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