schutt 13,720,359 235,449
Stephen A. Romano 13,724,860 230,948
Thomas A. Volini 13,724,296 231,512
Ratification of Balukoff Lindstrom & Co., P.A.
- ----------------------------------------------
For 13,892,132
Against 5,596
Abstain 58,080
21
ITEM 5. OTHER INFORMATION.
On July 19, 2002, Thomas A. Volini resigned from the Board of Directors.
On July 25, 2002, the Board of Directors appointed Rotchford L. Barker to the
Board of Directors. Mr. Barker was previously a member of the Board of
Directors from April 1996 until May 2002 when he did not stand for re-election
to the Board of Directors. Mr. Barker is an independent businessperson and
commodity trader. Mr. Barker has been a member of the Chicago Board of Trade
for more than thirty years and has served on the board of directors of the
exchange. Mr. Barker is also a director of Idacorp, an energy services holding
company that owns Idaho Power Company.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) The following exhibits are filed as part of this report:
Exhibit 10.35 Lease Agreement for Corporate Office Space between American Ecology Corporation and M&S
Prime Properties dated April 18, 2002
Exhibit 99.1 Certification of June 30, 2002 Form 10-Q by Chief Executive Officer dated August 12, 2002
Exhibit 99.2 Certification of June 30, 2002 Form 10-Q by Chief Financial Officer dated August 12, 2002
(b) The Company did not file any reports on Form 8-K during the quarter
ended June 30, 2002.
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SIGNATURES
- ----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AMERICAN ECOLOGY CORPORATION
(Registrant)
Date: August 12, 2002 By:/s/ Stephen A. Romano
Stephen A. Romano
President, Chief Executive Officer and Chief Operating
Officer
Date: August 12, 2002 By:/s/ James R. Baumgardner
James R. Baumgardner
Senior Vice President, Chief Financial Officer,
Secretary and Treasurer
23
EXHIBIT INDEX
Exhibit Description
- ------------- -----------------------------------------------------------------------------------------
Exhibit 99.1 Certification of June 30, 2002 Form 10-Q by Chief Executive Officer dated August 12, 2002
Exhibit 99.2 Certification of June 30, 2002 Form 10-Q by Chief Financial Officer dated August 12, 2002
Exhibit 10.35 Lease Agreement for Corporate Office Space between American Ecology Corporation and M&S
Prime Properties dated April 18, 2002
24