UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q/A
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 2001
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)
805 W. Idaho
Suite #200
Boise, Idaho 83702-8916
- ---------------------------------------- ----------------------
(Address of principal executive offices) (Zip Code)
(208) 331-8400
---------------------------------------------------
(Registrants telephone number, including area code)
Indicate by a check mark whether Registrant (1) has filed all reports required
to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days.
YES [X] NO [ ]
At December 13, 2001, Registrant had outstanding 13,742,322
shares of its Common Stock.
EXPLANATION OF AMENDMENT
The Registrant, American Ecology Corporation (the "Company"), received a letter
from the Securities and Exchange Commission dated November 1, 2001. The
Commission made comments and requested clarification of certain items in the
Notes to the financial statements, Item 1., and Management Discussion and
Analysis, Item 2. Based on these comments, the Company amended Part I, Item 1
Note 2, and Item 2 of its Form 10-Q to include clarifications of those items in
conjunction with a response letter filed with the Commission on November 13,
2001.
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
AMERICAN ECOLOGY CORPORATION
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
($ IN 000'S EXCEPT PER SHARE AMOUNTS)
<Table>
<Caption>
September 30, December 31,
2001 2000
------------- ------------
ASSETS
Current Assets:
Cash and cash equivalents $ 1,460 $ 4,122
Receivables (trade and other), net of allowance for
Doubtful accounts of $1,490 and $568 respectively 11,299 9,839
Income tax receivable 740 740
Prepayments and other 2,205 1,316
-------- --------
Total current assets
15,704 16,017
Cash and investment securities, pledged
242 235
Property and equipment, net
34,296 18,488
Facility development projects
27,289 27,430
Intangible assets relating to acquired businesses, net
348 366
Other assets 4,708 3,214
-------- --------
Total assets $ 82,587 $ 65,750
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long term debt $ 1,231 $ 1,094
Accounts payable 3,983 2,680
Accrued liabilities 6,936 9,149
Current portion of accrued closure and post closure obligations 700 700
Income taxes payable 320 115
-------- --------
Total current liabilities 13,170 13,738
Long term debt, excluding current portion 17,809 10,775
Closure and post closure obligation, excluding current portion 25,434 15,253
-------- --------
Total liabilities 56,413 39,766
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, 13,720,622
and 13,704,050 shares issued and outstanding respectively 138 137
Additional paid-in capital 54,500 54,610
Retained earnings (deficit) (28,465) (28,764)
-------- --------
Total shareholders' equity 26,174 25,984
-------- --------
Total Liabilities and Shareholders' Equity $ 82,587 $ 65,750
======== ========
</Table>
See notes to consolidated financial statements.
2
AMERICAN ECOLOGY CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
($ IN 000'S EXCEPT PER SHARE AMOUNTS)
<Table>
<Caption>
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------- -----------------------
2001 2001 2000 2000
-------- -------- -------- --------
Revenue $ 13,896 $ 11,796 $ 40,493 $ 31,600
Direct operating costs 8,498 6,555 23,572 17,327
-------- -------- -------- --------
Gross profit 5,398 5,241 16,921 14,273
Selling, general and administrative expenses 6,326 4,228 16,697 11,672
-------- -------- -------- --------
Income (loss) from operations (928) 1,013 224 2,601
Investment income (loss) 24 (95) 231 143
Interest income (expense) (294) (175) (898) (249)
Gain on sale of assets 50 45 162 44
Other income (loss) (34) 320 990 775
-------- -------- -------- --------
Net income (loss) before income taxes (1,182) 1,108 709 3,314
Income tax expense (benefit) 30 8 114 69
-------- -------- -------- --------
Net income (loss) (1,212) 1,100 595 3,245
Preferred stock dividends 99 100 295 299
-------- -------- -------- --------
Net income (loss) available to common
shareholders $ (1,311) $ 1,000 $ 300 $ 2,946
======== ======== ======== ========
Basic earnings per share $ (.10) $ .07 $ .02 $ .22
======== ======== ======== ========
Diluted earnings per share $ (.10) $ .06 $ .02 $ .18
======== ======== ======== ========
Dividends paid per common share $ -- $ -- $ -- $ --
======== ======== ======== ========
</Table>
See notes to consolidated financial statements.
3
AMERICAN ECOLOGY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
($ in 000's)
<Table>
<Caption>
Nine Months Ended September 30,
2001 2000
-------- --------
Cash flows from operating activities:
Net income $ 595 $ 3,245
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Depreciation and amortization 3,953 1,647
(Gain) on sale of assets (162) (1,098)
Changes in assets and liabilities:
Receivables (1,461) (2,983)
Investment securities classified as trading (6) (7)
Other assets 1,337 (146)
Accounts payable and accrued liabilities (1,236) (324)
Income tax payable (204) (40)
Facility closure and post closure obligations (391) (371)
-------- --------
Total adjustments 1,830 (3,322)
-------- --------
Net cash provided by (used in) operating activities 2,425 (77)
Cash flows from investing activities:
Capital expenditures (8,439) (7,959)
Proceeds from insurance trust 2,565
Proceeds from sales of property and equipment
-- 2,000
-------- --------
Net cash used in investing activities (5,874) (5,959)
Cash flows from financing activities:
Proceeds from issuance of indebtedness 4,005 4,032
Stock options exercised
-- 57
Repayments of indebtedness (3,218) (599)
-------- --------
Net cash provided by financing activities 3,352 3,490
Increase (decrease) in cash and cash equivalents (2,662) (2,546)
Cash and cash equivalents at beginning of period
4,122 4,771
-------- --------
Cash and cash equivalents at end of period $ 1,460 $ 2,225
======== ========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest paid $ 898 $ 249
Income taxes
160 130
Acquisition of equipment with capital leases 2,280 3,006
Acquisition through assumption of debt 20,400 --
</Table>
See notes to consolidated financial statements.
4
AMERICAN ECOLOGY CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(UNAUDITED)
($ in 000's)
<Table>
<Caption>
ADDITIONAL RETAINED
PREFERRED STOCK COMMON STOCK PAID-IN CAPITAL EARNINGS (DEFICIT)
--------------- ------------- --------------- -----------------
Balance, December 31, 2000 $ 1 $ 137 $ 54,610 $ (28,764)
Net income -- -- -- 1,482
Common stock issuance -- 2 32 --
Dividends for preferred stock
-- -- -- (97)
------------- ------------- ------------- -------------
Balance March 31, 2001 1 139 54,642 (27,379)
Net income -- -- -- 326
Common stock issuance -- -- 5 --
Dividends for preferred stock -- -- -- (99)
Other adjustment
-- -- -- (1)
------------- ------------- ------------- -------------
Balance June 30, 2001 $ 1 $ 139 $ 54,647 $ (27,153)
============= ============= ============= =============
Net income -- -- -- (1,212)
Reverse/forward stock split -- (1) (148) --
Dividends for preferred stock -- -- -- (99)
Other adjustments
-- -- 1 (1)
------------- ------------- ------------- -------------
Balance September 30, 2001 $ 1 $ 138 $ 54,500 $ (28,465)
============= ============= ============= =============
</Table>
The accompanying notes are an integral part of these financial statements
5
AMERICAN ECOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATION.
Pursuant to the rules and regulations of the Securities and Exchange Commission,
the Company has prepared the accompanying unaudited financial statements.
Certain information and footnote disclosures have been condensed or omitted
consistent with Generally Accepted Accounting Principles ("GAAP"). In the
opinion of management, all adjustments and disclosures necessary for a fair
presentation of these financial statements have been included. These financial
statements and notes should be read in conjunction with the financial statements
and notes included in the Company's 2000 Annual Report on Form 10-K for the year
ended December 31, 2000, filed with the Securities and Exchange Commission.
The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiaries. All significant inter-company transactions and
balances have been eliminated in consolidation.
NOTE 2. ACQUISITION.
On February 1, 2001, the Company acquired Envirosafe Services of Idaho, Inc., a
Delaware corporation. The Company changed the name to US Ecology Idaho, Inc
("USEI"). The following table compares, for the nine months ended September 30,
2001 and 2000, reported consolidated results of operations with USEI actual
results from the date of acquisition February 1, 2001, to unaudited pro forma
consolidated data as if the acquisition occurred at the beginning of the year:
Unaudited pro forma statement of operations data--
(in thousands, except per share data)
<Table>
<Caption>
2001 2000
Reported Pro Forma Reported Pro Forma
------------- ------------- ------------- -------------
Revenue $ 40,493 $ 41,988 $ 31,600 $ 45,055
Net income 595 853 3,245 5,567
Preferred stock dividends 295 295 299 299
------------- ------------- ------------- -------------
Net income available to common shareholders $ 300 $ 558 $ 2,946 $ 5,268
============= ============= ============= =============
Basic earnings per share $ .02 $ .04 $ .22 $ .38
------------- ------------- ------------- -------------
Diluted earnings per share $ .02 $ .03 $ .18 $ .32
------------- ------------- ------------- -------------
</Table>
This data does not purport to be indicative of the Company's results of
operations that might have occurred, nor which might occur in the future.
6
NOTE 3. OTHER ASSETS.
Other assets totaled $4,708,000 and $3,214,000 at September 30, 2001 and
December 31, 2000 respectively. The other asset category includes the following
accounts (in thousands):
<Table>
<Caption>
September 30, 2001 December 31, 2000
----------------- -----------------
Long term notes receivable $ 77 $ 68
Security deposits 21 34
Thermal processing construction in progress 163 31
Permits 4,363 3,008
Other assets deferred
84 73
--------------- ---------------
Total other assets $ 4,708 $ 3,214
=============== ===============
</Table>
NOTE 4. LONG-TERM DEBT.
Long-term debt at September 30, 2001 and December 31, 2000 consisted of the
following (in thousands):
<Table>
<Caption>
September 30, 2001 December 31, 2000
------------------ -----------------
Notes payable $ 986 $ 792
Line of credit 4,850 4,093
Industrial revenue bond 8,500 --
Capital lease obligations and other 4,704 6,984
--------------- ---------------
19,040 11,869
Less: Current maturities (1,231) (1,094)
--------------- ---------------
Long term debt $ 17,809 $ 10,775
=============== ===============
</Table>
Aggregate maturity of future minimum payments under long term debt and capital
leases is as follows (in thousands):
<Table>
<Caption>
September 30, 2001 December 31, 2000
------------------ -----------------
2001 $ 548 $ 1,094
2002 14,576 8,586
2003 2,373 1,549
2004 1,356 621
2005 143 19
2006
44 --
-- --
--------------- ---------------
TOTAL $ 19,040 $ 11,869
=============== ===============
</Table>
The Company has several long-term capital leases and notes payable that total
approximately $4.8 million. These leases and notes payable are principally for
assets acquired at Oak Ridge, Tennessee that bear a 10% interest rate, at
Beatty, Nevada, that bear an interest rate between 5.8% and 8.9%, at Richland,
Washington bearing interest rates of 5.25% through 6.14% and at Robstown, Texas
bearing interest rates between 6% and 14% expiring over the next 5 years.
On August 17, 2000, the Company entered into a 2-year Credit Agreement with a
local bank that provides a revolving line of credit. The line of credit is
secured by the Company's accounts receivable. Under the terms of the Credit
Agreement, borrowing under the line of credit cannot exceed 80% of eligible
accounts receivable or $8.0 million, whichever is less. After September 30, 2001
interest on borrowings is based on a 'pricing grid,' whereby the interest rate
decreases or increases based on the Company's ratio of funded debt to earnings
before interest, taxes, depreciation and amortization ("EBITDA"). The Company
can elect to borrow utilizing the Prime Rate or the offshore London Inter-Bank
Offering Rate ("LIBOR") plus an applicable spread. Through September 30, 2001,
borrowings are Prime plus 0.75% or LIBOR plus 3.25%, at the election of the
Company, subject to certain conditions. The Credit Agreement contains certain
financial covenants that the Company must adhere to quarterly, including a
maximum leverage ratio, a minimum current ratio, and a debt service coverage
ratio. At September 30,
7
the Company was in compliance with all applicable financial covenants. The
Credit Agreement matures on October 15, 2002. The Company is currently updating
its business plan for use in negotiating the extension of maturity date and
certain other conditions. There can be no assurance that the Company will be
successful in its negotiations with its Bank. If the Company is unsuccessful and
is unable to extend the maturity of the credit facility past December 31, 2002,
the Company will reclassify the line of credit borrowings as short-term
consistent with GAAP. Reclassifying the line of credit borrowings as short-term
debt would have a material, adverse affect on the Company's working capital
position and would, under certain conditions, trigger Bank liquidity covenants.
At September 30, 2001, the outstanding balance on the revolving line of credit
was $4,850,000. The Company is required to reserve for a $1,150,000 standby
letter of credit under the line of credit. At September 30, 2001, the Company
had $442,000 available for additional borrowing under the line of credit. During
the third quarter of 2001, the interest rate on the line of credit borrowings
ranged from 7.08% to 8.10%. The Company has continued to borrow and repay
according to business demands and availability of cash. The Company anticipates
that borrowings will continue to fluctuate, and that additional borrowing
capacity likely will be required to accommodate planned expansion and growth.
There can be no assurance that the Company can raise additional financing beyond
the $8.0 million line of credit.
The Company has an $8.5 million Industrial Revenue Bond ("IRB") associated with
the Grand View, Idaho facility. The proceeds from the IRB were used to make
capital additions and improvements to the Grand View facility prior to the
Company's acquisition of the facility. The IRB bears interest of 8.25%. The IRB
matures November 1, 2002. The Company is currently discussing potential
extension of the maturity date with the Bondholders. If the Company is unable to
extend the maturity of the Bonds past December 31, 2002 on reasonable terms, it
will reclassify the IRB borrowings as short-term to be consistent with GAAP.
Reclassifying the IRB as short-term would have a material, adverse affect on the
Company's working capital position and require the Company to renegotiate the
Bank liquidity covenants.
On April 4, 2001, the Company entered into a $1,113,930 long-term financing
agreement with AFCO Finance to finance 2001-2002 insurance premiums. The loan
bears an annual interest rate of 5.59%. Final payment is due February 2002. The
Company has consistently financed its insurance premiums through AFCO Finance in
the ordinary course of business.
The Company has several other long-term obligations that mature at different
times. These obligations include accrued dividends payable on Series D Preferred
Stock totaling $1,093,000, reserve for special waste at the Oak Ridge, Tennessee
facility for $350,000, a long-term payable to Boston Edison for $230,000, lease
payments of $1,623,000, and the above-mentioned industrial revenue bond for the
Idaho facility for $8,500,000. These long-term obligations total $11,796,000.
NOTE 5. 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 under long-term incentive, stock option
and stock purchase plans pursuant to terms of the Company's 1992 Stock Option
Plans. The computation of diluted earnings per share does not assume conversion
or exercise of securities that would have an anti-dilutive effect on earnings
per share. The following table shows the weighted average number of common
shares outstanding and the potential dilutive effect of outstanding options,
warrants, and convertible preferred shares.
8
<Table>
<Caption>
(in thousands except per share) Three Months Ended Nine Months Ended
September 30, September 30,
2001 2000 2001 2000
------------- ------------- ------------- -------------
BASIC
Net Income (loss) $ (1,212) $ 1,100 $ 595 $ 3,245
============= ============= ============= =============
Weighted average common shares 13,721 13,709 13,721 13,709
Net income (loss) per share, basic $ (.10) $ .07 $ .02 $ .22
------------- ------------- ------------- -------------
DILUTED
Weighted average of common shares 13,721 13,709 13,721 13,709
Dilutive effect of common stock options and warrants 3,696 2,653 3,696 2,653
------------- ------------- ------------- -------------
Total weighted average common and dilutive shares
Outstanding 17,417 16,362 17,417 16,362
Net income (loss) per share, diluted $ (.10) $ .06 $ .02 $ .18
------------- ------------- ------------- -------------
</Table>
NOTE 6. FACILITY DEVELOPMENT PROJECTS.
The Company has been licensed to construct and operate the low-level radioactive
waste ("LLRW") facility for the Southwestern Compact ("Ward Valley facility") in
California, and has been selected to obtain a license to develop and operate the
Central Interstate Compact LLRW facility ("Butte facility") in Nebraska.
The State of California has discontinued its efforts to obtain the Ward Valley
property from the U.S. Department of the Interior. For the Company to realize
its investment, the federal government must transfer the land to California, or
the Company must recover monetary damages from the State of California.
In 1997, the Company filed two lawsuits against the United States. In the first
case, US Ecology sued to recover monetary damages. In the second federal court
action, US Ecology sought an order to compel the transfer of the Ward Valley
site. Both actions were dismissed, due in part to the State of California's
decision to discontinue their participation as co-plaintiff with the company. No
further appeals are pending.
In May 2000, the Company filed a lawsuit against the State of California in
Superior Court for the County of San Diego seeking to compel California to
acquire the property to build the Ward Valley project or pay monetary damages in
excess of $162 million. In October 2000, the California trial court granted the
State's motion to dismiss the case. The Company appealed this ruling to the
California Court of Appeals, Fourth Appellate District. On September 5, 2001 the
California Court of Appeals reversed key portions of the lower court's ruling.
The Appeals Court ruling held that California's Radiation Control Law granted
the Department of Health Services the authority to enter into contracts
regarding establishment of the Ward Valley facility. The court further held that
the Company adequately alleged that California had induced it to spend money
based on promises that were later broken. The Court wrote in its finding that
"In this case, Ecology alleged facts that fit within the classic model of a
promissory estoppel claim." The three-judge panel also vacated the lower court's
order permitting intervention in the case by several Ward Valley opposition
groups and remanded the case for trial.
On October 15, 2001 both the State of California and the Company filed petitions
for review with the California Supreme Court. Each party seeks review of those
portions of the Court of Appeals ruling adverse to its interests. Briefing on
the matter is to be completed by November 15, 2001. The Supreme Court is
expected to decide whether to grant review no later than January 15, 2002. If
review is not granted, the case will proceed to trial in State Superior Court.
All costs through July 31, 1999 for development of the Ward Valley facility were
capitalized, and since then have been expensed as incurred. As of September 30,
2001, the Company had deferred $20,952,000 (25% of total assets) of
pre-operational facility development costs, of which $895,000 represents
capitalized interest. If the facility were to become operational, these costs
would be recovered during the facility's first 20 years of operation from
disposal fees approved by the California Department of Health Services (DHS).
Beginning in 2000, the Company is no longer required to pay the $250,000 annual
license fee to the Department of Health Services pending further notice by the
state. While the Company's 1993 license to construct and operate the
9
Ward Valley facility remains valid, there can be no assurance that the Company
will prevail in Court, that California will complete the land transfer, or that
the Company will recover its investment through facility construction and
operation.
The Company has incurred reimbursable costs and received revenue for the
development of the Butte, Nebraska facility under a contract with the Central
Interstate LLRW Compact Commission ("CIC"). US Ecology has a $6.5 equity
position in the Butte, Nebraska project, but has acted principally as a
contractor to the Central Interstate Low-Level Radioactive Waste Commission.
Electric utility companies generating waste within the CIC's five-state region
(the "Major Generators") have provided the balance of the CIC's funding to
develop the Butte facility. As of September 30, 2001, the Company has
contributed and capitalized approximately $6,478,000 of costs (7.8% of total
assets), $386,000 of which is capitalized interest, toward development of the
Butte facility.
In 1998, the State of Nebraska denied US Ecology's license application to build
and operate the facility. The CIC directed US Ecology to petition for a
contested case challenging the State's denial, which US Ecology filed in early
1999.
The Major Generators filed suit in the Federal District Court for Nebraska on
December 30, 1998, seeking to recover certain costs expended on the Nebraska
licensing process and prevent the State of Nebraska from proceeding with the
contested case. US Ecology intervened as a plaintiff, also seeking relief. The
contested case is stayed by a preliminary injunction issued by the presiding
federal judge. The court has issued a scheduling order setting trial for June
2002. Discovery in the case is underway.
The timing and outcome of the above matters are unknown. The Company continues
to pursue completion of the California project or recovery of money damages from
California in state court, and will continue its participation in federal court
litigation to protect its investment in the proposed Butte, Nebraska facility.
The Company believes that the deferred site development costs for both
facilities will be realized. In the event operations of either facility do not
commence, or the Company is unable to recoup its investments through legal
recourse, it would have a material adverse effect on the Company's financial
position.
The following table shows the ending capitalized balances for facility
development costs for the periods ended September 30, 2001 and December 31, 2000
(in thousands):
<Table>
<Caption>
Capitalized Costs Capitalized Interest Total
---------------- -------------------- ----------------
Ward Valley, CA Project $ 20,057 $ 895 $ 20,952
Butte, Nebraska Project 6,092 386 6,478
---------------- ---------------- ----------------
Total $ 26,149 $ 1,281 $ 27,430
================ ================ ================
</Table>
NOTE 7. INCOME TAXES.
The Company had an effective federal tax rate of 0% on September 30, 2001 and
December 31, 2000 respectively. The Company has established a valuation
allowance for certain deferred tax assets due to realization uncertainties
inherent to the long-term nature of facility closure and post closure costs,
uncertainties regarding future operating results, and limitations on utilization
of acquired net operating loss carryforwards for tax purposes. The realization
of a significant portion of net deferred tax assets is based in part on the
Company's estimates of the timing of reversals of certain temporary differences
and on the generation of taxable income before such reversals. The net operating
loss carryforward of approximately $33,643,000 at September 30, 2001, begins to
expire in the year 2006. Of this carryforward, $2,745,000 is limited pursuant to
the net operating loss limitation rules of Internal Revenue Code Section 382.
The amount of the Company's net operating loss carryforwards could be reduced if
the Company is ultimately unsuccessful in pursuing a pending refund claim but no
material change is expected based on the current status of this claim.
10
The portion of the unrestricted net operating losses and limited carryforward
under Internal Revenue Code expires as follows:
<Table>
<Caption>
Limited Unrestricted
Carryforward Carryforward
Year Amount Amount
---- ------------ ------------
2006 $793,000
2007 1,080,000
2008 872,000
2010 4,280,000
2011 8,657,000
2012 7,828,000
2018 6,105,000
2019 3,574,000
2020 454,000
</Table>
The Company filed an amended federal income tax refund claim in 1996 for
approximately $740,000. On September 29, 1999, the Internal Revenue Service
("IRS") proposed to deny this claim, sought to recover portions of tentative
refunds previously received by the Company and proposed to reduce the Company's
net operating loss carryforwards. On November 29, 1999, the Company protested
this denial which is currently pending with the IRS. The Company has tentatively
settled this claim in 2000 but this settlement was rejected by the Congressional
Joint Committee on Taxation because the main issue was then pending before the
United States Supreme Court in a case involving another taxpayer. This issue was
subsequently resolved in a favor of the Company's position by the Supreme Court.
As a result, the IRS Appellate Office has conceded this issue. The forwarding of
this claim to the Joint Committee for approval is currently being held up while
the Appellate Office re-examines two issues it previously conceded. These issues
effect only loss carryforwards, not the amount of the refund which should be
$605,009 plus statutory interest at rates varying from 4.5% to 6.5% from 1995 to
the date the refund is paid.
NOTE 8. ENVIRONMENTAL LIABILITIES.
Environmental Matters
The Company maintains reserves and insurance policies for costs associated with
future closure and post closure obligations for both currently and formerly
operated disposal facilities. These reserves are set based on professional
engineering studies and analysis of regulatory requirements performed at least
annually. Costs accounted for may include final disposal unit capping, gas
emission control, subsurface soil and groundwater monitoring and/or remediation,
and other monitoring or routine maintenance costs required after a disposal site
stops accepting waste. The total estimated final closure and post closure cost
must be fully accrued for each landfill at the time a site stops accepting
waste. The Company believes its reserves for this purpose are adequate.
The Company estimates that the aggregate final closure and post closure costs
for all insured facilities owned or operated was approximately $26,134,000 as of
September 30, 2001. The Company has a prepaid insurance policy with 2 years
remaining for these facilities and has also set aside investment securities to
pay certain deductible limits.
Management believes that disposition of these environmental matters in the
ordinary course of business will not have a material adverse effect on the
financial condition of the Company. Operation of disposal facilities creates
operational, monitoring, site maintenance, closure and post closure obligations
that could result in unforeseen costs for monitoring and corrective action. The
Company cannot predict the likelihood or effect of such costs, regulations,
statutes, or other future events affecting its facilities.
11
Financial Assurance and Site Maintenance
When disposal facilities reach capacity or upon lease or license termination,
they must be closed and then maintained for a prescribed period. In the case of
hazardous waste facilities, federal regulation requires that operators
demonstrate financial capability to close on an immediate, unscheduled basis.
The estimated costs of such a closure are set forth in the operator's
closure/post closure plan required by the Resource Conservation and Recovery Act
("RCRA").
The Company has provided letters of credit, trust funds and certificates of
insurance as financial assurance to meet closure and post closure obligations at
its hazardous waste facilities. Cash and investment securities totaling $242,000
at September 30, 2001 and $235,000 at December 31, 2000 have been pledged as
collateral for these obligations. Management believes that $242,000 is an
adequate reserve combined with the other financial assurance mechanisms
maintained.
When the Company acquired Envirosafe Services of Idaho, Inc. on February 1,
2001, the new subsidiary's Grand View, Idaho facility provided the required RCRA
financial assurance through a $15 million surety bond held by the State of
Idaho, secured by $2.5 million in cash collateral, for closure and post closure
obligations. The Company has since replaced the surety bond with an insurance
policy, which was accepted by the regulatory agencies. This policy is
consistent, in form and substance, with closure and post closure insurance
policies the Company maintains for its other facilities.
12
NOTE 9. OPERATING SEGMENTS.
The Company operates two primary business segments, Chemical Services and LLRW
Services. The Chemical Services division provides hazardous, PCB, non-hazardous,
municipal and certain very low level radioactive waste management services. The
LLRW Services division processes, packages, and disposes of material
contaminated with low levels of radioactivity. The Company evaluates the
performance of its operating segments based on gross profit, selling, general
and administrative expense, interest expense and income, corporate allocation,
and after an apportioned income tax. Segment data includes inter-company
transactions at cost, and allocation for certain corporate costs. Select
information for the Company's reportable segments is shown in the following
table. The "Corporate & Other" column includes corporate-related items not
allocated to the reportable segments.
<Table>
<Caption>
CHEMICAL LLRW CORPORATE
SERVICES SERVICES & OTHER TOTAL
------------- ------------- ------------- -------------
THREE MONTHS ENDING SEPTEMBER 30, 2001
Revenue $ 9,818 $ 4,179 $ (101) $ 13,896
Direct operating cost 5,496 3,042 (40) 8,498
------------- ------------- ------------- -------------
Gross profit $ 4,322 $ 1,137 $ (61) $ 5,398
Selling, general & administrative 2,583 1,730 2,013 6,326
------------- ------------- ------------- -------------
Income (loss) from operations 1,739 (593) (2,074) (928)
Investment income 11 3 10 24
Gain on sale of assets 36 14 -- 50
Interest expense (215) (18) (61) (294)
Corporate allocation & other (1,171) (939) 2,076 (34)
------------- ------------- ------------- -------------
Income before taxes 400 (1,533) (49) (1,182)
Income taxes 30 30
------------- ------------- ------------- -------------
Net income (loss) $ 400 $ (1,533) $ (79) $ (1,212)
NINE MONTHS ENDING SEPTEMBER 30, 2001
Revenue $ 27,619 $ 13,249 $ (375) $ 40,493
Direct operating cost 14,763 8,989 (180) 23,572
------------- ------------- ------------- -------------
Gross profit $ 12,856 $ 4,260 $ (195) $ 16,921
Selling, general & administrative 6,825 5,166 4,706 16,697
------------- ------------- ------------- -------------
Income (loss) from operations 6,031 (906) (4,901) 224
Investment income 178 4 49 231
Gain on sale of assets 121 41 -- 162
Interest expense (730) (76) (92) (898)
Corporate allocation & other (2,632) (2,198) 5,820 990
------------- ------------- ------------- -------------
Income before taxes 2,968 (3,135) 876 709
Income taxes 114 114
------------- ------------- ------------- -------------
Net income (loss) $ 2,968 $ (3,135) $ 762 $ 595
Total Assets 47,196 36,213 (822) 82,587
THREE MONTHS ENDING SEPTEMBER 30, 2000
Revenue $ 4,244 $ 7,552 $ -- $ 11,796
Direct operating cost 2,385 4,366 (196) 6,555
Gross profit $ 1,859 $ 3,186 $ 196 $ 5,241
Selling, general & administrative 1,146 1,513 1,569 4,228
------------- ------------- ------------- -------------
Income (loss) from operations 713 1,673 (1,373) 1,013
Investment income (9) (6) (80) (95)
Gain on sale of assets 33 12 -- 45
Interest expense (37) (57) (81) (175)
------------- ------------- ------------- -------------
</Table>
13
<Table>
<Caption>
CHEMICAL LLRW CORPORATE
SERVICES SERVICES & OTHER TOTAL
------------- ------------- ------------- -------------
Corporate allocation & other 717 1,066 (1,463) 320
------------- ------------- ------------- -------------
Income before taxes 1,417 2,688 (2,997) 1,108
Income taxes 8 8
------------- ------------- ------------- -------------
Net income 1,417 $ 2,688 $ (3,005) $ 1,100
NINE MONTHS ENDING SEPTEMBER 30, 2000
Revenue $ 13,298 $ 18,302 $ -- $ 31,600
Direct operating cost 7,816 9,853 (342) 17,327
------------- ------------- ------------- -------------
Gross profit $ 5,482 $ 8,449 $ 342 $ 14,273
Selling, general & administrative 2,769 5,314 3,589 11,672
------------- ------------- ------------- -------------
Income (loss) from operations 2,713 3,135 (3,247) 2,601
Investment income 37 1 105 143
Gain on sale of assets 32 12 -- 44
Interest expense (33) (82) (134) (249)
Corporate allocation & other 1,449 2,161 (2,835) 775
------------- ------------- ------------- -------------
Income before taxes 4,198 5,227 (6,111) 3,314
Income taxes -- -- 69 69
------------- ------------- ------------- -------------
Net income $ 4,198 $ 5,227 $ (6,180) $ 3,245
Total Assets 24,414 39,674 371 64,459
------------- ------------- ------------- -------------
</Table>
NOTE 10. CASH AND INVESTMENT SECURITIES.
The Company maintains several bank and money market accounts totaling $1,460,000
at September 30, 2001. The Company also had $242,000 of cash and investment
securities pledged for closure and post closure obligations.
NOTE 11. COMMITMENTS AND CONTINGENCIES.
The Company becomes involved in judicial and administrative proceedings
involving federal, state, and local governmental authorities in the ordinary
course of business. Actions may also be brought by individuals or groups of
individuals in connection with the permitting of planned facilities, alleged
violations of existing permits, or alleged damages suffered from exposure to
hazardous substances purportedly released from Company operated sites, and other
litigation. The Company maintains insurance intended to cover property and
damage claims asserted as a result of operations.
Insurance:
The Company carries a broad range of insurance coverage which management
considers prudent to protect the Company's assets and operations. This coverage
is subject to varying degrees of risk retention by the Company.
Casualty coverage currently includes $1,000,000 primary commercial general
liability with a $2,000,000 aggregate and $1,000,000 primary automobile
liability. The Company maintains workers' compensation insurance in accordance
with laws of the various states in which it is an employer. This coverage is
supported by $35,000,000 in umbrella insurance protection. A property policy
provides insurance coverage for real and personal property. The Company also
maintains an environmental impairment liability ("EIL") insurance policy for
certain of its treatment and disposal facilities, transfer stations, and
processing facilities. This provides coverage for property damage and/or bodily
injury to third parties caused by potential off-site pollution emanating from
such disposal facilities, transfer stations, or processing facilities in the
amount of $20,000,000 of coverage per loss with a $20,000,000 aggregate limit.
Professional environmental consultants liability insurance is carried to cover
damages the Company is legally obligated to pay because of an act, error or
omission in professional services, or a loss resulting in
14
environmental impairment away from an owned site. This policy is subject to a
$10,000,000 per occurrence limit with a $10,000,000 aggregate limit.
Nuclear liability insurance is carried to cover bodily injury and property
damage claims to third parties caused by the nuclear energy related hazards for
which the Company is legally obligated. Certain of the Company's waste disposal
and processing facilities are covered for closure and post closure costs through
a direct risk transfer insurance policy. Other sites are covered through funds
required by various states. Periodically management reviews and may establish
reserves for legal and administrative matters, or fees expected to be incurred
in connection with such matters. At this time, management believes that its
reserves and insurance are adequate.
There have been no significant changes in commitments and contingencies other
than that included in Part II, Item I. of this report, Legal Proceedings.
NOTE 12. PREFERRED STOCK.
In November 1996, the Company issued 300,000 shares of Series E Redeemable
Convertible Preferred Stock ("Series E") in a private offering to four of its
directors for $3,000,000 in cash. The Series E stock is now retired but carries
3,000,000 warrants with no assigned value and a $1.50 per share exercise price
that expire June 2008.
In September 1995, the Board of Directors authorized 105,264 shares of preferred
stock designated as 8 3/8% Series D Cumulative Convertible Preferred Stock
("Series D") and warrants to purchase 1,052,640 shares of the Company's common
stock. The Company sold 105,264 shares of Series D stock with warrants in a
private offering to a group of members or past members of the Board of Directors
for $4,759,000. Offering expenses of $101,000 and $140,000 in settlement of
liabilities were deducted from the proceeds. At September 30, 2001, each Series
D share became convertible at any time at the option of the holder into 15.30
shares of the Company's common stock, equivalent to a conversion price of $5.50
on the $47.50 total per share offering price plus accrued dividends times 1.44
due to dilution by later securities issuance.
Dividends on the Series D are cumulative from the date of issuance and payable
quarterly commencing on October 15, 1995. Current bank credit facility covenants
prohibit the payment of dividends. One holder of Series D stock has claimed the
subordination provision in the Series D designation certificate does not apply
to the current bank credit facility, and has asserted that quarterly dividends
should be paid. The Company disagrees with this interpretation and has so
notified the preferred shareholder involved. Accrued dividends at September 30,
2001 totaled $1,093,000.
On September 12, 1999, the warrants issued with the Series D expired except for
those belonging to one Series D holder. The Company extended an offer to all
Series D holders to extend the warrants to September 13, 2002 if they agreed to
converted their Series D to common stock. One holder converted 5,263.2 Series D
shares for 69,264 common shares and extended 64,211 warrants. Each warrant has
an exercise price of $4.75. No value was assigned to the warrants in the
accompanying consolidated financial statements as the value is deemed de
minimus. 100,001 shares ofSeries D preferred stock remain outstanding.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The following discussion and analysis contains trend information and other
forward-looking statements that involve a number of risks and uncertainties.
Actual results could differ materially from the Company's historic results of
operations and those discussed in these forward-looking comments. Factors that
could cause actual results to differ materially include, but are not limited to,
those identified in Notes 5, 6, 7, and 10 to the Consolidated Financial
Statements herein, Part II, Item 1, Legal Proceedings and the discussion below.
Certain factors that may influence actual operations in the future are discussed
in the Company's Form 10-K for the year ended December 31, 2000 in Part I, Item
1. Business. 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
expressions are most often used in statements relating to business plans,
strategies, anticipated
15
benefits or projections about the anticipated revenues, earnings or other
aspects of its operating results. We make these statements in an effort to keep
stockholders and the publics informed about our business, and have based them on
our current expectations about future events. Such statements should be viewed
with caution. These statements are not guarantees of future performance or
events. As noted elsewhere in this report, all phases of our business are
subject to uncertainties, risks and other influences, many of which the Company
has no control over. Additionally, any of 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, except as required as a publicly traded company.
INTRODUCTION
Incorporated in 1952, American Ecology Corporation and its predecessors have
operated commercial low-level radioactive and chemical waste disposal and
treatment facilities nationwide longer than any other company in the nation. The
Company mainly derives its revenues from fees charged for processing and
disposal of hazardous, non-hazardous, naturally occurring and low-level
radioactive waste. Revenues are also derived from brokering wastes to other
service providers, and environmental remediation work.
Disposal fees assessed to customers of the Company's operating facilities may
include state and local fees, and are generally based on the volume or weight of
waste deposited. The Company may assess fees and incur costs to process waste
(e.g. compaction or decontamination), stabilize waste (e.g. mixing with concrete
and other reagents), or transport waste. Some of these costs create
inter-company charges and revenue, all of which have been eliminated in the
consolidated financial statements.
Operating expenses include direct and indirect costs for labor, maintenance and
repairs, subcontracted costs and equipment, insurance, taxes and accruals for
burial fees and other costs. The Company has properly accounted for fees
assessed by regulatory authorities for the issuance of permits and licenses.
Selling, general & administrative costs include management salaries, sales and
marketing efforts, clerical and administrative costs, legal fees, office
rentals, corporate insurance, and other administrative costs for general
corporate overhead.
Revenue for the nine months ended September 30, 2001, was $40,493,000 or 28%
higher than the same period in 2000. The growth in revenue was the result of the
acquisition of Envirosafe Services of Idaho, Inc. the Grand View, Idaho
hazardous waste disposal facility, now named US Ecology Idaho, Inc. ("USEI"), in
February 2001. This increase in revenue resulted in a parallel increase of 36%
in direct costs and 43% in selling, general and administrative costs over the
same period a year ago. USEI is a part of the Chemical Services segment, which
had a 131% and 108% growth in revenue for the three and nine month periods ended
September 30, 2001, respectively. The LLRW division experienced operational
difficulties at the Oak Ridge facility and revenues declined 45% and 28% for the
same periods, respectively. Despite the positive and significant contribution
that the Idaho facility has made to the Company's revenue and operating profit,
it was insufficient to offset the material operating losses incurred at the
Company's Oak Ridge facility and higher selling, general, and administrative
expenses company wide. The net result was an operating loss of $928,000 for the
quarter, although the Company posted an operating profit of $224,000
year-to-date.
The calculations to report activities for both the three and nine months ended
September 30, 2001 are exclusive of inter-company transactions and corporate
eliminating entries.
16
SENIOR MANAGEMENT CHANGES
On November 6, 2001 the Company's Board of Directors accepted the resignation of
Jack K. Lemley as a Director and Chairman of the Board. On November 6, 2001, the
Company's Board of Directors appointed Thomas A. Volini as a new Director.
On November 6, 2001, the Company accepted the resignation L. Gary Davis, Vice
President and Corporate Controller.
On October 12, 2001, the Company eliminated several executive officer positions
including Executive Vice President and Operations Manager, a position previously
held by Zaki K. Naser, a Vice President position held by Robert S. Thorn, and a
Vice President position previously held by Barbara A. Trenary.
On October 5, 2001 the Executive Committee of the Board of Directors appointed
Stephen A. Romano as Chief Operating Officer of the Company. On October 11, 2001
it appointed Mr. Romano as President. Also at the October 11, 2001 Executive
Committee meeting of the Board of Directors, James R. Baumgardner, Senior Vice
President and Chief Financial Officer, was appointed Secretary and Treasurer of
the Company. Robert M. Trimble remains as the Company's General Counsel.
17
RESULTS OF OPERATIONS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000
The following table presents, for the periods indicated, the percentage of
operating line items in the consolidated income statement to operating revenues:
<Table>
<Caption>
Three Months Ended Nine Months Ended Three Months Ended Nine Months Ended
September 30, 2001 September 30, 2001 September 30, 2000 September 30, 2000
---------------------- ---------------------- ---------------------- ----------------------
$ % $ % $ % $ %
--------- --------- --------- --------- --------- --------- --------- ---------
Revenue 13,896 40,493 11,796 31,600
Direct operating costs 8,498 61.2% 23,572 58.2% 6,555 55.6% 17,327 54.8%
--------- --------- --------- --------- --------- --------- --------- ---------
Gross profits 5,398 38.8% 16,921 41.8% 5,241 44.4% 14,273 45.2%
SG & A 6,326 45.5% 16,697 41.2% 4,228 35.8% 11,672 36.9%
--------- --------- --------- --------- --------- --------- --------- ---------
Income from operations (928) -6.7% 224 0.6% 1,013 8.6% 2,601 8.2%
Investment income 24 2.0% 231 0.6% 95 -0.8% 143 0.5%
Gain on sale of assets 50 0.4% 162 0.4% 45 0.4% 44 0.1%
Interest expense (294) -2.1% (898) -2.2% (175) 1.5% (249) 0.8%
Other (income) expense (34) -2.0% 990 2.4% 320 2.7% 775 2.5%
--------- --------- --------- --------- --------- --------- --------- ---------
Net income before income
taxes (1,182) -8.5% 709 1.8% 1,108 9.4% 3,314 10.5%
Income tax expense (benefit) 30 0.2% 114 0.3% 8 0.1% 69 0.2%
--------- --------- --------- --------- --------- --------- --------- ---------
Net income (1,212) -8.7% 595 1.5% 1,100 9.3% 3,245 10.3%
Preferred stock dividends 99 0.7% 295 0.7% 100 0.8% 299 0.9%
--------- --------- --------- --------- --------- --------- --------- ---------
Net income (loss) available
to common shareholders (1,311) -9.4% 300 0.7% 1,000 8.5% 2,946 9.3%
--------- --------- --------- --------- --------- --------- --------- ---------
</Table>
18
CONDENSED STATEMENT OF OPERATIONS FOR THE NINE MONTHS ENDING
<Table>
<Caption>
Reported in $000 September 30, 2001 September 30, 2000
Chemical LLRW Chemical LLRW
------------- ------------- ------------- -------------
Revenue $ 27,619 $ 13,249 $ 13,298 $ 18,302
Direct operating costs 14,513 8,989 7,816 9,853
------------- ------------- ------------- -------------
Gross profit 12,856 4,260 5,482 8,449
SG & A 6,825 5,166 2,769 5,314
------------- ------------- ------------- -------------
Income (loss) from
operations 6,031 (906) 2,713 3,135
Other income (expense) (3,063) (2,229) 1,485 2,092
------------- ------------- ------------- -------------
Net income (loss) $ 2,968 $ (3,135) $ 4,198 $ 5,227
------------- ------------- ------------- -------------
</Table>
REVENUE
<Table>
<Caption>
Period to Period Change Period to Period Change
For the Three Months Ended For the Nine Months Ended
September 30, 2001 and 2000 September 30, 2001 and 2000
--------------------------- ---------------------------
$ % $ %
-------- ------ ------- -----
Statement of Operations Revenue
Chemical Division 5,574 131 14,321 107
LLRW Division (3,373) (45) (5,053) (28)
Corporate & Other (101) -- (375) --
</Table>
For the three months ended September 30, 2001, the Company reported consolidated
revenue of $13,896,000 or 18% increase compared to the corresponding period in
2000. Chemical Division revenue increased $5,574,000 or 131% over the same
period last year primarily due to the revenue contribution provided from US
Ecology Idaho, Inc., ("USEI") which was acquired in February 2001. USEI waste
volume in the third quarter was driven by continued shipments from steel mills
and U.S Army Corps of Engineers environmental remediation projects. Excluding
USEI, Chemical Division revenue increased 22% reflecting the stability of its
hazardous waste disposal business and continuing contribution from the Company's
El Centro municipal waste landfill in south Texas.
The LLRW division revenue declined by $3,373,000 or 45% in the third quarter,
principally due to production and throughput issues at its Oak Ridge facility.
Oak Ridge revenue in the third quarter was negatively impacted by reduced
facility throughput caused by equipment maintenance downtime for certain
routinely used volume reduction equipment. Lower waste receipts at the Richland,
Washington facility, also hurt the LLRW division. Waste receipts at this
rate-regulated disposal facility are sporadic over the year and are driven by
customer schedules rather than sales efforts.
For the nine months ended September 30, 2001 revenue for the Chemical Division
increased $14,321,000 or 107% compared to the same period one year ago. Again,
the increased revenue in the Chemical division was principally driven by the
strong performance of the recently acquired treatment and disposal Idaho
facility. However, all of the Company's chemical operations performed well
during the first three quarters of the year. Excluding USEI, the Chemical
Division posted an 11% increase in revenue year-to-date.
The Company's hazardous waste facilities in Robstown, Texas and Beatty, Nevada
contributed to third quarter performance due primarily to the thermal treatment
and recovery technology introduced at Beatty last year. Demand
19
for the thermal treatment and recovery process is high and the Beatty site has a
several month backlog of material to process.
For the nine months ended September 30, 2001 the LLRW division revenue declined
by $5,053,000 or 28%. In addition to the throughput issues previously discussed,
Oak Ridge's revenue in 2001 has been negatively impacted by the Company's
actions to concentrate its focus on the successful elimination of all aged
waste. During the first half of 2001, the Company allocated significant
resources in a successful effort to achieve this objective at the expense of
reduced processing of revenue-generating waste.
As a part of the USEI acquisition, the Company acquired a contract to operate a
steel mill waste treatment plant in Sterling, Illinois on land owned by
Northwestern Steel & Wire Company. The plant treats electric arc furnace dust,
also known as K061, prior to disposal at an on-site landfill also owned by the
steel mill. In December 2000, prior to the acquisition of USEI by the Company,
Northwestern Steel & Wire, filed for protection from creditors under Chapter 11
of the federal bankruptcy code. In May 2001, the steel mill ceased operations
and laid off most of its workforce. In response to the cessation of mill
operations, USEI negotiated a set of final payments with the mill and the
bankruptcy trustee, whereby the Company processed material through June with a
defined payment schedule and then beginning July 1, continued treatment at a
reduced fee for the reduced waste volumes. The Company has reduced headcount and
cost at its Sterling operation to compensate for the lower waste volumes and
lower processing rates. The Company now believes that it will be finished with
all processing operations by the end of November. During November, the Company
expects to process remaining waste, secure the facility for final closure by its
permittee (Northwestern Steel & Wire) and depart from the facility immediately
thereafter. Management does not believe that cessation of operations at Sterling
will have a material adverse impact on the Company's future revenue or earnings.
On July 24, 2001 the City of Corpus Christi passed a city ordinance establishing
a set of fees to be imposed on haulers of solid waste within the city limits. It
is the Company's belief that this ordinance is intended to recapture revenue
that the City of Corpus Christi has lost since the opening of the Company's El
Centro solid waste landfill in July of 2000. While the fee places a burden on
waste haulers and eliminates some of the competitive cost advantage that El
Centro has maintained over the City's landfill during the last year, the Company
believes that it will continue to compete effectively with the City for solid
waste within city limits. Moreover, El Centro will continue to have a price
advantage on when competing with the City's landfill for solid waste collected
outside the city limits. Nonetheless, it is expected that the new ordinance will
result in reduced volumes at El Centro the remainder of the year compared to the
first half of the year and no assurance can be given that the City will not
enact additional ordinances to control the flow of solid waste in the region.
The Company's corporate segment does not generate any revenue but the
eliminating entries between companies and the closed facilities resulted in a
period-to-period change for both the three and nine months ended September 30,
2001.
DIRECT OPERATING COSTS
The following table indicates the period-to-period change in direct operating
costs:
<Table>
<Caption>
Period to Period Change Period to Period Change
For the Three Months Ended For the Nine Months Ended
September 30, 2001 and 2000 September 30, 2001 and 2000
--------------------------- ---------------------------
$ % $ %
-------- ------ ------ -----
Statement of Operations-Direct Operating Costs
Chemical Division 3,111 130 6,697 86
LLRW Division (1,324) (30) (864) (9)
Corporate & Other 156 (80) 162 (48)
</Table>
20
For the three and nine months ending September 30, 2001 direct operating costs
increased for the Chemical Division but decreased in the LLRW Division. Total
consolidated direct operating costs for the Company in the third quarter of 2001
were $8,498,000 or 61% of revenue compared to $6,555,000 or 56% of revenue
during the same quarter last year. For the nine months, consolidated direct
operating costs increased to $23,572,000 or 58% of revenue compared to
$17,327,000 or 55% of revenue for the same period in 2000.
For the Chemical Division, direct operating expenses increased to $5,496,000 or
54% of revenue in the quarter compared to the $2,385,000 or 56% of revenue
during the same 3 months last year. The increase in direct operating costs in
the Chemical Division was a result of the operations of the newly acquired USEI
Idaho hazardous waste facility. Excluding the impact of USEI, direct operating
expenses for the nine months in the Chemical Division dropped 4%, principally
due to the lower cost airspace that has been constructed at the Robstown, Texas,
and Beatty, Nevada disposal units.
The LLRW Division's direct operating costs decreased for both the three and nine
months ended September 30, 2001. As previously discussed, the decrease in
revenue for LLRW at both Oak Ridge and Richland, Washington resulted in
corresponding decreases in direct operating costs of $1,324,000 for the quarter
and $864,000 year to date.
The Company's corporate segment does not generate any direct operating costs.
Certain eliminating entries between companies and the closed facilities resulted
in a period-to-period change for both the three and nine months ended September
30, 2001, which was not material in amount.
SELLING, GENERAL AND ADMINISTRATIVE COSTS (SG&A)
<Table>
<Caption>
Period to Period Change Period to Period Change
For the Three Months Ended For the Nine Months Ended
September 30, 2001 and 2000 September 30, 2001 and 2000
--------------------------- ---------------------------
$ % $ %
--------- --------- --------- --------
Selling, General and Administrative Costs
Chemical Division 1,437 125 4,056 146
LLRW Division 217 14 (148) (3)
Corporate & Other 694 44 1,366 38
</Table>
For the three months ending September 30, 2001, SG&A costs increased 50% to
$6,326,000 from $4,228,000 over the same period one year ago. Approximately half
of the increase was attributable to the USEI acquisition. Excluding USEI, SG&A
increased 26% in the third quarter of this year compared to the same quarter in
2000. The increase in SG&A occurred at all sites and in multiple spending
categories, e.g. salaries, travel & entertainment, consulting and professional
expenses, insurance, legal costs, and selling expense. In addition, the third
quarter SG&A figure was increased by a $500,000 accrual to cover an anticipated
increase in radioactive waste burial fee costs for waste shipped from the Oak
Ridge facility. This accrual covers about 20,000 cubic feet of waste on hand
that will be processed then disposed of at an out of state disposal facility.
The out of state facility has given notice of a fee increase from 33% to 45%.
SG&A also increased for the nine months ending September 30, 2001 to $16,697,000
compared to $11,672,000 for the nine months ending September 30, 2000 or a 43%
increase. Again, over half of the year-to-date $5,025,000 increase in SG&A can
be ascribed to the USEI acquisition. Non-USEI SG&A increases are attributable to
increased spending at all sites in multiple spending categories, e.g. salaries,
travel & entertainment, consulting and professional expenses, insurance, legal
costs, and selling expense.
The LLRW division experienced a 14 percent increase and a 3 percent decreases in
SG&A costs for the three and nine months ending September 30, 2001 respectively.
The increase in SG&A spending in the LLRW Division during the third quarter of
this year was the result of an insurance premium adjustment and an increase in
some one time charges for professional and consulting fees paid by the Richland
facility.
21
The Company's corporate segment incurs selling, general & administrative costs
for legal, consulting, administrative salaries and related expenses of managing
the business including certain eliminating entries between companies and the
closed facilities. The overall increase of $444,000 for the three months period
and $1,117,000 for the nine months was mainly attributed to additional headcount
at the corporate office. In addition, spending increased in a number of areas
including information systems, quality assurance, document control, and
administration.
During the first three quarters of the year, management directed the various
sites, departments and division heads to reduce costs and expenses voluntarily.
These efforts were largely unsuccessful. As previously discussed, the Company's
Board of Directors made significant changes in the day-to-day management of the
Company in October 2001. New management promptly implemented an aggressive cost
cutting plan that included the elimination of several officer positions, other
reduced headcount and a series of directives to cancel or postpone spending.
This action included a two-phased reduction in force ("RIF") implemented on
October 12 and November 9, 2001. This process reduced the number of full-time
Company employees by 18 or a 6% reduction in total headcount. Almost all of the
RIF occurred in the SG&A or overhead departments. In addition, new management
has implemented an aggressive and restrictive plan to reduce travel,
entertainment, professional, and consulting expenses. Management believes that
its cost control initiatives will significantly reduce SG&A expenses in 2002.
During the fourth quarter of 2001,the Company expects to incur approximately
$250,000 of one-time, non-recurring charges associated with these staff
reductions and reorganization.
OTHER COSTS AND INVESTMENT INCOME
<Table>
<Caption>
Period to Period Change Period to Period Change
For the Three Months Ended For the Nine Months Ended
September 30, 2001 and 2000 September 30, 2001 and 2000
--------------------------- ---------------------------
$ % $ %
-------- --------- --------- --------
Other Costs
Chemical Division 606 86 1,187 82
LLRW Division 27 3 (44) (2)
Corporate & Other (680) 41 (1,875) 48
</Table>
Investment income is comprised principally of interest income earned on various
investments in securities held-to-maturity, dividend income, and realized and
unrealized gains and losses earned on the Company's investment portfolio
classified as trading securities. The Company earned $24,000 of investment
income for the third quarter of 2001, with the majority coming from the
Company's Beatty facility for service charges on customer accounts and other
miscellaneous investments. For the nine-months ended September 30, 2001, the
Company reported investment income of $231,000 compared to $143,000 for the same
nine months ending September 30, 2000. The Company closed an investment
portfolio during the last twelve months and now maintains its excess cash in
money market accounts and certificates of deposit. Included in this section is
gain on sale of fixed assets for both 2001 and 2000. The Company arranged a sale
and lease back in August of 2000 and each month recognizes a gain of $18,000.
For the third quarter of 2001, interest expense increased to $294,000 from
$175,000 during the third quarter last year. Likewise, interest expense for the
nine months ended September 30, 2001 increased to $898,000 from $249,000 last
year. The higher interest expense is the result of increased borrowing on the
credit facility and the assumption of the $8.5 million industrial revenue bond
obligation for USEI.
OTHER INCOME
Other income is the account used to record various business activities that are
not a part of the Company's ordinary and usual business line of revenue. Other
income also includes the reversal of expenses charged to reserves for contingent
liabilities from prior periods and miscellaneous cash receipts. The Company
believes it is appropriate to use an account like other income to reflect
accurately in the current period those costs and expenses which were reversed
from accruals in prior periods of estimated operating or selling, general &
administrative expense. As a result, credits from prior periods go to other
income rather than crediting current years expenses or revenue, thus preserving
the true current period results from operations.
22
If a reserve were established based on a known liability that was reasonably
estimated, and later settled for a lesser amount, that unused portion of the
reserve from a prior period would result in other income. On the other hand if
such contingent liability were resolved within the same year, then the account
that the original expense was charged to would take the resultant credit.
Other income (loss) for the three and nine months ended September 30, 2001 was a
loss of $34,000 and income of $990,000 year to date, compared to other income of
$320,000 and $775,000 for the same periods of 2000. The main reason for the
increase in other income in 2001, related to burial fee adjustments the Company
made for the elimination of aged waste at the Oak Ridge facility. With the
exception of one waste stream requiring special processing, the Company
successfully eliminated the aged waste backlog from the Oak Ridge facility
during the first six months of 2001. This special waste stream required an
additional reserve accrual of $100,000 in the current quarter based on bids
received to process and a total reserve for special waste of $350,000. Included
in the year to date transactions, the Company has made adjusting entries that
resulted in other income by removing obligations that were on the balance sheet
of USEI at the time of acquisition. The USEI accounts that were adjusted
included bond interest premium for $177,000 which was being accrued and also
paid for, and restructuring fees of $52,000.
The table below provides a complete itemization of transactions that accounted
for other income for the three and nine months ended September 30, 2001 and
2000.
<Table>
<Caption>
(Reported in thousands of dollars) Three Months Ended Nine Months Ended
September 30, September 30,
OTHER INCOME FROM GENERAL BUSINESS ITEMS 2001 2000 2001 2000
------------- ------------- ------------- -------------
Burial fee accrual adjustment -- $ 163 $ 500 $ 236
State tax refunds from prior year -- 36 -- 39
Loan repayment to Chase Bank of Texas originally
expensed as bank fees -- -- -- 112
Payment of sales invoices previously written off -- 47 -- 102
Reverse bad debt expense reserve $ (46) 71 (21) 149
Bond interest from excess accrual in prior year -- -- 177 --
Professional fees adjustment -- -- 160 --
Reverse USEI restructuring charge -- -- 52 --
Correction of prior years expenses that were
allowable as capitalized costs -- -- -- 128
------------- ------------- ------------- -------------
SUBTOTAL (46) 317 867 766
OTHER INCOME FROM NON-GENERAL BUSINESS ITEMS
Adjustment of income tax accrual -- -- 107 --
Fire insurance proceeds 8 -- 8 --
Correction of gain on asset sale -- -- (2) --
Cash receipts for property rentals 3 2 7 6
1 1 3 3
------------- ------------- ------------- -------------
TOTAL OTHER INCOME $ (34) $ 320 $ 990 $ 775
------------- ------------- ------------- -------------
</Table>
23
OPERATING EARNINGS AND NET INCOME
<Table>
<Caption>
Period to Period Change Period to Period Change
For the Three Months Ended For the Nine Months Ended
September 30, 2001 and 2000 September 30, 2001 and 2000
------------------------------ ------------------------------
$ % $ %
------------- ------------- ------------- -------------
Income from Operations
Chemical Division 1,026 144 3,318 122
LLRW Division (2,266) (135) (4,041) (129)
------------- ------------- ------------- -------------
Corporate & Other (309) 18 (1,654) 51
EBINT (1)
Chemical Division 3,708 (210) 3,907 146
LLRW Division (2,239) (135) (3,968) (126)
Corporate & Other (39) (2) (1,022) (90)
Consolidated Net Income (2,311) (231) (2,547) (86)
EBITDA (2) (1469) (101) 1,188 (29)
</Table>
(1) EBINT represents earnings from operations before deducting interest and
taxes.
(2) EBITDA is defined herein as income from operations excluding depreciation
and amortization and asset impairments and unusual items. EBITDA, which is not a
measure of financial performance under generally accepted accounting principles,
is provided because the Company understands that such information is used by
certain investors when analyzing the financial position and performance of the
Company.
For the three months ending September 30, 2001, the Company's Chemical Division
posted income from operations of $1,739,000 or a 144% improvement over the
$713,000 reported for the same period of 2000. The Division also posted a strong
performance for the nine months ended September 30, 2001 generating $3,318,000
more operating income than one year ago. The principal reason for the
improvement is the strong performance of the newly acquired Grand View, Idaho
treatment and disposal facility. The Robstown, Texas and Beatty, Nevada disposal
facilities also improved performance over last year.
The LLRW Division's operating income was lower by $2,226,000 and $4,041,000 for
the three and nine months ended September 30, 2001, respectively, compared to
the same periods one year ago. LLRW division revenue declined by 45% for the
three months ended September 30, 2001and 28% for the nine months ended on the
same date due primarily to the Oak Ridge facility's focus on eliminating aged
waste and the related revenue decrease. Throughput and operational problems have
also negatively impacted revenue and costs at the Oak Ridge facility during the
first 9 months of 2001. With the aged waste backlog essentially eliminated and
recent headcount reductions, and a change in site management, executive
management expects improved revenue and earnings. The Richland Washington
facility revenue is limited by rate base regulations and experienced lower
revenue for the nine months ended September 30, 2001 than for September 30,
2000.
Net income is measured at the consolidated level after corporate allocations,
taxes and eliminating entries. For the three and nine months ended September 30,
2001 the Company's consolidated results reflected a net loss of $1,212,000 and
net income of $595,000 respectively, or a decrease of 231% and 86% compared to
the same periods one year ago. The main reason for this decrease in
profitability was the significant operating losses at the Oak Ridge facility.
Management believes that its cost control initiatives, reduced staff, and
reductions in spending will improve the Company's operating performance in
future periods.
INCOME TAXES
The Company's effective income tax (benefit) rates were 10% and 3% for the
quarters ending September 30, 2001 and 2000 respectively. The third quarter
income tax expense of $30,000 and credit of $8,000 for each of the quarters
ending September 30, 2001, and 2000, respectively is for payments on different
state, local, and franchise taxes. For the nine months ended September 30, 2001
the Company incurred $114,000 compared to $69,000 one year ago. The Company has
a valuation allowance of approximately $19.8 million for deferred federal tax
assets with more than $2.7 million of limited loss carry-forwards and $34.4
million of unlimited net operating loss carry-forwards. The Company does not
anticipate a federal tax liability for 2001, however, the same credits are not
available for state and local taxes and the Company estimates at least $150,000
of tax obligation for 2001.
24
SEASONAL EFFECTS
Operating revenues are generally lower in the winter months than the warmer
summer months. However, both Chemical and LLRW Services revenue are more
affected by market conditions than seasonality.
NEW ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board has recently issued Statement of
Financial Accounting Standards 143 "Accounting for Asset Retirement
Obligations." Management believes the statement will have no material impact on
the Company's financial statements.
CAPITAL RESOURCES AND LIQUIDITY
On September 30, 2001, cash, cash equivalents and short-term investments totaled
$1,460,000, a decrease of $2,662,000 from December 31, 2000. The decrease in
cash was due to on-going capital expenditures, customer rebates at the
rate-regulated facility in Richland, Washington, payments for aged waste
disposal, and the funding of operating losses at Oak Ridge. Accounts receivable
totaled $11,299,000 at September 30, 2001 or an increase of $1,460,000 from
December 31, 2000. The increase in accounts receivable is due to the addition of
USEI. The Company's "days sales outstanding" increased in the third quarter to
80 days at September 30, compared to 71 days at June 30, and 73 days at March
31, 2001.
As of September 30, 2001 the Company's liquidity, as measured by the current
ratio, increased to 1.19:1 compared to 1.17:1 at December 31, 2000. The
Company's working capital increased to $2,534,000 from $2,279,000 on December
31, 2000 but decreased from $5,774,000 on March 31, 2001. The main reason for
the decrease in working capital in 2001 was because the Company continued to pay
vendor obligations and reduced available cash on hand. Overall this is an
improvement from one year ago, when the Company had a working capital deficit of
$2,885,000 on September 30, 2000. The Company received cash collateral of
$2,565,000 that was held in trust for the USEI facility during the second
quarter of 2001. The money was held in trust as collateral for the previous
owners of USEI to secure a $15 million surety bond for the State of Idaho. The
Company's insurance and arrangements to secure the same surety bond was adequate
for the State of Idaho to authorize the cash collateral to be released to the
Company. The Company used these proceeds for ordinary business, to pay down
certain accounts payable and to improve the Company's overall working capital
position. Given this increase in liquidity and availability of capital,
management has made it a priority to increase cash flow through improved
collections, repay some or all of the line of credit, and extend the current
banking arrangement. If the Company is unsuccessful in its negotiations with its
bank and it is unable to extend the maturity of the credit facility past
December 31, 2002, it will reclassify the line of credit borrowings as short
term consistent with GAAP. Reclassifying the line of credit borrowings short
term would have a material, adverse affect on the Company's working capital
position and possibly trigger bank liquidity covenants.
Since December 31, 2000, the Company's leverage has increased, as evidenced by
debt to equity ratio of 2.16:1.0 at September 30, 2001, compared to 1.53:1.0 at
fiscal year-end 2000. The debt to equity ratio is defined as total debt divided
by shareholders equity. This increase in the Company's leverage is principally
the result of the assumption of the $8,500,000 industrial revenue bond and
$12,000,000 of other USEI liabilities, and a $1.2 million third quarter loss.
The Company maintains a banking relationship with Wells Fargo Bank in Boise,
Idaho that provides an $8,000,000 line of credit. At quarter-end and on November
12, 2001, the Company had borrowed $4,850,000 not including the $1,150,000
reserved for a standby letter of credit and has $442,000 available for
borrowing.
SUBSEQUENT EVENTS
In October 2001, the Company sold the primary assets of its Nuclear Equipment
Service Center assets in Oak Ridge,
25
Tennessee to Alaron Corporation. The Center had provided motor and other large
component decontamination and rebuilding services primarily to electric
utilities. The Company is exiting this particular market niche with the Alaron
asset. The Company expects a gain on the sale but has not completed the
accounting for this transaction. The Company expects to net approximately
$425,000 after the Company repays Wells Fargo bank for certain assets sold from
the 2000 sale and lease back agreement.
26
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: December 13, 2001 By: /s/ Stephen A. Romano
----------------------------------
Stephen A. Romano
President and Chief Operating Officer
Date: December 13, 2001 By: /s/ James R. Baumgardner
----------------------------------
James R. Baumgardner
Senior Vice President,
Chief Financial Officer,
Secretary and Treasurer
27