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 March 31, 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)
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 May 10, 2002, Registrant had outstanding 14,403,985 shares of its Common
Stock.
AMERICAN ECOLOGY CORPORATION
QUARTERLY REPORT FORM 10-Q FOR THE
THREE MONTHS ENDED MARCH 31, 2002
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements PAGE
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 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk 15
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 16
Item 2. Changes in Securities and Use of Proceeds 17
Item 3. Defaults upon Senior Securities 17
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 5. Other Information 17
Item 6. Exhibits and Reports on Form 8-K 17
Signatures 18
2
OFFICERS CORPORATE OFFICE
- -------- ----------------
Stephen A. Romano American Ecology Corporation
Chief Executive Officer, President and Chief 805 W. Idaho, Suite 200
Operating Officer Boise, Idaho 83702
(208) 331-8400
James R. Baumgardner (208) 331-7900 (fax)
Senior Vice President, Chief Financial Officer www.americanecology.com
Treasurer and Secretary -----------------------
Michael J. Gilberg COMMON STOCK
Vice President and Controller ------------
American Ecology Corporation's common
stock trades on the NASDAQ Stock Market
under the symbol ECOL.
DIRECTORS
- ---------
Rotchford L. Barker
Independent Businessman FINANCIAL REPORTS
-----------------
A copy of American Ecology Corporation
Paul C. Bergson Financial Reports, filed with the
Principal Securities and Exchange Commission,
Bergson & Company may be obtained by writing to:
805 W. Idaho, Suite 200
Keith D. Bronstein Boise, Idaho 83702
President or at www.americanecology.com
Tradelink, LLC -----------------------------
Edward F. Heil TRANSFER AGENT
Sole Member --------------
E.F. Heil, LLC Mellon Investor Services LLC
Overpeck Centre
85 Challenger Road
Dan Rostenkowski Ridgefield Park, New Jersey 07660
President (201) 296-4000
DanRoss &Associates, Inc. or at www.mellon-investor.com
-----------------------------
Paul F. Schutt AUDITOR
Chairman of the Board -------
Nuclear Fuel Services, Inc. Balukoff, Lindstrom & Co., P.A.
877 West Main Street, Suite 805
Boise, Idaho 83702
Thomas A. Volini (208) 344-7150
Chairman, CEO and President
Town & Country Utilities, Inc.
3
PART I. FINANCIAL INFORMATION
- -----------------------------
ITEM 1. FINANCIAL STATEMENTS.
AMERICAN ECOLOGY CORPORATION
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
($ IN 000'S EXCEPT PER SHARE AMOUNTS)
March 31, December 31,
2002 2001
----------- --------------
ASSETS
Current Assets:
Cash and cash equivalents $ 1,741 $ 4,476
Receivables (trade and other), net of allowance for
doubtful accounts of $813 and $1,176 respectively 14,087 12,674
Income tax receivable 740 740
Prepayments and other 1,220 1,881
----------- --------------
Total current assets 17,788 19,771
Cash and investment securities, pledged 243 243
Property and equipment, net 40,386 34,265
Facility development projects 27,430 27,430
Other assets 3,926 5,115
----------- --------------
Total assets $ 89,773 $ 86,824
=========== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long term debt $ 10,746 $ 9,860
Short term line of credit 1,500 5,000
Accounts payable 1,618 2,408
Accrued liabilities 9,860 12,121
Current portion of accrued closure and post closure obligations 1,119 700
Income taxes payable 535 250
----------- --------------
Total current liabilities 25,378 30,339
Long term debt, excluding current portion 4,266 4,436
Closure and post closure obligation, excluding current portion 13,759 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, 14,416,485
and 13,766,485 shares issued and outstanding respectively 144 138
Additional paid-in capital 55,606 54,637
Retained earnings (deficit) (9,381) (28,360)
----------- --------------
Total shareholders' equity 46,370 26,416
----------- --------------
Total liabilities and shareholders' equity $ 89,773 $ 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
March 31, 2002 March 31, 2001
---------------- ----------------
Revenue $ 18,377 $ 12,866
Direct operating costs 9,241 6,733
---------------- ----------------
Gross profit 9,136 6,133
Selling, general and administrative expenses 5,680 4,803
---------------- ----------------
Income from operations 3,456 1,330
Investment income 11 174
Interest income (expense) (288) (258)
Gain on sale of assets 40 46
Other income (loss) (465) 236
---------------- ----------------
Net income before income taxes 2,754 1,528
Income tax expense -- 46
---------------- ----------------
Net income before cumulative effect of accounting change 2,754 1,482
Cumulative effect of accounting change 16,323 --
---------------- ----------------
Net income 19,077 1,482
Preferred stock dividends 98 97
---------------- ----------------
Net income available to common shareholders $ 18,979 $ 1,385
================ ================
Basic earnings from continuing operations .19 .10
Basic earnings from cumulative effect of accounting change 1.19 --
---------------- ----------------
Basic earnings per share $ 1.38 $ .10
================ ================
Diluted earnings from continuing operations .19 .08
Diluted earnings from cumulative effect of accounting change 1.14 --
---------------- ----------------
Diluted earnings per share $ 1.33 $ .08
================ ================
Dividends paid per common share $ -- $ --
================ ================
Pro forma results as if FAS 143 was implemented January 1, 2001:
Net income before cumulative effect of accounting change, as previously reported $ 2,754 $ 1,482
Less pro forma accretion of closure and post closure liability -- (252)
Less pro forma amortization of closure asset -- (70)
Plus previous closure and post closure liability expenses -- 204
---------------- ----------------
Pro forma net income $ 2,754 $ 1,364
================ ================
See notes to consolidated financial statements.
5
AMERICAN ECOLOGY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
($ in 000's)
Three months Ended March 31,
2002 2001
---------------- ----------------
Cash flows from operating activities:
Net income $ 19,077 $ 1,482
Adjustments to reconcile net income to net cash provided
(used) by operating activities:
Depreciation, amortization, and accretion 1,857 1,256
Cumulative effect of accounting change (16,323) --
(Gain) on sale of assets (40) (46)
Changes in assets and liabilities:
Receivables (1,413) 48
Other assets 172 (1,248)
Accounts payable and accrued liabilities (3,051) (4,272)
Income tax payable (5) (5)
Facility closure and post closure obligations (137) 24
---------------- ----------------
Total adjustments (18,940) (4,243)
---------------- ----------------
Net cash provided (used) by operating activities 137 (2,761)
Cash flows from investing activities:
Capital expenditures (1,005) (1,192)
Proceeds from sales of assets 40 46
Acquisition of Envirosafe Services of Idaho, Inc. -- 2,575
Transfers from cash and investment securities, pledged -- 440
---------------- ----------------
Net cash provided (used) by investing activities (965) 1,869
Cash flows from financing activities:
Proceeds from issuances and indebtedness 1,102 3,000
Payments of indebtedness (3,984) (3,203)
Stock options and warrants exercised 975 32
---------------- ----------------
Net cash (used) by financing activities (1,907) (171)
Decrease in cash and cash equivalents (2,735) (1,063)
Cash and cash equivalents at beginning of period 4,476 4,122
---------------- ----------------
Cash and cash equivalents at end of period $ 1,741 $ 3,059
================ ================
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest expense $ 288 $ 258
Income taxes 5 46
Non-cash investing and financing activities:
Acquisition of equipment with notes/capital leases -- 743
Acquisition of Envirosafe Services of Idaho, Inc. -- 18,541
Preferred stock dividends accrued 98 97
Transfer of prepaid assets to settle closure liability 462 --
See notes to consolidated financial statements.
6
AMERICAN ECOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATION
In the opinion of management, the accompanying unaudited consolidated financial
statements contain all adjustments and disclosures necessary to present fairly
the financial position of American Ecology Corporation and its wholly owned
subsidiaries (the "Company") and the results of operations and cash flows.
These financial statements and notes should be read in conjunction with the
financial statements and notes included in the Company's 2001 Annual Report on
Form 10-K for the year ended December 31, 2001, filed with the Securities and
Exchange Commission.
Certain reclassifications of prior quarter amounts were made to conform with
current quarter presentation, none of which affect previously recorded net
income.
NOTE 2. EARNINGS PER SHARE
Basic earnings per share are computed based on net income and the weighted
average number of common shares outstanding. Diluted earnings per share reflect
the assumed issuance of common shares for outstanding options and conversion of
warrants. The computation of diluted earnings per share does not assume exercise
or conversion of securities that would have an anti-dilutive effect on earnings
per share.
(In Thousands)
Three Months Ended March 31,
----------------------------
2002 2001
------------- -------------
Net income before cumulative effect of accounting change $ 2,754 $ 1,482
Cumulative effect of accounting change 16,323 --
------------- -------------
Net income 19,077 1,482
Less preferred stock dividends 98 97
------------- -------------
Net income available to common shareholders $ 18,979 $ 1,385
============= =============
Weighted average shares outstanding:
Common shares 13,781 13,746
Effect of dilutive shares 478 3,483
------------- -------------
Weighted average shares outstanding 14,259 17,230
============= =============
NOTE 3. EQUITY
In 1996, the Company issued 300,000 shares of Series E Redeemable Convertible
Preferred Stock ("Series E") that were subsequently retired in 1998. The Series
E stock carried 3,000,000 warrants with a $1.50 per share exercise price, which
expire July 1, 2003.
On March 29, 2002, a Series E warrant holder exercised 650,000 Series E
warrants. The Company issued 650,000 shares of common stock and received cash of
$975,000 in this transaction. At March 31, 2002 there were 2,350,000 Series E
warrants outstanding, which expire July 1, 2003.
7
NOTE 4. OPERATING SEGMENTS
The Company operates with three segments, Operating Disposal Facilities,
Non-Operating Disposal Facilities, and Processing and Field Services. These
segments have been determined by evaluating the Company's internal reporting
structure and nature of services offered. The Operating Disposal Facility
segment represents disposal facilities currently accepting hazardous,
non-hazardous and radioactive waste. The Non-Operating Disposal Facility segment
represents facilities that no longer accept waste or require additional
approvals to begin operation. The Processing and Field Services segment
aggregates, volume-reduces, and performs remediation and other services on
radioactive and other hazardous material, but excludes processing performed at
the disposal facilities.
Income taxes are assigned to Corporate, but 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.
Summarized financial information concerning the Company's reportable segments is
shown in the following table.
Reported in $(000) OPERATING NON-OPERATING PROCESSING
DISPOSAL DISPOSAL AND FIELD
FACILITIES FACILITIES SERVICES CORPORATE TOTAL
======================================================================================================
THREE MONTHS ENDED MARCH 31, 2002
- ---------------------------------
Revenue $ 13,976 $ 67 $ 4,334 $ -- $18,377
Direct Cost 5,549 303 3,389 -- 9,241
------------ --------------- ------------ ----------- --------
Gross Profit 8,427 (236) 945 -- 9,136
S,G&A 3,583 80 1,210 807 5,680
------------ --------------- ------------ ----------- --------
Income (loss) from operations 4,844 (316) (265) (807) 3,456
Investment income 8 -- -- 3 11
Gain on sale of assets 40 -- -- -- 40
Interest expense (233) -- (8) (47) (288)
Other income (expense) 25 (490) -- -- (465)
------------ --------------- ------------ ----------- --------
Income before extraordinary items
and taxes 4,684 (806) (273) (851) 2,754
Extraordinary item and taxes -- -- -- -- --
Cumulative effect of accounting
change 18,165 1,548 (3,390) -- 16,323
------------ --------------- ------------ ----------- --------
Net Income $ 22,849 $ 742 $ (3,663) $ (851) $19,077
Depreciation Expense $ 1,572 $ 124 $ 143 $ 18 $ 1,857
Total Assets $ 47,148 $ 27,484 $ 11,315 $ 3,826 $89,773
======================================================================================================
THREE MONTHS ENDED MARCH 31, 2001
- ----------------------------------
Revenue $ 10,303 $ 3 $ 2,560 $ -- $12,866
Direct Cost 4,137 391 2,205 -- 6,733
------------ --------------- ------------ ----------- --------
Gross Profit 6,166 (388) 355 -- 6,133
S,G&A 2,260 -- 1,182 1,361 4,803
------------ --------------- ------------ ----------- --------
Income (loss) from operations 3,906 (388) (827) (1,361) 1,330
Investment income 159 1 -- 14 174
Gain on sale of assets 37 -- 9 -- 46
Interest expense (215) -- (17) (26) (258)
Other income 76 -- -- 160 236
------------ --------------- ------------ ----------- --------
Income before extraordinary items
and taxes 3,963 (387) (835) (1,213) 1,528
Extraordinary item and taxes -- -- -- 46 46
------------ --------------- ------------ ----------- --------
Net Income $ 3,963 $ (387) $ (835) $ (1,259) $ 1,482
Depreciation Expense $ 1,126 $ -- $ 113 $ 17 $ 1,256
Total Assets $ 41,192 $ 27,944 $ 9,696 $ 4,348 $83,180
8
NOTE 5. CUMULATIVE EFFECT OF ACCOUNTING CHANGE
Effective January 1, 2002, the Company implemented Statement of Financial
Accounting Standards 143, Accounting for Asset Retirement Obligations (FAS 143).
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 space used to the
original space available in the facilities. 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.
Accrued closure and post-closure liability represents the expected future costs
associated with closure and post-closure of the Company's facilities.
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 or other costs as necessary. The Company's
recorded liabilities are based on best estimates of current costs and are
updated periodically to include the effects of existing technology, presently
enacted laws and regulations, inflation and other economic factors.
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 275
Payment of obligation (600)
---------
March 31, 2002 obligation $ 14,878
=========
At March 31, 2002, $243,000 of pledged cash and investment securities were
legally restricted for purposes of settling the closure and post closure
obligation.
Cumulative effect of accounting change is comprised as follows (in thousands):
Reduction in closure and post closure obligation $11,130
Initial recognition of closure and post closure asset 5,193
-------
Cumulative effect of implementation of FAS 143 $16,323
=======
NOTE 6. LINE OF CREDIT
At March 31, 2002 and December 31, 2001, the outstanding balance on principal
loan and revolving line of credit was $1,500,000 and $5,000,000, respectively.
The Company has continued to borrow and repay according to business demands and
availability of cash. On April 5, 2002 the Company repaid the remaining
$1,500,000, bringing the current balance to $0.
NOTE 7. LITIGATION
Significant developments occurred on the following legal matters during the
quarter ending March 31, 2002:
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 signed a settlement agreement with General Motors
("GM") related to a claim previously brought by GM regarding a waste disposal
contract between GM and the Company's Winona, Texas facility in the early
1990's. Without admitting fault or wrongdoing, the Company agreed to pay 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.
9
ZURICH AMERICAN INSURANCE COMPANY V. NATIONAL UNION FIRE INSURANCE COMPANY OF
- --------------------------------------------------------------------------------
PITTSBURGH, ET AL INCL. AEC, AEESC, AEMC AND AESC; SUPREME COURT OF STATE OF NEW
- -------------------------------------------------
YORK, COUNTY OF NEW YORK; CASE NO. 604662/99
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 GM 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.
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 a settlement agreement, URS has
agreed to pay the Company $700,000 no later than May 31, 2002, of which $600,000
was previously recorded as revenue.
Earlier, on March 20, 2002, the Company settled a related payment dispute with
BNL relating to storage of cement ducts at the Company's Oak Ridge facility. BNL
agreed to pay $86,000 for storage of the ducts, which was recorded as revenue in
the first quarter.
MANCHAK V. US ECOLOGY, INC., U.S. DISTRICT COURT FOR THE DISTRICT OF NEVADA,
- --------------------------------
CIVIL ACTION NO. 96-494.
On April 24, 2002 the Company filed a motion for summary judgment seeking
dismissal of the Beatty patent infringement lawsuit (the "Manchak" case). The
Company expects to file additional motions contesting the matter during the
second quarter of 2002. Additionally, the Company has opened a dialogue with
the plaintiffs regarding the possibility of settlement, although the possibility
of settlement cannot be predicted. The Company continues to maintain that it
did not violate any Manchak patents.
FEDERAL RCRA INVESTIGATION AT THE OAK RIDGE, TENNESSEE FACILITY
- -----------------------------------------------------------------------
In April 2002, Company management met with an Assistant US Attorney for Eastern
Tennessee and the Federal investigators involved in the case to discuss the
status of the investigation concerning unlicensed storage of hazardous waste
from 1994 to 1999. The Company continues to cooperate fully with all Federal
agencies involved.
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
In a case regarding the Company's construction and operation of a
State-licensed, low-level radioactive waste facility in Ward Valley, California,
a peremptory writ filed by the Company resulted in the appointment of a new
Judge in the case in Superior Court for the County of San Diego. At a January
2002 scheduling conference, the new Judge tentatively set a trial date of
January 2003. Discovery is ongoing and a status conference is tentatively
scheduled for July 2002.
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
In a case regarding the Company's construction and a operation of a low-level
radioactive waste facility in Butte, Nebraska, a number of motions filed by the
State of Nebraska seeking dismissal of the matter or judicial review of specific
issues were denied during the first quarter of 2002. The trial will begin on
June 3, 2002 and will be heard by the judge without a jury.
10
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, 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, and loss of major
contracts. When the Company uses words like "may," "believes," "expects,"
"anticipates," "should," "estimate," "project," "plan," their opposites and
similar expressions, the Company is making forward-looking statements. These
terms are most often used in statements relating to business plans, strategies,
anticipated benefits or projections about the anticipated revenues, earnings or
other aspects of our operating results. The Company makes these statements in an
effort to keep stockholders and the public informed about our business based on
our current expectations about future events. Such statements should be viewed
with caution and are not guarantees of future performance or events. As noted
elsewhere in this report, our business is subject to uncertainties, risks and
other influences, many of which the Company has no control over. Additionally,
these factors, either alone or taken together, could have a material adverse
effect on the Company and could change whether any forward-looking statement
ultimately turns out to be true. The Company undertakes no obligation to
publicly release updates or revisions to these statements. The following
discussion should be read in conjunction with the audited consolidated financial
statements and the notes thereto filed on Form 10-K for the year ending December
31, 2001.
Unless otherwise described, changes discussed relate to the increase or decrease
from the three months ended March 31, 2001 to the three months ended March 31,
2002.
INTRODUCTION
- ------------
The Company is a hazardous, non-hazardous, and radioactive waste management
company that offers comprehensive 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 Company
principally derives its revenue from fees charged for access to the Company's
five fixed waste disposal facilities and one processing facility. Fees are
charged for removal, transportation, processing, and disposal of waste subject
to law, regulation and applicable licenses and permits. The Company and its
predecessors have been in business for 50 years.
On April 18, 2002, the Company entered into a 5-year lease for office space, for
approximately 8,500 square feet of commercial office space in Boise, Idaho. The
lease for the Company's current office space expires September 1, 2002. The
Company expects to move into the new office space in July 2002 and projects
savings of approximately $80,000 over the five-year term of the lease.
Effective July 2002, the Company's new address is expected to be: 300 E.
Mallard Drive, Suite 300, Boise, ID 83706.
RESULTS OF OPERATIONS
- -----------------------
THREE MONTHS ENDED MARCH 31, 2002 AND 2001
- -------------------------------------------------
The following table presents, for the periods indicated, the percentage of
operating line items in the consolidated income statement to operating revenues:
Three Months Ended Three months Ended
March 31, 2002 March 31, 2001
----------------- -----------------
$ % $ %
-------- ------- -------- -------
Revenue 18,377 12,866
Direct operating costs 9,241 50.3% 6,733 52.3%
-------- --------
Gross profits 9,136 49.7% 6,133 47.7%
SG & A 5,680 30.9% 4,803 37.3%
-------- --------
Income from operations 3,456 18.8% 1,330 10.3%
Investment income 11 0.1% 174 1.4%
Gain on sale of assets 40 0.2% 46 0.4%
Interest expense (288) -1.6% (258) -2.0%
11
Other income (expense) (465) -2.5% 236 1.8%
-------- --------
Net income before income taxes 2,754 15.0% 1,528 11.9%
Income tax expense -- 0.0% 46 0.4%
-------- --------
Net income before cumulative effect of 2,754 15.0% 1,482 11.5%
accounting change
Cumulative effect of accounting change 16,323 88.8% -- 0.0%
-------- --------
Net income 19,077 103.8% 1,482 11.5%
Preferred stock dividends 98 0.5% 97 0.8%
-------- --------
Net income available to common
shareholders 18,979 103.3% 1,385 10.8%
======== ========
REVENUE
- -------
For the three months ended March 31, 2002, the Company reported consolidated
revenue of $18,377,000 or a 43% increase compared to the $12,866,000 in the
corresponding period in 2001. During the 3 months ending March 31, 2002,
$6,129,000, or 33% of revenue was for work performed for the U.S. Army Corps of
Engineers.
During the quarter, the Richland, Washington LLRW disposal facility contributed
$2,080,000 of the increase in revenue due to the completion of a $3,850,000
contract for the Army Corps of Engineers. This completed clean-up project
represented 86% of revenue at the Richland facility during the first quarter of
2002.
The Grand View, Idaho disposal facility, purchased on February 1, 2001,
contributed $1,777,000 to the quarterly increase in revenue. The higher Grand
View revenue reflects $1,495,000 from a full first quarter of operation in 2002,
versus two months in 2001, and $282,000 from increased waste volumes at the
facility. A record volume of 56,000 tons of material disposed during the first
quarter of 2002 primarily reflects increased utilization of the Army Corps of
Engineers contract by the Corps and other Federal agencies.
The Oak Ridge, Tennessee processing facility contributed $1,559,000 of the
increase in revenue during the quarter due to increased throughput of
radioactive waste at the facility. A second shift added at the facility during
the fourth quarter of 2001was continued in the first quarter of 2002 to expedite
off-site shipment of accumulated wastes. Along with improved material handling
procedures that enabled the facility to process additional material over the
first quarter of 2001, selling prices at the Oak Ridge facility have been
increased. This pricing increase did not significantly affect revenue during
the first quarter of 2002 due to backlogs of both customer waste and non-revenue
producing materials requiring processing and off-site shipment.
Field Services, a project oriented remediation business, contributed $1,040,000
of the increase in revenue. Four projects were active during the first quarter
of 2002. Three significant projects are ongoing and expected to generate
increased revenue in the second quarter of 2002.
In the fourth quarter of 2001, the Company sold certain under-performing,
non-core business operations that represented $826,000 of revenue in the three
months ended March 31, 2001. The Company did not report revenue for these closed
or sold business units in the first quarter of 2002.
Reported revenue at the Beatty, Nevada disposal facility was $464,000 lower in
the first quarter of 2002 due to lower direct disposal volumes and continued low
thermal processing throughput. In an effort to increase throughput, the Company
entered into an incentive-driven operating agreement with the thermal equipment
manufacturer and thermal process patent holder during the quarter.
12
DIRECT OPERATING COSTS
- ------------------------
For the three months ended March 31, 2002, the Company reported direct operating
costs of $9,241,000 or a 37% increase compared to $6,733,000 in the
corresponding period in 2001. Direct costs increased at a lower rate than
revenue reflecting that significant portions of the Company's direct costs are
fixed. Direct costs relative to revenue actually declined, dropping to 50% of
revenue in 2002, compared to 52% of revenue in the first quarter of 2001.
The Oak Ridge, Tennessee processing facility contributed $933,000 of the
increase in direct costs due to increased labor costs and related off-site
shipment of both customer and non-revenue producing materials. Direct costs at
the Oak Ridge facility fell as a percentage of revenue from 112% of revenue to
81% of revenue. The backlog of material on site was decreased substantially
during the first quarter of 2002, allowing increased processing of more recently
received and new, incoming wastes.
The Beatty, Nevada disposal facility contributed $74,000 of the increase in
direct costs though revenue fell $464,000. Direct costs were 82% of revenue
during the first three months of 2002 versus 62% in 2001. During the three
months ended March 31, 2002 the facility experienced throughput and efficiency
problems with the thermal processing units. In March 2002, the Company entered
into an operating agreement with the thermal equipment manufacturer to maintain
and operate the equipment. Management expects increased throughput based on the
manufacturer/operator's superior knowledge and experience with the equipment,
and their throughput-based royalty incentive. During the quarter, one of the two
thermal units ceased operations pending a requested modification to the
Company's air permit with the State of Nevada. It is expected that the
requisite modification to the permit's allowable emissions will take effect in
May 2002.
SELLING, GENERAL AND ADMINISTRATIVE COSTS (SG&A)
- -----------------------------------------------------
For the three months ended March 31, 2002, the Company reported SG&A of
$5,680,000. This was 18% higher than the $4,803,000 reported in the
corresponding period in 2001, but only 2% higher than the SG&A reported in the
fourth quarter of 2001. 2001 SG&A only reflected 2 months of SG&A for the
Company's Grand View, Idaho facility, which was purchased on February 1, 2001.
SG&A increased at a lower rate than sales as certain SG&A are fixed expenses and
the Company has focused on SG&A reduction since the management changes
instituted in October 2001.
The most significant increase in SG&A was at the Richland, Washington disposal
facility where $870,000 of taxes were paid to the state for the $3,850,000 US
Army Corps of Engineers contract. Absent the Washington taxes and adjusting for
the addition of Grand View SG&A, total SG&A was substantially lower than 2001,
even though revenue increased 43%. Company management continues to focus on cost
control and overhead containment.
INVESTMENT INCOME
- ------------------
For the three months ended March 31, 2002, the Company reported investment
income of $11,000 or a $163,000 decrease from the corresponding period in 2001.
Investment income is earnings on restricted investments and notes receivable of
which the Company maintains minimal amounts. Investment income for the three
months ended March 31, 2001 are 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.
INTEREST EXPENSE
- -----------------
For the three months ended March 31, 2002, the Company reported interest expense
of $288,000 or an increase of $30,000 from the corresponding period in 2001. The
largest component of interest expense is the $60,000 a month interest payable on
the $8,500,000 industrial revenue bond ("IRB") for the Grand View, Idaho
facility. Increased usage on the Company's line of credit also contributed to
the higher interest expense. Significant borrowings on the credit facility are
not expected during the remainder of 2002, although the Company expects to
periodically utilize the line of credit in response to normal fluctuations in
cash flow. The IRB matures on November 1, 2002. Company management is
implementing a plan to refinance this IRB and raise additional tax-free funds to
expand at the Grand View facility.
13
GAIN ON SALE OF ASSETS
- --------------------------
For the three months ended March 31, 2002, the Company disposed of an
insignificant amount of assets. The gain on sale of assets primarily relates to
a pro-rated gain on assets sold as part of the August 2000 sale and leaseback
transaction.
OTHER INCOME (LOSS)
- ---------------------
Other Income is composed of the following ($ in thousands):
Three months ended March 31, 2002 March 31, 2001
---------------- ---------------
Litigation accrual related to GM settlement $ (740) $ --
Payment received on National settlement 250 --
Insurance claim refunds 25 --
Reversal of professional fee accrual -- 160
Reversal of restructuring charge -- 52
Adjustment to bad debt expense reserve -- 23
Other miscellaneous income, net -- 1
---------------- ---------------
Total other income $ (465) $ 236
================ ===============
Management has assigned a high priority to resolving a number of long-standing
legal matters to better allow the Company to focus its resources and energies on
its core business activities. Four such legal matters were resolved or
tentatively resolved in the first quarter.
INCOME TAXES
- -------------
Income taxes are, and should remain insignificant until the Company has fully
utilized its net operating loss carry-forward of approximately $27,000,000.
While no income tax expense is reported for the three months ended March 31,
2002, expected payments of alternative minimum tax of $290,000 have been accrued
as income tax payable and as a deferred tax asset as of March 31, 2002.
Alternative minimum tax and state income tax for certain taxing jurisdictions
are the only taxes expected to be paid during 2002.
CUMULATIVE EFFECT OF ACCOUNTING CHANGE
- ------------------------------------------
On January 1, 2002, the Company implemented SFAS 143 Accounting for Asset
Retirement Obligations. This change is more fully described in Note 5 to the
financial statements with a pro-forma effect as shown on the face of the income
statement.
Compliance with SFAS 143 is mandatory. Implementation is expected to have the
following primary effects upon the Company:
- A stronger balance sheet through a reduction in liabilities and
increase in the Company reported book net worth. While this offers
numerous benefitsthat are difficult to quantify management believes a
stronger balance sheet should improve the Company's access to, and
cost of capital.
- Improved comparability of results with the Company's competitors is
expected to occur as uniform application of the SFAS 143 standard
replaces the diverse practices previously followed in the waste
industry.
14
- 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.
COMPANY PERFORMANCE
- --------------------
Company performance for the three months ended March 31, 2002 as measured by net
income before cumulative effect of accounting change reflected significant
improvement over both the quarters ending December 31 and March 31, 2001.
Management believes the improvement was substantially the result of its emphasis
on spending reductions and cost controls, streamlined reporting, creation of a
national sales organization and a new sales incentive program designed to
increase base business implemented in the fourth quarter of 2001 and first
quarter of 2002. The Company does not expect performance for the quarter ending
June 30, 2002 to equal the quarter ended March 31, 2002 as a large one-time
contract was completed at Richland in March 2002. Other large contracts
currently in progress are expected to have a positive impact, but lesser than
the first quarter impact of the Alaska Army Corps of Engineers contract, in the
second quarter of 2002.
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 March 31, 2002, cash equivalents totaled $1,741,000, a decrease of $2,735,000
from December 31, 2001. The decrease in cash was primarily due to repayment of
debt. A further decrease in cash balances maintained is expected as improved
cash management will allow non-interest earning cash to be used to repay
interest-bearing debt. The Company's "days sales outstanding" decreased in the
first quarter to 69 days at March 31, 2002, compared to 83 days at December 31,
2001. Further improvements in cash and receivable balances are expected based on
additional effort on these balances planned for the quarter ending June 30,
2002.
As of March 31, 2002 the Company's liquidity, as measured by the current ratio,
was constant at .7:1 at March 31, 2002 and December 31, 2001. The Company's
working capital deficit decreased to $7,590,000 at March 31, 2002 from
$10,568,000 on December 31, 2001. The primary reason for the increase in working
capital was the completion of processing and disposal contracts billed in the
previous quarter.
Since December 31, 2001, the Company's leverage has decreased, as evidenced by
debt to equity ratio of .9:1.0 at March 31, 2002, compared to 2.3:1.0 at fiscal
year-end 2001. The debt to equity ratio is defined as total debt divided by
shareholders equity. This decrease in the Company's leverage is principally the
result of the implementation of SFAS 143 as more fully described in Note 5 to
the financial statements and the full retention of earnings.
The Company maintains a banking relationship with Wells Fargo Bank in Boise,
Idaho that provides an $8,000,000 line of credit expiring in October 2002. As
of March 31, 2002, the Company had borrowed $1,500,000 on the line of credit,
which was repaid to a zero balance on April 5, 2002.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company does not maintain equities, commodities, derivative, or any other
instruments for trading or any other purposes, and also 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 March 31, 2002, $243,000 is held in short term pledged investment
accounts and $740,000 in tax refunds is due from the Federal Government.
Together these items earn interest at approximately 5% and comprise 1.1% of
assets.
15
The Company has minimal interest rate risk on debt instruments, as management
has preferred fixed rate instruments to the risk incurred by variable rate
instruments. At March 31, 2002, $1,500,000 of variable rate debt is owed under
the line of credit and is accruing interest at the rate of 5.5%. The
$1,500,000 line of credit balance comprises 3.2% of the Company's capital.
PART II OTHER INFORMATION.
- -----------------------------
ITEM 1. LEGAL PROCEEDINGS.
Except as described below, there were no material developments with regard to
previously reported legal proceedings:
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 signed a settlement agreement with General Motors
("GM") related to a claim previously brought by GM regarding a waste disposal
contract between GM and the Company's Winona, Texas facility in the early
1990's. Without admitting fault or wrongdoing, the Company agreed to pay 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.
ZURICH AMERICAN INSURANCE COMPANY V. NATIONAL UNION FIRE INSURANCE COMPANY OF
- --------------------------------------------------------------------------------
PITTSBURGH, ET AL INCL. AEC, AEESC, AEMC AND AESC; SUPREME COURT OF STATE OF NEW
- -------------------------------------------------
YORK, COUNTY OF NEW YORK; CASE NO. 604662/99
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 GM 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.
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 a settlement agreement, URS has
agreed to pay the Company $700,000 no later than May 31, 2002, of which $600,000
was previously recorded as revenue.
Earlier, on March 20, 2002, the Company settled a related payment dispute with
BNL relating to storage of cement ducts at the Company's Oak Ridge facility. BNL
agreed to pay $86,000 for storage of the ducts, which was recorded as revenue in
the first quarter.
MANCHAK V. US ECOLOGY, INC., U.S. DISTRICT COURT FOR THE DISTRICT OF NEVADA,
- --------------------------------
CIVIL ACTION NO. 96-494.
On April 24, 2002 the Company filed a motion for summary judgment seeking
dismissal of the Beatty patent infringement lawsuit (the "Manchak" case). The
Company expects to file additional motions contesting the matter during the
second quarter of 2002. Additionally, the Company has opened a dialogue with
the plaintiffs regarding the possibility of settlement, although the possibility
of settlement cannot be predicted. The Company continues to maintain that it
did not violate any Manchak patents.
FEDERAL RCRA INVESTIGATION AT THE OAK RIDGE, TENNESSEE FACILITY
- -----------------------------------------------------------------------
In April 2002, Company management met with an Assistant US Attorney for Eastern
Tennessee and the Federal investigators involved in the case to discuss the
status of the investigation concerning unlicensed storage of hazardous waste
from 1994 to 1999. The Company continues to cooperate fully with all Federal
agencies involved.
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
In a case regarding the Company's construction and operation of a
State-licensed, low-level radioactive waste facility in Ward Valley, California,
a peremptory writ filed by the Company resulted in the appointment of a new
16
Judge in the case in Superior Court for the County of San Diego. At a January
2002 scheduling conference, the new Judge tentatively set a trial date of
January 2003. Discovery is ongoing and a status conference is tentatively
scheduled for July 2002.
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
In a case regarding the Company's construction and a operation of a low-level
radioactive waste facility in Butte, Nebraska, a number of motions filed by the
State of Nebraska seeking dismissal of the matter or judicial review of specific
issues were denied during the first quarter of 2002. The trial will begin on
June 3, 2002 and will be heard by the judge without a jury.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
As of March 31, 2002, the Company had accrued $1,292,000 of dividends on the
Series D Preferred Stock whose payment is prohibited by the Line of Credit. The
accrued dividend is included in long term debt due to the uncertainty over when
it will ultimately be paid.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None
ITEM 5. OTHER INFORMATION.
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) No exhibits are filed as part of this report.
(b) The Company did not file any reports on Form 8-K during the quarter
ended March 31, 2002.
17
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: May 13, 2002 By:_____________________________
Stephen A. Romano
President, Chief Executive Officer and Chief Operating
Officer
Date: May 13, 2002 By:_____________________________
James R. Baumgardner
Senior Vice President, Chief Financial Officer,
Secretary and Treasurer
18