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 September 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
-------- ----------
(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 November 12, 2002, Registrant had outstanding 14,528,996 shares of its Common
Stock.
AMERICAN ECOLOGY CORPORATION
QUARTERLY REPORT ON FORM 10-Q FOR THE
THREE MONTHS ENDED SEPTEMBER 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 13
Item 3. Quantitative and Qualitative Disclosures About Market Risk 24
Item 4. Controls and Procedures 24
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 24
Item 2. Changes in Securities and Use of Proceeds 26
Item 3. Defaults Upon Senior Securities 26
Item 4. Submission of Matters to a Vote of Security Holders 26
Item 5. Other Information 26
Item 6. Exhibits and Reports on Form 8-K 26
Signatures 27
2
OFFICERS CORPORATE OFFICE
- -------- ----------------
Stephen A. Romano Lakepointe Centre I
Chief Executive Officer, President and Chief American Ecology Corporation
Operating Officer 300 East Mallard Drive, Suite 300
Boise, Idaho 83706
James R. Baumgardner (208) 331-8400
Senior Vice President, Chief Financial Officer (208) 331-7900 (fax)
Treasurer and Secretary www.americanecology.com
-----------------------
Michael J. Gilberg
Vice President and Controller COMMON STOCK
------------
American Ecology Corporation's common stock
DIRECTORS trades on the Nasdaq National Market under the
- --------- symbol ECOL.
Roger P. Hickey, Chairman
President
Chicago Partners
FINANCIAL REPORTS
-----------------
Rotchford L. Barker A copy of American Ecology Corporation
Independent Businessman Annual and Quarterly Reports, as filed on Form 10-K
and 10-Q with the Securities and Exchange
John M. Couzens Commission, may be obtained by writing:
President and Chief Executive Officer Lakepointe Centre I
Qwest Digital Media 300 E. Mallard, Suite 300
Boise, Idaho 83706
Roy C. Eliff or at www.americanecology.com
-----------------------
Independent Businessman
Edward F. Heil TRANSFER AGENT
--------------
Sole Member Mellon Investor Services LLC
E.F. Heil, LLC Overpeck Centre
85 Challenger Road
Stephen A. Romano Ridgefield Park, New Jersey 07660
Chief Executive Officer, President and Chief (201) 296-4000
Operating Officer or at www.mellon-investor.com
Paul F. Schutt
Chairman of the Board AUDITOR
-------
Nuclear Fuel Services, Inc. Moss Adams LLP
1001 Fourth Avenue, Suite 2900
Seattle, WA 98154
3
PART I. FINANCIAL INFORMATION
- -------------------------------
ITEM 1. FINANCIAL STATEMENTS.
AMERICAN ECOLOGY CORPORATION
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
($ IN 000'S EXCEPT PER SHARE AMOUNTS)
September 30, December 31,
2002 2001
--------------- --------------
ASSETS
Current Assets:
Cash and cash equivalents $ 3,051 $ 4,476
Receivables (trade and other), net of allowance for
doubtful accounts of $666 and $1,176 respectively 12,244 12,674
Income tax receivable 740 740
Prepayments and other 1,119 1,881
--------------- --------------
Total current assets 17,154 19,771
Cash and investment securities, pledged 244 243
Property and equipment, net 39,086 34,265
Facility development projects 27,430 27,430
Other assets 3,507 5,115
--------------- --------------
Total assets $ 87,421 $ 86,824
=============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long term debt $ 3,973 $ 9,860
Short term line of credit -- 5,000
Accounts payable 1,830 2,408
Accrued liabilities 7,695 12,121
Current portion of accrued closure and post closure obligations 1,016 700
Income taxes payable 20 250
--------------- --------------
Total current liabilities 14,534 30,339
Long term accrued liabilities 2,624 1,843
Long term debt, excluding current portion 6,965 2,593
Closure and post closure obligation, excluding current portion 13,762 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, 14,528,996
and 13,766,485 shares issued and outstanding respectively 145 138
Additional paid-in capital 55,763 54,637
Accumulated deficit (6,373) (28,360)
--------------- --------------
Total shareholders' equity 49,536 26,416
--------------- --------------
Total liabilities and shareholders' equity $ 87,421 $ 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 Nine Months Ended
------------------ -----------------
September 30, September 30,
------------- -------------
2002 2001 2002 2001
-------- -------- -------- --------
Revenue $15,774 $13,896 $50,932 $40,493
Direct operating costs 10,848 9,326 31,789 25,775
-------- -------- -------- --------
Gross profit 4,926 4,570 19,143 14,718
Selling, general and administrative expenses 3,982 5,498 12,261 14,494
-------- -------- -------- --------
Income (loss) from operations 944 (928) 6,882 224
Investment income 7 24 23 231
Interest expense 227 294 751 898
Gain on sale of assets 43 50 126 162
Other income (expense) 39 (34) (545) 990
-------- -------- -------- --------
Net income (loss) before income taxes 806 (1,182) 5,735 709
Income tax expense (benefit) (226) 30 (226) 114
-------- -------- -------- --------
Net income (loss) before cumulative effect of accounting change 1,032 (1,212) 5,961 595
Cumulative effect of accounting change -- -- 16,323 --
-------- -------- -------- --------
Net income (loss) 1,032 (1,212) 22,284 595
Preferred stock dividends 100 99 297 295
-------- -------- -------- --------
Net income (loss) available to common shareholders $ 932 $(1,311) $21,987 $ 300
======== ======== ======== ========
Basic earnings from continuing operations .06 (.10) .40 .02
Basic earnings from cumulative effect of accounting change -- -- 1.14 --
-------- -------- -------- --------
Basic earnings per share $ .06 $ (.10) $ 1.54 $ .02
======== ======== ======== ========
Diluted earnings from continuing operations .06 (.10) .36 .02
Diluted earnings from cumulative effect of accounting change -- -- 1.03 --
-------- -------- -------- --------
Diluted earnings per share $ .06 $ (.10) $ 1.39 $ .02
======== ======== ======== ========
Dividends paid per common share $ - $ -- $ -- $ --
======== ======== ======== ========
Pro forma results as if FAS 143 was implemented Jan 1, 2001:
Net income (loss) before cumulative effect of accounting change, $ 1,032 $(1,212) $ 5,961 $ 595
as previously reported
Less pro forma accretion of closure and post closure liability -- (252) -- (756)
Less pro forma amortization of closure asset -- (70) -- (210)
Plus previous closure and post closure liability expenses -- 103 -- 332
-------- -------- -------- --------
Pro forma net income (loss) $ 1,032 $(1,431) $ 5,961 $ (39)
======== ======== ======== ========
Diluted earnings per share before cumulative effect of accounting .06 (.10) .36 .02
change, as previously reported
Less pro forma expenses, plus previous expenses -- (.01) -- (.03)
-------- -------- -------- --------
Pro forma diluted earnings per share $ .06 $ (.11) $ .36 $ (.01))
======== ======== ======== ========
See notes to consolidated financial statements.
5
AMERICAN ECOLOGY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
($ in 000's)
Nine Months Ended September 30,
2002 2001
------------- -------------
Cash flows from operating activities:
Net income $ 22,284 $ 595
Adjustments to reconcile net income to net cash provided
(used) by operating activities:
Depreciation, amortization, and accretion 5,487 3,953
Cumulative effect of accounting change (16,323) --
(Gain) on sale of assets (126) (162)
Changes in assets and liabilities:
Receivables 430 728
Other assets (7) (4,269)
Accounts payable and accrued liabilities (4,520) (3,379)
Income tax payable (4) 205
Facility closure and post closure obligations (787) 68
------------- -------------
Net cash provided (used) by operating activities 6,434 (2,261)
Cash flows from investing activities:
Capital expenditures (2,629) (2,656)
Proceeds from sales of assets 152 162
Acquisition of Envirosafe Services of Idaho, Inc. -- 2,575
Transfers from cash and investment securities, pledged -- 435
------------- -------------
Net cash provided (used) by investing activities (2,477) 516
Cash flows from financing activities:
Proceeds from issuances and indebtedness 12 4,005
Payments of indebtedness (6,527) (4,813)
Stock purchased and canceled in forward split -- (149)
Stock options and warrants exercised 1,133 40
------------- -------------
Net cash (used) by financing activities (5,382) (917)
Decrease in cash and cash equivalents (1,425) (2,662)
Cash and cash equivalents at beginning of period 4,476 4,122
------------- -------------
Cash and cash equivalents at end of period $ 3,051 $ 1,460
============= =============
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest expense $ 751 $ 249
Income taxes 4 130
Non-cash investing and financing activities:
Acquisition of equipment with notes/capital leases -- 3,006
Acquisition of Envirosafe Services of Idaho, Inc. -- 18,541
Preferred stock dividends accrued 297 295
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, results of operations, and cash flows of American
Ecology Corporation and its wholly-owned subsidiaries (the "Company"). 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 available to common
shareholders 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 whose
exercise price is greater than the average common share market price as the
assumed conversion of these securities would increase earnings per share or
decrease loss per share.
Three Months Ended Nine Months Ended
------------------ -----------------
September 30, September 30,
------------- -------------
(in thousands) 2002 2001 2002 2001
------- -------- ------- -------
Net income before cumulative effect of accounting change $ 1,032 $(1,212) $ 5,961 $ 595
Cumulative effect of accounting change -- -- 16,323 --
------- -------- ------- -------
Net income 1,032 (1,212) 22,284 595
Less preferred stock dividends 100 99 297 295
------- -------- ------- -------
Net income available to common shareholders $ 932 $(1,311) $21,987 $ 300
======= ======== ======= =======
Weighted average shares outstanding:
Common shares 14,518 13,721 14,236 13,721
Effect of dilutive shares 1,718 3,696 1,601 3,696
------- -------- ------- -------
Weighted average shares outstanding 16,236 17,417 15,837 17,417
======= ======== ======= =======
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.
On March 29, 2002, a Series E warrant holder serving on the Company's Board of
Directors exercised 650,000 Series E warrants. The Company issued 650,000 shares
of common stock and received cash in the amount of $975,000 in this transaction.
At September 30, 2002 there were 2,350,000 Series E warrants outstanding, which
expire July 1, 2003.
The Company accounts for options under APB Opinion No. 25, "Accounting for Stock
Issued to Employees". Under this opinion, the Company has not recorded
compensation costs for options during 2002 and 2001. Substantially all options
outstanding are 100% vested as of the grant date.
7
The fair value of each option grant is estimated using the Black-Scholes
option-pricing model with the following assumptions:
Three Months Ended Sep 30, Nine Months Ended Sep 30,
------------------------- -------------------------
2002 2001 2002 2001
----------- ------------ ------------ ------------
Expected volatility 80-105% --% 49-105% 51%
Risk-free interest rates 4.75% --% 4.75% 7.00%
Expected lives 10 years -- years 10 years 10 years
Dividend yield 0% --% 0% 0%
Weighted-average fair value of options granted
during the period (Black-Scholes) $ 2.66 $ -- $ 1.92 $ 1.14
Under option:
Options outstanding, beginning of period 954,150 1,478,198 1,128,650 1,448,898
Granted 17,500 -- 147,500 50,000
Exercised (105,500) -- (107,500) 20,700
Canceled (101,000) -- (403,500) --
----------- ------------ ------------ ------------
Options outstanding, end of period 765,150 1,478,198 765,150 1,478,198
=========== ============ ============ ============
Price range per share of outstanding options $2.25-4.50 $ 1.00-14.75 $1.00-14.75 $1.00-14.75
Price range per share of options exercised $1.25-1.94 $ -- $ 1.25-300 $ 1.25-1.69
Price range per share of options canceled $1.25-3.00 $ -- $1.06-12.17 $ --
Options exercisable at end of period 765,150 1,020,700 765,150 1,121,872
=========== ============ ============ ============
Options available for future grant 1,709,350 1,503,350 1,709,350 1,503,350
=========== ============ ============ ============
Pro forma cost of options:
Per share $ -- $ -- $ .02 $ --
Dollars $ 47,000 $ -- $ 283,000 $ 57,000
NOTE 4. OPERATING SEGMENTS
The Company conducts business through three operating segments, Operating
Disposal Facilities, Non-Operating Disposal Facilities, and Processing and Field
Services. These segments reflect the Company's internal reporting structure 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. Operating Disposal Facilities include the
Beatty, Nevada, Grand View, Idaho, and Robstown, Texas hazardous waste disposal
facilities, the Richland, Washington low-level radioactive waste ("LLRW")
disposal facility, and the Robstown, Texas municipal solid waste and industrial
waste disposal facility. The Non-Operating Disposal Facility segment represents
facilities that no longer accept waste or require additional approvals to begin
operation including the Winona, Texas; Sheffield, Illinois; Ward Valley,
California; and Butte, Nebraska locations. The Processing and Field Services
segment aggregates, volume-reduces, and performs remediation and other clean-up
services on radioactive and other hazardous material, but excludes processing or
treatment performed at the Operating Disposal Facilities. The Processing and
Field Services segment operates out of the Company's Oak Ridge, Tennessee
facility.
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.
8
($in 000's) OPERATING NON-OPERATING PROCESSING
DISPOSAL DISPOSAL AND FIELD
FACILITIES FACILITIES SERVICES CORPORATE TOTAL
THREE MONTHS ENDED SEPTEMBER 30, 2002
- -------------------------------------
===========================================================================================================
Revenue $ 11,575 $ 94 $ 4,105 $ -- $15,774
Direct cost 6,013 465 4,370 -- 10,848
------------ --------------- ------------ ----------- --------
Gross profit (loss) 5,562 (371) (265) -- 4,926
S,G&A 1,707 42 1,144 1,089 3,982
------------ --------------- ------------ ----------- --------
Income (loss) from operations 3,855 (413) (1,409) (1,089) 944
Investment income 2 -- -- 5 7
Gain on sale of assets 32 4 6 1 43
Interest expense 216 -- 6 5 227
Other income (expense) 40 (2) 1 -- 39
------------ --------------- ------------ ----------- --------
Income (loss) before income taxes 3,713 (411) (1,408) (1,088) 806
Income taxes (benefit) -- -- -- (226) (226)
Net income (loss) $ 3,713 $ (411) $ (1,408) $ (862) $ 1,032
Depreciation and accretion expense $ 1,571 $ 114 $ 137 $ 17 $ 1,839
Total assets $ 46,214 $ 27,544 $ 7,840 $ 5,823 $87,421
THREE MONTHS ENDED SEPTEMBER 30, 2001
- -------------------------------------
===========================================================================================================
Revenue $ 10,238 $ 40 $ 3,618 $ -- $13,896
Direct cost 6,567 201 2,558 -- 9,326
------------ --------------- ------------ ----------- --------
Gross profit (loss) 3,671 (161) 1,060 -- 4,570
S,G&A 2,158 98 1,167 2,075 5,498
------------ --------------- ------------ ----------- --------
Income (loss) from operations 1,513 (259) (107) (2,075) (928)
Investment income 14 -- -- 10 24
Gain on sale of assets 40 -- 10 -- 50
Interest expense 228 -- 6 60 2 94
Other income (36) -- 1 1 (34)
------------ --------------- ------------ ----------- --------
Income (loss) before income taxes 1,303 (259) (102) (2,124) (1,182)
Income taxes -- -- -- 30 30
------------ --------------- ------------ ----------- --------
Net income (loss) $ 1,303 $ (259) $ (102) $ (2,154) $(1,212)
Depreciation expense $ 1,161 $ -- $ 117 $ 16 $ 1,294
Total assets $ 43,947 $ 27,486 $ 8,165 $ 2,989 $82,587
NINE MONTHS ENDED SEPTEMBER 30, 2002
- ------------------------------------
===========================================================================================================
REVENUE $ 36,640 $ 274 $ 14,018 $ -- $50,932
DIRECT COST 18,447 1,044 12,298 -- 31,789
------------ --------------- ------------ ----------- --------
GROSS PROFIT (LOSS) 18,193 (770) 1,720 -- 19,143
S,G&A 6,414 97 3,064 2,686 12,261
------------ --------------- ------------ ----------- --------
INCOME (LOSS) FROM OPERATIONS 11,779 (867) (1,344) (2,686) 6,882
INVESTMENT INCOME 10 -- -- 13 23
GAIN ON SALE OF ASSETS 115 4 6 1 126
INTEREST EXPENSE 676 -- 22 53 751
OTHER INCOME (EXPENSE) 72 (489) (255) 127 (545)
------------ --------------- ------------ ----------- --------
INCOME (LOSS) BEFORE INCOME TAXES 11,300 (1,352) (1,615) (2,598) 5,735
INCOME TAXES (BENEFIT) -- -- -- (226) ( 226)
CUMULATIVE EFFECT OF ACCOUNTING
CHANGE 18,165 1,548 (3,390) -- 16,323
------------ --------------- ------------ ----------- --------
NET INCOME (LOSS) $ 29,465 $ 196 $ (5,005) $ (2,372) $22,284
DEPRECIATION EXPENSE $ 4,689 $ 343 $ 406 $ 49 $ 5,487
TOTAL ASSETS $ 46,214 $ 27,544 $ 7,840 $ 5,823 $87,421
9
NINE MONTHS ENDED SEPTEMBER 30, 2001
- ------------------------------------
===========================================================================================================
Revenue $ 31,555 $ 61 $ 8,877 $ -- $40,493
Direct cost 17,240 755 7,780 -- 25,775
------------ --------------- ------------ ----------- --------
Gross profit (loss) 14,315 (694) 1,097 -- 14,718
S,G&A 5,983 237 3,368 4,906 14,494
------------ --------------- ------------ ----------- --------
Income (loss) from operations 8,332 (931) (2,271) (4,906) 224
Investment income 181 7 -- 43 231
Gain on sale of assets 133 -- 29 -- 162
Interest expense 767 -- 39 92 898
Other income 326 -- 1 663 990
------------ --------------- ------------ ----------- --------
Income (loss) before income taxes 8,205 (924) (2,280) (4,292) 709
Income taxes -- -- -- 114 114
------------ --------------- ------------ ----------- --------
Net income (loss) $ 8,205 $ (924) $ (2,280) $ (4,406) $ 595
Depreciation expense $ 3,568 $ -- $ 337 $ 48 $ 3,953
Total assets $ 43,947 $ 27,486 $ 8,165 $ 2,989 $82,587
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. 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):
December 31, 2001 obligation $ 26,333
January 1, 2002 implementation of FAS 143 (11,130)
Accretion of obligation 825
Payment of obligation (1,147)
Adjustment of obligation (103)
---------
September 30, 2002 obligation $ 14,778
=========
The adjustment of obligation is a change in the expected timing of cash
expenditures based upon actual cash expenditures. During the quarter ending
June 30, 2002 a deep well was properly 'plugged and abandoned' at the Winona,
Texas facility at a cost of $147,000 versus estimated expenditures of $250,000.
At September 30, 2002, $244,000 of pledged cash and investment securities were
legally restricted for purposes of settling the closure and post closure
obligation related to the Sheffield, Illinois Non-Operating Disposal Facility.
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
=======
10
NOTE 6. LINE OF CREDIT
On September 30, 2002, the Company had in place a revolving line of credit with
Wells Fargo Bank in Boise, Idaho. The line of credit is secured by the Company's
accounts receivable. At September 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 borrowed since that date. On October 15, 2002 the
Company and Wells Fargo Bank entered into an amendment that reduced the interest
rate and fee structure to the Company, modified existing financial covenants,
reduced the periodic reporting requirements, reduced the maximum amount
available from $8,000,000 to $6,000,000 and extended the maturity date of the
line of credit to June 15, 2004.
Note 7. Income Taxes
The components of the income tax provision (benefit) were as follows (in
thousands):
Three Months Ended Sep 30, Nine Months Ended Sep 30,
-------------------------- --------------------------
2002 2001 2002 2001
---- ---- ---- ----
State tax expense (benefit) (226) 30 (226) 114
===== ==== ===== ====
The tax effects of temporary differences between income for financial reporting
and taxes give rise to deferred tax assets and liabilities. At September 30,
2002, the Company has approximately $11 million of deferred tax assets which
primarily relate to net operating losses, deferred site maintenance costs,
depreciation and amortization, and other accrued liabilities. Management
believes it is more likely than not that some or all of the deferred tax assets
will not be realized, consequently a valuation allowance has been established
for the net deferred tax assets. The realization of a significant portion of
net deferred tax assets is based in part on the Company's estimates of the
timing of reversals of certain temporary differences and on the generation
of taxable income before such reversals.
The net operating loss carry forward is approximately $32,000,000 at
September 30, 2002. Of this carry forward, approximately $2,745,000 is limited
pursuant to the net operating loss limitation rules of Internal Revenue Code
Section 382 and begins to expire in 2006. The remaining unrestricted net
operating loss carry forward expires at various dates between 2010 and 2020.
The amount of the Company's net operating loss carry forwards could be reduced
if the Company is ultimately unsuccessful in pursuing a pending refund claim
with the Internal Revenue Service.
NOTE 8. 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.
Plaintiff filed suit in 1996 claiming that the Company had infringed on a sludge
treatment patent at its Beatty, Nevada hazardous disposal facility in the early
1990s. The Company does not believe it infringed any Manchak patent. On October
15, 2002, the United States District Court for the District of Nevada granted
the Company's motion for summary judgment, dismissing the suit. The Plaintiff
filed a motion for reconsideration with the trial court on October 31, 2002.
The Company expects to file a claim seeking recovery of attorney fees from
Plaintiff. The Company believes the plaintiff's case is without merit and will
continue to vigorously contest the matter.
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 recognized the subsidiary's
11
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 matter is now fully resolved.
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 promises to the Company including a commitment 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. A court mandated
settlement conference is scheduled for December 9, 2002. Trial is scheduled 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.
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. The Company is seeking
more than $6.2 million in this matter. On September 30, 2002 the United States
District Court for the District of Nebraska entered a judgment against the State
of Nebraska for $151 million plus post-judgment interest. As part of the Court's
damages determination, the Court identified total US Ecology damages of $12.3
million. The State of Nebraska appealed the ruling on October 30, 2002. No
assurance can be given that Court's ruling will be sustained upon appeal or that
the Company will recover any damages.
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 filed a motion for summary judgment in July 2002 based on lack of
evidence. On August 7, the Court ruled that plaintiffs had 90 days to complete
discovery and respond to the motion. The motion for summary judgment will be
heard on November 19, 2002. 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.
12
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 above grievance is now fully resolved.
On August 8, 2002 the Company and the Union announced that they had entered into
a new 5-year collective bargaining agreement.
NOTE 9. SUBSEQUENT EVENTS
On October 15, 2002, the Company and Wells Fargo Bank entered into an amendment
to the line of credit that reduced the interest rate and fee structure to the
Company, modified existing financial covenants, reduced the periodic reporting
requirements, reduced the maximum amount available from $8,000,000 to $6,000,000
and extended the maturity date to June 15, 2004.
On October 15, 2002, in the matter styled MANCHAK V. US ECOLOGY, INC., CIVIL
----------------------------
ACTION NO. 96-494, U.S. DISTRICT COURT FOR THE DISTRICT OF NEVADA, the United
States District Court for the District of Nevada granted the motion for summary
judgment, dismissing the patent infringement lawsuit filed against the Company.
On October 31, 2002 plaintiffs filed a motion for reconsideration with the trial
court.
On October 18, 2002, the Company announced that subsidiary American Ecology
Recycle Center, Inc. ("AERC"), which operates the Oak Ridge, Tennessee LLRW
processing facility and Field Services division was being marketed for sale.
Interested parties have entered into non-disclosure agreements, received
information about AERC and met with Company representatives. The Company has
indicated that interested parties should submit bids to acquire AERC by late
November.
On October 24, 2002, the Company announced that it had entered into a five year,
fully amortizing, $7.0 million term loan agreement, effective October 28, 2002,
with Wells Fargo Bank to substantially refinance the $8.5 million Idaho
Industrial Revenue Bond. The term loan provides for a variable interest rate of
the bank's prime rate or an offshore rate plus an applicable margin that is
based upon the Company's performance. The Company has pledged substantially all
of its fixed assets at the Grand View, Beatty, Richland, and Robstown hazardous
and radioactive waste facilities. The term loan is cross-collateralized with
the Company's line of credit. At October 28, 2002 the interest rates available
to the Company ranged from 4.1% to 4.9%. The Company funded the $1.5 million
balance owing on the bond with cash on hand.
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
limited to, the ability to sell or market the Oak Ridge processing and field
services subsidiary (AERC), 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 "will", "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
13
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 nine-month periods ended September 30, 2001 to the three and
nine-month periods ended September 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 waste treatment and disposal assets.
Management believes that this restructuring has yielded significant benefits
including improved market penetration, clearer organizational accountability,
cost savings, and improved utilization of operating assets. Management further
believes that the planned disposition of its low-level radioactive waste
processing facility in Oak Ridge, Tennessee is an important element of the
Company's refocused business strategy. For the three and nine-months ending
September 30, 2002, the Company's revenue and net income have shown significant
improvement, principally due to implementation of the management's teams new
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 nine-months
ended September 30, 2002 as measured by net income before cumulative effect of
accounting change reflected a material improvement over its financial
performance during the same period in 2001. Management believes this improvement
is due to the turn-around plan and restructuring actions implemented late last
year. This plan focused on increasing waste volumes, cost controls, streamlined
reporting, and the implementation of a new sales organization and related
incentive program designed to increase revenue and earnings. These improvements
were impeded by significant operating losses for the Company's Oak Ridge,
Tennessee based subsidiary, American Ecology Recycle Center, Inc.
The Company's financial performance for the three months ended September 30,
2002 was weaker than the first and second quarters of 2002, primarily due the
completion of several large clean-up projects in the first half of the year.
Continued operating losses at the Oak Ridge, Tennessee processing facility
combined with lower revenue at the Robstown, Texas and Richland, Washington
facilities contributed to the weaker third quarter. In the third quarter, and
throughout 2002, the Company invested substantially in the removal of waste
inventory, non-revenue producing material and facility upgrades to prepare the
Oak Ridge-based subsidiary for sale. Management does not believe that the Oak
Ridge processing business is consistent with the Company's core treatment and
disposal business model and considers the timely and orderly disposition of that
business as critical to the ability of the Company to meet its future growth
objectives.
A significant portion of the Company's 2002 revenue is attributable to discrete
clean-ups ("Event Business"). The project-specific nature of the Event Business
necessarily creates variability in revenue and earnings. This can produce large
14
quarter to quarter swings, depending on the relative contribution from single
Event Business. Management's strategy is to expand its recurring business ("Base
Business") while simultaneously securing both large and small event
opportunities. Management believes that by structuring its operating costs so
that the Company's Base Business covers fixed costs, more of the Event Business
revenue will fall through to the bottom line. This strategy takes advantage of
the high fixed cost nature of the disposal 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, Income Taxes, Project Accounting and Disposal Facility Accounting
however, involves 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.
LITIGATION
The Company is involved in litigation requiring estimates of 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 nine-month period ending September
30, 2002. The Company also has recorded $27,430,000 for future facility
development costs, which may not be realized 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.
INCOME TAXES
The Company has historically recorded a valuation allowance against its deferred
tax assets in accordance with FAS 109, Accounting for Income Taxes. The
valuation allowance reflects management's belief that due to a history of tax
losses and the financial condition of the business, it was more likely than not
that the Company would be unable to utilize portions of the deferred tax assets
prior to their expiration. The Company reported taxable income in 2001, however,
fully expects to do so again in 2002. The Company further believes the business
will again be profitable 2003. The determination of whether a valuation
allowance is appropriate and of how much that valuation allowance should be is
based on subjective judgments of whether it is more likely than not that the
Company will be able to utilize some, or all, of the deferred tax assets. The
Company is presently assessing its valuation allowance for the deferred tax
assets and the future likelihood of the utilization of some or all of the
Company's $30 million net operating loss.
PROJECT ACCOUNTING
The Company performs relatively large, fixed fee, and long-duration remediation
projects through the Company's Field Services Division. Management makes
preliminary assumptions regarding the duration, percentage of completion, and
cost of the projects prior to bidding, but will not know the actual duration and
costs until the project is 100% complete. Differences between the preliminary
contamination assessment and the actual contamination can vary materially,
resulting in significant changes in each individual project profit or loss.
DISPOSAL FACILITY ACCOUNTING
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 closing, maintaining, 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 to construct disposal cells are
identified by management and capitalized as a disposal unit development asset.
The disposal unit development asset is depreciated as each available cubic yard
of disposal space is filled. Periodic independent engineering surveys and
inspection reports are used to determine the remaining volume available. These
15
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, maintain, 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.
On January 1, 2002, the Company early adopted 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. Under FAS 143, 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 the currently projected 55 years.
The current annualized estimated expense increase is approximately $750,000 per
year.
RESULTS OF OPERATIONS
- -----------------------
The following table presents, for the periods indicated, the percentage of
operating line items in the consolidated income statement to revenues:
Three Months Ended Nine Months Ended
------------------ -----------------
($ in 000's) September 30, September 30, September 30, September 30,
------------- ------------- ------------- -------------
2002 2001 2002 2001
---- ---- ---- ----
$ % $ % $ % $ %
-------- ----- -------- ----- -------- ----- ------- -----
Revenue 15,774 13,896 50,932 40,493
Direct operating costs 10,848 68.8% 9,326 67.1% 31,789 62.4% 25,775 63.7%
-------- -------- -------- -------
Gross profits 4,926 31.2% 4,570 32.9% 19,143 37.6% 14,718 36.3%
SG & A 3,982 25.2% 5,498 39.6% 12,261 24.1% 14,494 35.8%
-------- -------- -------- -------
Income (loss) from operations 944 6.0% (928) -6.7% 6,882 13.5% 224 0.6%
Investment income 7 0.0% 24 0.2% 23 0.0% 231 0.6%
Gain on sale of assets 43 0.3% 50 0.4% 126 0.2% 162 0.4%
Interest expense 227 1.4% 294 2.1% 751 1.5% 898 2.2%
Other income (expense) 39 0.2% (34) -0.2% (545) -1.1% 990 2.4%
-------- -------- -------- -------
Net income (loss) before income 806 5.1% (1,182) -8.5% 5,735 11.3% 709 1.8%
taxes
Income tax expense (benefit) (226) -1.4% 30 0.2% (226) -0.4% 114 0.3%
-------- -------- -------- -------
Net income (loss) before
cumulative effect of accounting 1,032 6.5% (1,212) -8.7% 5,961 11.7% 595 1.5%
change
Cumulative effect of accounting -- 0.0% -- 0.0% 16,323 32.0% -- 0.0%
-------- -------- -------- -------
change
Net income (loss) 1,032 6.5% (1,212) -8.7% 22,284 43.8% 595 1.5%
Preferred stock dividends 100 0.6% 99 0.7% 297 0.6% 295 0.7%
-------- -------- -------- -------
Net income available to common
shareholders 932 5.9% (1,311) -9.4% 21,987 43.2% 300 0.7%
======== ======== ======== =======
16
COMPARISON OF THREE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001
- ------------------------------------------------------------
REVENUE
- -------
For the three months ended September 30, 2002, the Company reported consolidated
revenue of $15,774,000, a 14% increase over the $13,896,000 reported for the
same period in 2001. During the three months ending September 30, 2002,
$3,853,000 or 24% of revenue, represented work performed under a contract with
the U.S. Army Corps of Engineers. This contract is utilized by the Corps of
Engineers and other federal agencies shipping waste to the Company's Grand View,
Idaho treatment and disposal facility.
In the fourth quarter of 2001, the Company sold certain non-core business
operations that represented $531,000 of revenue in the three months ended
September 30, 2001. When the three-month revenue in 2001 is adjusted, comparable
consolidated revenue for 2002 was 18% higher over the same period last year.
Operating Disposal Facilities
- -------------------------------
At the Grand View, Idaho disposal facility, purchased on February 1, 2001,
revenue increased $1,502,000 from the same period last year. During the third
quarter, the facility disposed of 78,000 tons of material with a large
percentage representing usage under the Army Corps of Engineers contract. The
large percentage of usage under that contract is expected to continue through
the first quarter of 2003.
Revenue at the Beatty, Nevada disposal facility was $429,000 higher in the three
months ended September 30, 2002 than the same quarter of 2001 due to increased
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 has produced increased throughput.
Increased direct disposal and treatment volumes combined with improved
operational efficiencies and sales production improved revenue and earnings at
the site during the quarter ending September 30, 2002.
The Robstown, Texas hazardous disposal facility's revenue decreased $744,000 for
the three months ended September 30, 2002 from the same period in 2001. The
decrease in revenue was primarily due to a weaker economy and reduced "Event"
business. During the third quarter, Company management reorganized the sales
force responsible for this facility and improved revenues are expected for the
fourth quarter.
Processing and Field Services
- --------------------------------
During the three months ended September 30, 2002, the Oak Ridge, Tennessee
processing facility's revenue decreased $711,000 due to reduced throughput of
radioactive waste. This lower waste throughput was partially offset by a higher
average selling price for processing implemented earlier in the year. In the
third quarter the facility experienced problems processing waste in a timely
manner. In addition, facility resources were devoted to removing the non-revenue
producing material and upgrading the facility in preparation for sale.
Field Services, an event-driven remediation business, contributed $1,728,000 of
the quarterly increase in revenue for the period ended September 30, 2002. Five
projects were active during the first nine months of 2002. Three of these
extended into the third quarter and two are expected to generate revenue in the
fourth quarter of 2002. The two projects extending into the fourth quarter are
fixed fee contracts for the decontamination, removal and disposal ofradioactive
material from client facilities. Field Services has begun the characterization
required to determine where the materials removed from these facilities will
ultimately be disposed. This characterization process is not sufficiently
advanced to determine the final direct cost for disposal of all materials
removed from client premises. No assurance can be given at this time that the
fixed price contract amounts will cover the full cost of disposal of such
materials.
17
In the fourth quarter of 2001, the Company sold certain non-core business
operations that represented $531,000 of revenue in the three months ended
September 30, 2001.
DIRECT OPERATING COSTS
- ------------------------
For the three months ended September 30, 2002, consolidated direct operating
costs increased at a higher rate than revenue. The Company reported consolidated
direct operating costs of $10,858,000 or a 16% increase compared to $9,326,000
in the same period in 2001. The higher consolidated direct operating costs were
the result of higher disposal costs for waste shipped off site from the Oak
Ridge facility, project-driven direct operating costs associated with on-going
Field Services projects and volume driven costs incurred at the Grand View and
Beatty disposal facilities.
Operating Disposal Facilities
- -------------------------------
At the Beatty, Nevada disposal facility direct costs increased $359,000 during
the three months ended September 30, 2002. The increase in direct operating
costs is due to increased volumes of waste disposed of and, to lesser extent, an
emphasis on improving disposal methods and regulatory compliance oversight which
has resulted in increased labor and other related costs. The backlog of material
on site awaiting disposal decreased during the third quarter of 2002, reflecting
increased through put at the facility.
On 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. Also 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. On September 30, 2002, the Company entered an
administrative stipulation and order to resolve the matter, with no admission of
guilt, including an $81,500 penalty. The matter is now resolved.
The Company has instituted a series of measures to upgrade operational
efficiency and regulatory compliance at the Beatty facility. These actions
include, but are not limited to replacing the former site manager, hiring a new
lab manager, terminating other site personnel, and temporarily assigning
experienced staff from Company facilities in Robstown and Winona, Texas, and
Boise and Grand View, Idaho to assist at Beatty. The Company's Director of
Hazardous Waste Operations has also spent significant time at the facility
during the quarter. Management believes that the primary operational and
compliance issues have been resolved and the site will remain profitable the
remainder of the year.
Processing and Field Services
- --------------------------------
Field Services contributed $1,532,000 of the increase in direct operating costs
for the three months ended September 30, 2002 due to an increase in the number
and scope of projects currently underway. Five projects worth approximately
$8,000,000 are being performed in 2002 compared to 3 projects worth
approximately $1,000,000 performed in 2001. Two significant projects were being
performed during the third quarter of 2002 while one smaller project was being
performed during the third quarter of 2001.
At the Oak Ridge, Tennessee processing facility direct operating costs increased
by $442,000 for the three months ended September 30, 2002, despite lower
quarter-to-quarter revenue. This reflects both higher disposal costs being
charged from the facility's primary off-site disposal provider and higher
volumes of waste shipped for disposal. Waste shipped off site for disposal is
comprised of both customer waste (waste that can be charged to a specific
customer) and non-revenue waste (waste that is either a by-product of processing
or otherwise not billable to a customer).
Non Operating Disposal Facilities
- ------------------------------------
Non Operating Disposal Facilities incur primarily legal and consulting costs
required to license the facilities for initial operation, or labor costs
required to safely close and maintain the facilities subsequent to operational
use. For the three months ended September 30, 2002 and 2001, the Company
18
reported $340,000 and $100,000 of expenses related to licensing facilities for
initial use and $120,000 and $110,000, respectively, of costs in 2001 and
accretion of the closure liability in 2002 in order to close or maintain
facilities subsequent to use.
SELLING, GENERAL AND ADMINISTRATIVE COSTS (SG&A)
- -----------------------------------------------------
For the three months ended September 30, 2002, the Company reported SG&A of
$3,982,000, a 28% reduction from the $5,498,000 for the same three months of
2001. SG&A decreased materially relative to revenue, reflecting the Company's
focus on reducing SG&A. During the third quarter, reductions in SG&A occurred at
every site, except for the Oak Ridge facility. The most notable reduction in
SG&A was at corporate (Boise), where SG&A expense decreased $986,000 or 48% from
the same quarter last year, including legal expenses for the three months ending
September 30, 2002 of $250,000 from the three months ending September 30, 2001.
The remaining reduction in SG&A resulted from across the board decreases in SG&A
components.
While management continues to focus on cost containment, new investment is being
made in information system infrastructure and upgraded staffing. Beginning in
July 2002, the Company launched an initiative to materially upgrade its
production and financial information systems. It is expected that by the end of
the first quarter of 2003, the Company's information systems upgrade will be
largely complete. Concurrent with the information system upgrade, the Company is
centralizing its accounting function. Management believes that the
implementation of an enhanced information system platform and centralized
accounting will improve the availability, and timeliness of financial and
management information. The majority of these costs will be incurred and
expensed in 2002 and are not expected to exceed $200,000.
COMPARISON OF NINE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001
- -----------------------------------------------------------
REVENUE
- -------
For the nine-months ended September 30, 2002, the Company reported consolidated
revenue of $50,932,000, a 26% increase over the $40,493,000 reported for the
nine-month period in 2001. During the nine-months ending September 30, 2002,
$10,724,000 or 21% of revenue represented work performed under the U.S. Army
Corps of Engineers contract.
In the fourth quarter of 2001, the Company sold certain non-core business
operations that represented $2,523,000 of revenue in the nine months ended
September 30, 2001. The Company did not report revenue for these closed or sold
business units in the first three quarters of 2002. When the nine-month revenue
in 2001 is adjusted, comparable revenue for 2002 was 34% higher over the same
period last year.
Operating Disposal Facilities
- -------------------------------
During the nine months ended September 30, 2002, the Richland, Washington LLRW
disposal facility contributed $1,618,000 of the increase in revenue due to the
March 2002 completion of a $3,850,000 contract for the Army Corps of Engineers.
The Fort Greely, Alaska Army Corps 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 $2,564,000 to the increase in revenue. A record volume of material
disposed reflect increased utilization by the U.S. Army Corps of Engineers and
other Federal agencies, and the facility's December 2001 regulatory approval to
accept specified low concentration radioactive materials from private industry
in addition to government customers.
Revenue at the Beatty, Nevada disposal facility was $673,000 lower in the
nine-months ended September 30, 2002 due to reduced disposal volumes and thermal
processing inefficiencies experienced primarily in the first quarter of 2002.
19
The Robstown, Texas hazardous disposal facility contributed $1,655,000 of the
increase in revenue for the nine months ended September 30, 2002. The increase
in revenue reflects disposal of waste from two large clean-up projects during
the first half.
Processing and Field Services
- --------------------------------
During the nine-months ended September 30, 2002, the Oak Ridge, Tennessee
processing facility contributed $1,654,000 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 half of 2002 due to a backlog of
customer waste processed under prior pricing agreements and shipments of
non-revenue producing materials off-site for disposal.
Field Services contributed $6,009,000 of the increase in revenue for the
nine-months ended September 30, 2002 as five projects were active during the
first nine months of 2002.
In the fourth quarter of 2001, the Company sold certain non-core business
operations that represented $2,523,000 of revenue in the nine months ended
September 30, 2001.
DIRECT OPERATING COSTS
- ------------------------
For the nine-months ended September 30, 2002, the Company reported consolidated
direct operating costs of $31,789,000 or a 23% increase compared to $25,775,000
in the corresponding period in 2001. However, consolidated direct operating
costs increased at a lower rate than revenue during the first nine months of
2002, reflecting the high fixed cost nature of the Company's business.
Operating Disposal Facilities
- -------------------------------
The Robstown, Texas disposal facility contributed $1,543,000 of the increase in
direct operating costs for the nine months ended September 30, 2002. The
increase in direct costs is principally due to two large remediation projects
requiring disposal during the first half of 2002.
The Beatty, Nevada disposal facility contributed $386,000 of the increase in
direct costs even though revenue fell $673,000 during the nine-months ended
September 30, 2002. Direct costs were 76% of revenue during the first nine
months of 2002 versus 65% in 2001. During the nine months ended September 30,
2002 the facility experienced reduced throughput as well as operational
inefficiencies, which management believes have been largely resolved.
Processing and Field Services
- --------------------------------
Field Services contributed $4,227,000 of the increase in direct operating costs
for the nine months ended September 30, 2002 due to an increase in the number
and scope of projects. Five projects worth approximately $8,000,000 are being
performed in 2002 while 3 projects worth approximately $1,000,000 were being
performed in 2001.
The Oak Ridge, Tennessee processing facility contributed $1,405,000 of the
increase in direct operating costs for the nine months ended September 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 three quarters of 2002. However, direct operating
costs at the Oak Ridge facility fell as a percentage of revenue from 112% of
revenue last year to 100% of revenue for the nine-month period of this year
principally due to staff reductions and improved operational efficiencies. The
backlog of material on site has been decreased substantially during the first
nine-months of 2002, allowing increased processing of more recent backlog
materials and new, incoming wastes.
Non Operating Disposal Facilities
- ------------------------------------
Non Operating Disposal Facilities incur primarily legal and consulting costs
required to license the facilities for initial use, or labor costs in order to
safely close and maintain the facilities subsequent to use. For the nine months
20
ended September 30, 2002 and 2001, the Company reported $810,000 and $420,000 of
expenses related to licensing facilities for initial use and $230,000 and
$330,000, respectively, in order to close and maintain facilities subsequent to
use.
SELLING, GENERAL AND ADMINISTRATIVE COSTS (SG&A)
- ------------------------------------------------
For the nine-months ended September 30, 2002, the Company reported SG&A of
$12,261,000 or 24 % of revenue compared to the $14,494,000 or 36% of revenue
posted during the first nine months of 2001. Of note, 2001 SG&A only reflected 8
months of SG&A for the Company's Grand View, Idaho facility, which was purchased
on February 1, 2001. SG&A was 2,233,000 lower during the first nine months of
2002 than during the same period of 2001 even though revenue increased by 26%.
Priority attention continues to be devoted to advancing or resolving pending
legal matters and litigation. During the first nine months of 2002, the Company
has resolved 7 of 13 previously pending legal matters. Legal expenses for the
nine months ending September 30, 2002 decreased $190,000 from the nine months
ending September 30, 2001.
One of the major items in the Company's restructuring plan implemented late last
year was cost controls and streamlined reporting. The restructuring effort
originally focused on headcount and has subsequently focused on reviewing
services required to more efficiently and effectively operate the Company. With
the exception of insurance, substantially all other SG&A spending categories
have decreased from the nine months ending September 30, 2001 to the nine months
ending September 30, 2002.
COMPARISON OF THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001
- ---------------------------------------------------------------------
INVESTMENT INCOME
- ------------------
For the three and nine months ended September 30, 2002, the Company earned
investment income of $7,000 and $23,000 or a $17,000 and $208,000 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 nine months ended
September 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 to fund operations
during 2001.
INTEREST EXPENSE
- -----------------
For the three and nine-months ended September 30, 2002, the Company reported
interest expense of $227,000 and $751,000 or a decrease of $67,000 and $147,000
from the corresponding periods in 2001. Decreased use of the Company's line of
credit contributed to the decreased interest expense during 2002. 2002 Interest
expense is primarily comprised of the interest payable on the recently
refinanced $8,500,000 industrial revenue bond ("IRB") for the Grand View, Idaho
facility of 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 matured on November 1, 2002. As the Company announced on October
24, 2002, the Industrial Revenue Bond was substantially refinanced with a
$7,000,000, five year, fully amortizing term loan from the Company's primary
lender, Wells Fargo Bank. The term loan provides for a variable interest rate of
the bank's prime rate or an offshore rate plus an applicable margin that is
based upon the Company's performance. At October 28, 2002 the interest rates
available to the Company ranged from 4.1% to 4.9%. The Company has funded the
$1.5 million balance owing on the bond with cash on hand.
Due to this refinancing, interest expense is expected to decrease by
approximately $30,000 per month from what was previously being paid on the IRB
due to the reduction in the interest rate and lower amount of debt outstanding
under the new term loan. Interest expense is also expected to fluctuate to a
greater extent starting in the fourth quarter of 2002 due to the variable
interest rate attached to the term loan.
21
GAIN ON SALE OF ASSETS
- --------------------------
For the three and nine-months ended September 30, 2002, the Company disposed of
an insignificant amount of assets. The gain on sale of assets primarily relates
to a pro-rated gain on assets sold as part of the August 2000 sale and leaseback
transaction.
OTHER INCOME (LOSS)
- ---------------------
Other Income is composed of the following ($ in thousands):
Three Months Ended Nine Months Ended
------------------ -----------------
September 30, September 30,
------------- -------------
2002 2001 2002 2001
--------- ---------- ---------- ----------
Litigation accrual related to GM settlement $ -- $ -- $ (740) $ --
Payment received on National Union settlement -- -- 250 --
Insurance claim refunds -- 8 27 8
NLRB settlement -- -- (156) --
Data processing services 28 -- 55 --
Other miscellaneous income, net 11 (42) 19 (14)
Reversal of professional fee accrual -- -- -- 160
Reversal of restructuring charge -- -- -- 52
Adjustment of tax accrual -- -- -- 107
Reversal of excess bond interest -- -- -- 177
Reversal of excess burial fee accrual -- -- -- 500
--------- ---------- ---------- ----------
Total other income (loss) $ 39 $ (34) $ (545) $ 990
========= ========== ========== ==========
INCOME TAXES
- -------------
The components of the income tax provision (benefit) were as follows (in
thousands):
Three Months Nine Months
Ended Sep 30, Ended Sep 30,
------------------- -------------------
2002 2001 2002 2001
--------- -------- --------- --------
State tax expense (benefit) (226) 30 (226) 114
========= ======== ========= ========
The tax effects of temporary differences between income for financial reporting
and taxes give rise to deferred tax assets and liabilities. At September 30,
2002, the Company has approximately $11 million of deferred tax assets which
primarily relate to net operating losses, deferred site maintenance costs,
depreciation and amortization, and other accrued liabilities. Management
believes it is more likely than not that some or all of the deferred tax assets
will not be realized, consequently a valuation allowance has been established
for the net deferred tax assets. The realization of a significant portion of
net deferred tax assets is based in part on the Company's estimates of the
timing of reversals of certain temporary differences and on the generation
of taxable income before such reversals.
The net operating loss carry forward is approximately $32,000,000 at
September 30, 2002. Of this carry forward, approximately $2,745,000 is limited
pursuant to the net operating loss limitation rules of Internal Revenue Code
Section 382 and begins to expire in 2006. The remaining unrestricted net
operating loss carry forward expires at various dates between 2010 and 2020.
The amount of the Company's net operating loss carry forwards could be reduced
if the Company is ultimately unsuccessful in pursuing a pending refund claim
with the Internal Revenue Service.
22
CUMULATIVE EFFECT OF ACCOUNTING CHANGE
- ------------------------------------------
On January 1, 2002, the Company early adopted 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. Management believes
the improved balance sheet was a factor in renewing the Company's line
of credit on more favorable terms and in refinancing the IRB.
- Improved comparability of results with the Company's competitors is
expected to occur as uniform application of the SFAS 143 standard
replaces the varying 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.
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 September 30, 2002, cash and cash equivalents totaled $3,051,000, a decrease
of $1,425,000 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 low or non-interest earning cash to be
utilized more efficiently, e.g. repaying higher cost debt. In addition to the
$5,000,000 repaid on the line of credit by April 5, 2002 and other regularly
scheduled debt payments, the Company has early retired $808,000 of relatively
high cost debt in the first nine months of 2002. These debt reduction actions
reflect management's initiatives to improve the Company's balance sheet and
maximize asset utilization.
During the first nine months of 2002, the Company's "days sales outstanding"
decreased in the first three quarters of 2002 to 66 days at September 30, 2002,
compared to 83 days at December 31, 2001. Continued improvements in cash and
receivable balances are a priority objective for the fourth quarter of 2002.
As of September 30, 2002 the Company's liquidity, as measured by the current
ratio, improved to 1.2 to 1.0 at September 30, 2002 from 0.7 to 1.0 at December
31, 2001. Likewise, the Company's working capital position materially improved,
as reported working capital increased $13,188,000 to $2,620,000 at September 30,
2002 from a $10,568,000 deficit on December 31, 2001. The primary reasons for
the increase in working capital was the refinancing of the IRB, completion of
processing and disposal contracts billed prior to December 31, 2001 and strong
cash flow from operations.
The Company is reporting a material improvement in its working capital position
due in large part to the refinancing of the $8.5 million Idaho IRB with a $7.0
million term loan. The remaining $1,500,000 was funded with cash on hand. At
September 30, 2002, $5,833,000 of the $8,500,000 IRB balance is reported as long
term debt since it is not scheduled to be repaid within the next year. However,
the terms of the credit facility allow for early retirement of the debt. The
Company has pledged substantially all of its fixed assets at the Grand View,
Beatty, Richland, and Robstown, Texas hazardous and radioactive waste disposal
facilities as collateral for the term loan. The term loan is
cross-collateralized with the Company's line of credit.
Since December 31, 2001, the Company's leverage has decreased, as evidenced by
debt to equity ratio of 0.8:1.0 at September 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.
23
On September 30, 2002, the Company had in place a revolving line of credit with
Wells Fargo Bank in Boise, Idaho. The line of credit is secured by the Company's
accounts receivable. At September 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 borrowed since that date. On October 15, 2002 the
Company and Wells Fargo Bank entered into an amendment that reduced the interest
rate and fee structure to the Company, modified existing financial covenants,
reduced the periodic reporting requirements, reduced the maximum amount
available from $8,000,000 to $6,000,000 and extended the maturity date of the
line of credit to June 15, 2004.
The Company is currently assessing capital expenditure needs for 2003. Along
with the normal replacement of aging assets, a multi-million dollar expansion of
disposal capacity at the Grand View, Idaho facility is planned for 2003.
The Company believes that cash flow from operations, augmented as needed by
borrowings under the line of credit, will be sufficient to meet the Company's
cash needs for the foreseeable future.
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 September 30, 2002, $244,000 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 limited interest rate risk on debt instruments, as management
has preferred fixed rate instruments to variable rate instruments. At September
30, 2002, no variable rate debt is owed, and the line of credit would have been
accruing interest at the rate of 5.0%. On October 28, 2002, the Company
substantially refinanced the 8.25% fixed rate $8,500,000 Industrial Revenue Bond
with a $7,000,000 five year term loan from the Company's primary lender. The
term loan provides for a variable interest rate of the bank's prime rate or an
offshore rate plus an applicable margin that is based upon the Company's
performance. At October 28, 2002 the interest rates available to the Company
ranged from 4.1% to 4.9%. The Company is considering entering into an interest
rate swap or interest rate cap transaction to mitigate fluctuations in interest
rate, thereby lessening the impact of changes of interest rates on earnings.
ITEM 4. CONTROLS AND PROCEDURES.
(a) Within the 90 day period prior to the filing of this report, Company
management, under the direction of the Chief Executive Officer and Chief
Financial Officer, carried out an evaluation of the effectiveness of the design
and operation of the Company's disclosure controls and procedures pursuant to
Rule 13a-14 of the Securities Exchange Act of 1934 (Exchange Act). Based upon
that evaluation, the Chief Executive Officer and Chief Financial Officer believe
that the Company's disclosure controls and procedures are effective in timely
alerting them to material information required to be disclosed in the Company's
Exchange Act filings.
(b) The Company maintains a system of internal controls that are designed to
provide reasonable assurance that our records and filings accurately reflect the
transactions that we have engaged in. For the quarter ending September 30,
2002, there were no significant changes to our internal controls or in other
factors that could significantly affect our internal controls.
PART II OTHER INFORMATION.
- -----------------------------
ITEM 1. LEGAL PROCEEDINGS.
24
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.
Plaintiff filed suit in 1996 claiming that the Company had infringed on a sludge
treatment patent at its Beatty, Nevada hazardous disposal facility in the early
1990s. The Company does not believe it infringed any Manchak patent. On October
15, 2002, the United States District Court for the District of Nevada granted
the Company's motion for summary judgment, dismissing the suit. The Plaintiff
filed a motion for reconsideration with the trial court on October 31, 2002.
The Company expects to file a claim seeking recovery of attorney fees from
Plaintiff. The Company believes the plaintiff's case is without merit and will
continue to vigorously contest the matter.
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 recognized the subsidiary's
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 matter is now fully resolved.
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 promises to the Company including a commitment 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. A court mandated
settlement conference is scheduled for December 9, 2002. Trial is scheduled 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.
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. The Company is seeking
more than $6.2 million in this matter. On September 30, 2002 the United States
District Court for the District of Nebraska entered a judgment against the State
of Nebraska for $151 million plus post-judgment interest. As part of the Court's
damages determination, the Court identified total US Ecology damages of $12.3
million. The State of Nebraska appealed the ruling on October 30, 2002. No
assurance can be given that Court's ruling will be sustained upon appeal or that
the Company will recover any damages.
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 filed a motion for summary judgment in July 2002 based on lack of
evidence. On August 7, the Court ruled that plaintiffs had 90 days to complete
discovery and respond to the motion. The motion for summary judgment will be
heard on November 19, 2002. 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.
25
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 above grievance is now fully resolved.
On August 8, 2002 the Company and the Union announced that they had entered into
a new 5-year collective bargaining agreement.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
As of September 30, 2002, the Company had accrued $1,491,000 of dividends on the
Series D Preferred Stock whose payment is prohibited by the Credit Agreement
with Wells Fargo Bank. The accrued dividend is included in long term accrued
liabilities reported on the Company's consolidated balance sheet.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None
ITEM 5. OTHER INFORMATION.
On September 16, 2002, the Board of Directors, upon recommendation of the Audit
Committee, engaged Moss Adams LLP as the Company's independent auditor,
replacing Balukoff Lindstrom & Co. The Company has also retained KPMG LLP to
provide tax preparation and advisory services.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) The following exhibits are filed as part of this report:
Exhibit 10.54 2002 Management Bonus Plan dated July 25, 2002
Exhibit 99.1 Certification of September 30, 2002 Form 10-Q by Chief
Executive Officer dated November 12, 2002
26
Exhibit 99.2 Certification of September 30, 2002 Form 10-Q by Chief
Financial Officer dated November 12, 2002
Exhibit 99.3 Certification of September 30, 2002 Form 10-Q by Chief
Executive Officer dated November 12, 2002
Exhibit 99.4 Certification of September 30, 2002 Form 10-Q by Chief
Financial Officer dated November 12, 2002
(b) Reports on Form 8-K.
On August 16, 2002, we filed a Form 8-K with the Securities and
Exchange Commission to announce the settlement and felony plea
agreement in relation to a longstanding Federal investigation of
our Oak Ridge, Tennessee facility.
On September 18, 2002, we filed a Form 8-K to announce the
engagement of Moss Adams LLP as the Company's independent
auditors, replacing Balukoff Lindstrom & Co.
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 12, 2002 By:/s/ Stephen A. Romano
--------------------------------------
Stephen A. Romano
President, Chief Executive Officer and
Chief Operating Officer
Date: November 12, 2002 By:/s/ James R. Baumgardner
--------------------------------------
James R. Baumgardner
Senior Vice President, Chief
Financial Officer,
Secretary and Treasurer
27
EXHIBIT INDEX
Exhibit Description
------- -----------
Exhibit 10.54 2002 Management Bonus Plan dated July 25, 2002
Exhibit 99.1 Certification of September 30, 2002 Form 10-Q by Chief
Executive Officer dated November 12, 2002
Exhibit 99.2 Certification of September 30, 2002 Form 10-Q by Chief
Financial Officer dated November 12, 2002
Exhibit 99.3 Certification of September 30, 2002 Form 10-Q by Chief
Executive Officer dated November 12, 2002
Exhibit 99.4 Certification of September 30, 2002 Form 10-Q by Chief
Financial Officer dated November 12, 2002
28