-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, IoQD6Mac9SwDW1ndFs3GTl2JR02w4CqpbdKAgishNX14WrcjUpMhB4iFLjjcRNL0 H1pZxqtsfb/9Moc5Ux0Djw== 0000950129-01-504564.txt : 20020413 0000950129-01-504564.hdr.sgml : 20020413 ACCESSION NUMBER: 0000950129-01-504564 CONFORMED SUBMISSION TYPE: 10-Q/A PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20010630 FILED AS OF DATE: 20011218 FILER: COMPANY DATA: COMPANY CONFORMED NAME: AMERICAN ECOLOGY CORP CENTRAL INDEX KEY: 0000742126 STANDARD INDUSTRIAL CLASSIFICATION: REFUSE SYSTEMS [4953] IRS NUMBER: 953889638 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q/A SEC ACT: 1934 Act SEC FILE NUMBER: 000-11688 FILM NUMBER: 1816768 BUSINESS ADDRESS: STREET 1: 805 W IDAHO STREET 2: STE 200 CITY: BOSIE STATE: ID ZIP: 83702 BUSINESS PHONE: 2083318400 MAIL ADDRESS: STREET 1: 805 W IDAHO STREET 2: STE 200 CITY: BOISE STATE: ID ZIP: 83702 10-Q/A 1 h93005be10-qa.txt AMERICAN ECOLOGY CORPORATION - AMENDMENT 06/30/01 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-Q/A [x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended June 30, 2001 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _____________________to________________________ Commission File Number 0-11688 AMERICAN ECOLOGY CORPORATION ---------------------------- (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 95-3889638 -------- ---------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 805 W. Idaho Suite #200 Boise, Idaho 83702-8916 ------------ ---------- (Address of principal executive offices) (Zip Code) (208) 331-8400 -------------- (Registrants telephone number, including area code) Indicate by a check mark whether Registrant (1) has filed all reports required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [ ] At December 13, 2001, Registrant had outstanding 13,742,322 shares of its Common Stock. EXPLANATION OF AMENDMENT The Registrant, American Ecology Corporation (the "Company"), received a letter from the Securities and Exchange Commission dated November 1, 2001. The Commission made comments and requested clarification of certain items in the Notes to the financial statements, Item 1., and Management Discussion and Analysis, Item 2. Based on these comments, the Company amended Part I, Item 1, Statement of Cash Flows and Note 2, and Item 2 of its Form 10-Q to include clarifications of those items in conjunction with a response letter filed with the Commission on November 13, 2001. PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS. AMERICAN ECOLOGY CORPORATION CONSOLIDATED BALANCE SHEETS (UNAUDITED) ($ IN 000'S EXCEPT PER SHARE AMOUNTS)
June 30, December 31, 2001 2000 -------- ------------ ASSETS Current Assets: Cash and cash equivalents $ 773 $ 4,122 Receivables (trade and other), net of allowance for Doubtful accounts of $843 and $839 respectively 10,372 9,839 Income tax receivable 740 740 Prepayments and other 2,565 1,316 -------- -------- Total current assets 14,450 16,017 Cash and investment securities, pledged 242 235 Property and equipment, net 30,491 18,488 Facility development projects 27,430 27,430 Intangible assets relating to acquired businesses, net 354 366 Other assets 8,293 3,214 -------- -------- Total assets $ 81,260 $ 65,750 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Current portion of long term debt $ 947 $ 1,094 Accounts payable 2,988 2,680 Accrued liabilities 6,699 9,149 Current portion of accrued closure and post closure obligations 700 700 Income taxes payable 272 115 -------- -------- Total current liabilities 11,606 13,738 Long term debt, excluding current portion 16,606 10,775 Closure and post closure obligation, excluding current portion 25,414 15,253 -------- -------- Total liabilities 53,626 39,766 Commitments and Contingencies Shareholders' equity: Convertible preferred stock, $.01 par value, 1,000,000 shares authorized, none issued -- -- Series D cumulative convertible preferred stock, $.01 par value, 100,001 authorized and issued, 5,263 shares converted and retired 1 1 Series E redeemable convertible preferred stock, $10.0 par value, 300,000 authorized and issued, 300,000 shares converted and retired -- -- Common stock, $.01 par value, 50,000,000 authorized, 13,720,736 and 13,704,050 shares issued and outstanding respectively 139 137 Additional paid-in capital 54,647 54,610 Retained earnings (deficit) (27,153) (28,764) -------- -------- Total shareholders' equity 27,634 25,984 -------- -------- Total Liabilities and Shareholders' Equity $ 81,260 $ 65,750 ======== ========
The accompanying notes are an integral part of these financial statements 2 AMERICAN ECOLOGY CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) ($ IN 000'S EXCEPT PER SHARE AMOUNTS)
Three Months Ended Six Months Ended June 30, June 30, 2001 2000 2001 2000 -------- -------- -------- -------- Revenue $ 13,731 $ 10,485 $ 26,597 $ 19,804 Direct operating costs 8,341 5,898 15,074 10,773 -------- -------- -------- -------- Gross profit 5,390 4,587 11,523 9,031 Selling, general and administrative expenses 5,568 4,128 10,371 7,444 -------- -------- -------- -------- Income (loss) from operations (178) 459 1,152 1,587 Investment income 34 125 208 237 Gain on sale of assets 66 -- 112 1 Interest Expense (346) (60) (604) (108) Other income 788 199 1,024 489 -------- -------- -------- -------- Net income before income taxes 364 723 1,892 2,206 Income tax expense (benefit) 38 (41) 84 61 -------- -------- -------- -------- Net income 326 764 1,808 2,145 Preferred stock dividends 99 99 196 199 -------- -------- -------- -------- Net income available to common shareholders $ 227 $ 665 $ 1,612 $ 1,946 ======== ======== ======== ======== Basic earnings per share $ .02 $ .05 $ .12 $ .14 -------- -------- -------- -------- Diluted earnings per share $ .01 $ .04 $ .09 $ .12 -------- -------- -------- -------- Dividends paid per common share $ -- $ -- $ -- $ -- -------- -------- -------- --------
See notes to consolidated financial statements. 3 AMERICAN ECOLOGY CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) ($ in 000's)
Six Months Ended June 30, 2001 2000 ------- ------- Cash flows from operating activities: Net income $ 1,808 $ 2,145 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization 2,659 1,195 Deferred income tax provision 157 (47) Stock compensation 12 Changes in assets and liabilities: Receivables (534) 89 Investment securities classified as trading (7) (5) Other assets (1,249) (78) Accounts payable and accrued liabilities (2,142) (151) Facility closure and post closure obligations 105 (411) ------- ------- Total adjustments (1,011) 604 Net cash provided by (used in) operating activities 797 2,749 Cash flows from investing activities: Capital expenditures (3,752) (4,322) Proceeds from insurance trust 2,565 -- ------- ------- Net cash used in investing activities (1,187) (4,322) Cash flows from financing activities: Proceeds from issuance of indebtedness 4,200 -- Stock options exercised 39 -- Repayments of indebtedness (7,198) (544) ------- ------- Net cash provided by (used in) financing activities (2,959) (544) Increase (decrease) in cash and cash equivalents (3,349) (2,117) Cash and cash equivalents at beginning of period 4,122 4,771 ------- ------- Cash and cash equivalents at end of period $ 773 $ 2,654 ======= ======= Supplemental disclosures of cash flow information: Cash paid during the period for: Interest paid $ 604 $ 108 Income taxes 160 72 Acquisition of Equipment with Capital Leases 850 1,623
See notes to consolidated financial statements. 4 AMERICAN ECOLOGY CORPORATION CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (UNAUDITED) ($ in 000's)
ADDITIONAL RETAINED PREFERRED STOCK COMMON STOCK PAID-IN CAPITAL EARNINGS (DEFICIT) --------------- ------------ --------------- ------------------ Balance, December 31, 2000 $ 1 $ 137 $ 54,610 $ 28,764) Net Income -- -- -- 1,482 Common Stock Issuance -- 2 32 0 Dividends for preferred stock -- -- -- (97) -------- -------- -------- --------- Balance March 31, 2001 1 139 54,642 (27,379) Net Income -- -- -- 326 Common Stock Issuance -- -- 5 -- Dividends for preferred stock -- -- -- (99) Other Adjustment -- -- -- (1) -------- -------- -------- --------- Balance June 30, 2001 $ 1 $ 139 $ 54,647 $ (27,153) ======== ======== ======== =========
The accompanying notes are an integral part of these financial statements 5 AMERICAN ECOLOGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1. BASIS OF PRESENTATION. Pursuant to the rules and regulations of the Securities and Exchange Commission, the Company has prepared the accompanying unaudited financial statements. Certain information and footnote disclosures have been condensed or omitted consistent with Generally Accepted Accounting Principles ("GAAP"). In the opinion of management, all adjustments and disclosures necessary for a fair presentation of these financial statements have been included. These financial statements and notes should be read in conjunction with the financial statements and notes included in the Company's 2000 Annual Report on Form 10-K for the year ended December 31, 2000, filed with the Securities and Exchange Commission. The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant inter-company transactions and balances have been eliminated in consolidation. NOTE 2. ACQUISITION. On February 1, 2001, the Company acquired Envirosafe Services of Idaho, Inc. a Delaware corporation. The Company changed the name to US Ecology Idaho, Inc ("USEI"). The following table compares, for the six months ended June 30, 2001 and 2000, reported consolidated results of operations with USEI actual results from the date of acquisition on February 1, 2001, to unaudited pro forma consolidated data as if the acquisition occurred at the beginning of the year: Unaudited pro forma statement of operations data-- (in thousands, except per share data)
2001 2000 Reported Pro Forma Reported Pro Forma -------- -------- -------- -------- Revenue $ 26,597 $ 28,092 $ 19,804 $ 28,774 Net income 1,808 2,066 2,145 3,693 Preferred stock dividends 196 196 199 199 -------- -------- -------- -------- Net income available to common shareholders $ 1,612 $ 1,870 $ 1,946 $ 3,494 ======== ======== ======== ======== Basic earnings per share $ .12 $ .14 $ .14 $ .25 -------- -------- -------- -------- Diluted earnings per share $ .09 $ .11 $ .12 $ .22 -------- -------- -------- --------
This data does not purport to be indicative of the Company's results of operations that might have occurred, nor which might occur in the future. 6 NOTE 3. OTHER ASSETS. Other assets totaled $8,293,000 and $3,214,000 at June 30, 2001 and 2000. The other asset category includes the following accounts (in thousands):
June 30, 2001 December 31, 2000 ------------- ----------------- Long Term Notes Receivable $ 148 $ 68 Security Deposits 44 34 Thermal Desorbtion 107 31 Permits 7,958 3,008 Other Assets Deferred 36 73 ------- ------- Total Other Assets $ 8,293 $ 3,214 ======= =======
NOTE 4. LONG-TERM DEBT. Long-term debt at June 30, 2001 and December 31, 2000 consisted of the following (in thousands):
June 30, 2001 December 31, 2000 ------------- ----------------- Notes payable $ 2,412 $ 792 Line of Credit 4,200 4,093 Industrial Revenue Bond 8,500 -- Capital lease obligations and other 2,441 6,984 -------- -------- 17,553 11,869 Less: Current maturities (947) (1,094) -------- -------- Long term debt $ 16,606 $ 10,775 ======== ========
7 Aggregate maturity of future minimum payments under long term debt and capital leases is as follows (in thousands):
June 30, 2001 December 31, 2000 ------------- ----------------- 2001 $ 757 $ 1,094 2002 14,094 8,586 2003 2,045 805 2004 496 621 2005 74 19 2006 88 -- -------- -------- TOTAL $ 17,553 $ 11,869 ======== ========
The Company has several long-term capital leases. The carrying amount of these leases is approximately $4.8 million that includes terms under both notes payable and capital leases. These leases are for assets acquired at Oak Ridge, Tennessee that bear a 10% interest rate, at Beatty, Nevada that bear interest between 5.8% and 8.9%, Richland, Washington with interest rates of 5.25% through 6.14% and at Robstown, Texas with interest rates between 6% and 14% interest expiring over the next 5 years. On August 17, 2000, the Company entered into a 2-year Credit Agreement with a local bank that provides a revolving line of credit. The line of credit is secured by the Company's accounts receivable. On February 1, 2001, the Credit Agreement was amended to increase the line of credit to $8.0 million, change certain financial covenants to reflect the acquisition of Envirosafe Services of Idaho, Inc. (now US Ecology Idaho, Inc.), and modify the pricing. Under the terms of the Credit Agreement, as amended, borrowing under the line of credit cannot exceed 80% of eligible accounts receivable or $8.0 million, whichever is less. After September 30, 2001 interest on borrowings is based on a 'pricing grid,' whereby the interest rate decreases or increases based on the Company's ratio of funded debt to earnings before interest, taxes, depreciation and amortization ("EBITDA"). The Company can elect to borrow utilizing the Prime Rate or the offshore London Inter-Bank Offering Rate ("LIBOR") plus an applicable spread. Through September 30, 2001, borrowings are Prime plus 0.75% or LIBOR plus 3.25%, at the election of the Company, subject to certain conditions. The Credit Agreement contains certain financial covenants that the Company must adhere to quarterly, including a maximum leverage ratio, a minimum current ratio, and a debt service coverage ratio. At June 30, and August 13, 2001, the Company was in compliance with all applicable financial covenants. The Credit Agreement matures on August 30, 2002, and the Company is currently negotiating the extension of the maturity date and other conditions. There can be no assurance that the Company will be successful in its negotiations with its Bank. If the Company is unsuccessful in its negotiations with its Bank and it is unable to extend the maturity of the credit facility past August 3, 2002, it will be forced, under GAAP, to reclassify line of credit borrowings as short term. Reclassifying the line of credit borrowings short term would have a material, adverse affect on the Company's working capital position and possibly trigger the Bank liquidity covenants. At June 30, 2001, the outstanding balance on the revolving line of credit was $4,200,000. The Company is required to reserve a $1,150,000 standby letter of credit under the line of credit. At June 30, 2001 the Company had $685,000 of availability under the line of credit. By August 13, 2001 the Company's availability to borrow had increased to $2,000,000. During the second quarter of 2001, the interest rate on borrowings ranged from 7.18% to 8.31%. The Company has continued to borrow and repay according to business demands and availability of cash. The Company anticipates that borrowings will continue to fluctuate, and additional borrowing capacity will be required in the future to accommodate planned expansion and growth. There can be no assurance that the Company can raise additional financing beyond the $8.0 million line of credit. The Company has an $8.5 million Industrial Revenue Bond ("IRB") associated with the Grand View, Idaho facility. The proceeds from the IRB were used to make capital additions and improvements to the Grand View facility. The IRB bears interest of 8.25%. The Bond Agreement matures in November, 2002, and the Company is currently negotiating the extension of the maturity date and other conditions. There can be no assurance that the Company will be successful in its negotiations with the Bondholders. If the Company is unsuccessful in its negotiations with 8 the Bondholders and it is unable to extend the maturity of the Bonds at least to 2003, it will be forced, under GAAP, to reclassify the IRB as short term. Reclassifying the IRB as short term would have a material, adverse affect on the Company's working capital position and possibly trigger the Bank liquidity covenants. On April 4, 2001, the Company entered into a $1,113,930 long-term financing agreement with AFCO Finance to finance 2001-2002 insurance premiums. The loan bears an annual interest rate of 5.59%, with final payment due February 2002. The Company has consistently financed its insurance premiums through AFCO Finance in the ordinary course of business. The Company has several other long-term obligations that mature at different times. These obligations include accrued dividend payable on Series D Preferred Stock totaling $992,000, reserve for special waste at the Oak Ridge, Tennessee facility for $250,000, and a long-term payable to Boston Edison for $270,000, lease payments of $1,623,000, and an industrial revenue bond for the Idaho facility for $8,500,000 all totaling $11,635,000. NOTE 5. EARNINGS PER SHARE. Basic earnings per share are computed based on net income and the weighted average number of common shares outstanding. Diluted earnings per share reflect the assumed issuance of common shares under long-term incentive, stock option and stock purchase plans pursuant to the terms of the 1992 Stock Option Plans. The computation of diluted earnings per share does not assume conversion or exercise of securities that would have an antidilutive effect on earnings per share. The following table shows the weighted average number of common shares outstanding and dilutive potential effect of options, warrants, and convertible preferred shares outstanding:
(in thousands except per share) Three Months Ended Six Months Ended June 30, June 30, 2001 2000 2001 2000 -------- -------- -------- -------- BASIC Net Income 227 665 1,612 1,946 Weighted average common shares 13,749 13,708 13,749 13,708 Net income per share, basic $ .02 $ .05 $ .12 $ .14 -------- -------- -------- -------- DILUTED Weighted average of common shares 13,749 13,708 13,749 13,708 Dilutive effect of common stock options and warrants 3,696 2,629 3,696 2,629 -------- -------- -------- -------- Total weighted average common and dilutive shares outstanding 17,445 16,337 17,445 16,337 Net income per share, diluted $ .01 $ .04 $ .09 $ .12 -------- -------- -------- --------
NOTE 6. FACILITY DEVELOPMENT PROJECTS. The Company has been licensed to construct and operate the low-level radioactive waste ("LLRW") facility for the Southwestern Compact ("Ward Valley facility"), and has been selected to obtain a license to develop and operate the Central Interstate Compact LLRW facility ("Butte facility"). The State of California, where the Ward Valley Site is located, has not obtained the project property from the U.S. Department of the Interior. For the Company to realize its investment, the federal government must transfer the land to the State of California, or the Company must recover monetary damages from the State of California. In 1997, the Company filed two lawsuits against the United States. In the first case, US Ecology sued to recover approximately $73.1 million in site development costs as well as lost profits and lost opportunity costs. US Ecology lost this case at the trial and appeals court levels and elected not to petition the Supreme Court on the advice of 9 counsel. In the second federal case US Ecology sought an order to compel the transfer of the Ward Valley site. Both the trial and appeals court ruled against US Ecology and such rulings are now final. The Company also filed a lawsuit against the State of California in Superior Court for the County of San Diego in May 2000 seeking to compel California to acquire the property to build the Ward Valley project and pay monetary damages in excess of $162 million. In October 2000, the California trial court granted the state's motion to dismiss the case on demurrer, which the Company appealed. The appeal is scheduled to be heard by the California Court of Appeal for the 4th District on August 13, 2001. All costs through July 31, 1999 for development of the Ward Valley facility were capitalized, and since then have been expensed as incurred. As of June 30, 2001, the Company had deferred $20,952,000 (26% of total assets) of pre-operational facility development costs, of which $895,000 represents capitalized interest. If the facility were to become operational, these costs would be recovered during the facility's first 20 years of operation from disposal fees approved by the California Department of Health Services (DHS). Beginning in 2000, the Company is no longer required to pay the $250,000 annual license fee to the Department of Health Services pending further notice by the state. While the Company's 1993 license to construct and operate the Ward Valley facility remains valid, there can be no assurance that the Company will prevail in Court, that California will complete the land transfer, that all of these costs will be approved by the DHS, or that the facility will ever be constructed. The Company has incurred reimbursable costs and receives revenues for the development of the Butte, Nebraska facility under a contract with the Central Interstate LLRW Compact Commission ("CIC"). While US Ecology has a minor equity position in the Butte, Nebraska project, it has acted principally as a contractor to the Central Interstate Low-Level Radioactive Waste Commission. Major generators of waste within the CIC's five-state region have provided substantially all funding to develop the Butte facility. As of June 30, 2001, the Company has contributed and capitalized approximately $6,478,000 of costs (7.7% of total assets), $386,000 of which is capitalized interest, toward development of the Butte facility. In December 1998, the State of Nebraska denied US Ecology's license application to build and operate the facility. The CIC directed US Ecology to petition for a contested case challenging the State's denial, which US Ecology filed for in January 1999. The Major Generators funding the development project filed suit in the Federal District Court for Nebraska on December 30, 1998, seeking to recover certain costs expended on the Nebraska licensing process and prevent the State of Nebraska from proceeding with the contested case. US Ecology intervened as a plaintiff and is seeking relief. The contested case is stayed by a preliminary injunction issued by the presiding federal judge. The court has issued a scheduling order setting trial for June 2002. Discovery in the case is underway. The timing and outcome of the above matters are unknown. The Company continues to pursue completion of the California project or recovery of money damages from California in state court, and will continue its participation in litigation to protect its interest in the proposed Butte, Nebraska facility. The Company believes that the deferred site development costs for both facilities will be realized. In the event operations of either facility do not commence, or the Company is unable to recoup its investments through legal recourse, it may have an adverse effect on the Company's financial position. The following table shows the ending capitalized balances for facility development costs for the periods ended June 30, 2001 and December 31, 2000 (in thousands):
Capitalized Costs Capitalized Interest Total ----------------- -------------------- ----- Ward Valley, CA Project $ 20,057 $ 895 $ 20,952 Butte, Nebraska Project 6,092 386 6,478 --------- -------- -------- Total $ 26,149 $ 1,281 $ 27,430 ========= ========= ========
10 NOTE 7. INCOME TAXES. The Company had an effective federal tax rate of 0% on June 30, 2001 and December 31, 2000 respectively. The Company has established a valuation allowance for certain deferred tax assets due to realization uncertainties inherent with the long-term nature of facility closure and post closure costs, uncertainties regarding future operating results, and limitations on utilization of acquired net operating loss carryforwards for tax purposes. The realization of a significant portion of net deferred tax assets is based in part on the Company's estimates of the timing of reversals of certain temporary differences and on the generation of taxable income before such reversals. The net operating loss carryforward of approximately $34,097,000 at June 30, 2001, begins to expire in the year 2006. Of this carryforward, $2,745,000 is limited pursuant to the net operating loss limitation rules of Internal Revenue Code Section 382. The portion of the carryforward limited under Internal Revenue Code Section 382 expires $793,000 in 2006, $1,079,000 in 2007, and $872,000 in 2008. The remaining unrestricted net operating loss carryforward expires in the amount of $4,280,000 in 2010, $8,657,000 in 2011, $7,828,000 in 2012, $6,927,000 in 2018, $3,574,000 in 2019, and $454,000 in 2020. The amount of the Company's net operating loss carryforwards could be reduced if the Company is ultimately unsuccessful in pursuing a pending refund claim. The Company filed an amended federal income tax refund claim in 1996 for approximately $740,000. On September 29, 1999, the Internal Revenue Service ("IRS") proposed to deny this claim, sought to recover portions of tentative refunds previously received by the Company and proposed to reduce the Company's net operating loss carryforwards. On November 29, 1999, the Company protested this denial which is currently pending with the IRS. The Company has tentatively settled this claim on a basis that allows a partial refund, retention of a portion of the tentative refunds already received and a retention of the net operating loss carryforwards. This settlement may require the approval of the Congressional Joint Committee on Taxation. NOTE 8. ENVIRONMENTAL LIABILITIES. Environmental Matters The Company maintains reserves and insurance policies for costs associated with future closure and post closure obligations for both current and formerly operated disposal facilities based on professional engineering studies and analysis of regulatory requirements performed at least annually. Costs accounted for may include final disposal unit capping, gas emission control, subsurface soil and groundwater monitoring and/or remediation, and other monitoring or routine maintenance costs required after a disposal site stops accepting waste. The total estimated final closure and post closure cost must be fully accrued for each landfill at the time a site stops accepting waste. The Company believes its reserves for this purpose are adequate. The Company estimates that the aggregate final closure and post closure costs for all insured facilities owned or operated was approximately $26,113,000 as of June 30, 2001. The Company has a two and a half year prepaid insurance policy remaining for these facilities, and has also set aside investment securities to pay certain deductible limits. Management believes that disposition of these environmental matters in the ordinary course of business will not have a material, adverse effect on the financial condition of the Company. Operation of disposal facilities creates operational, monitoring, site maintenance, closure and post closure obligations that could result in unforeseen costs for monitoring and corrective action. The Company cannot predict the likelihood or effect of such costs, regulations, statutes, or other future events affecting its facilities. Financial Assurance and Site Maintenance When disposal facilities reach capacity or upon lease or license termination, they must be closed and then maintained for a prescribed period. In the case of hazardous waste facilities, federal regulation requires that operators demonstrate financial capability to close on an immediate, unscheduled (worst-case) basis. The estimated costs of such a closure are set forth in the operator's closure/post closure plan required by the Resource Conservation and Recovery Act. 11 The Company has provided letters of credit, trust funds and certificates of insurance, as financial assurance to meet closure and post closure obligations at its hazardous waste facilities. Cash and investment securities totaling $242,000 at June 30, 2001 and $235,000 at December 31, 2000 have been pledged as collateral for these obligations. Management believes that $242,000 is an adequate reserve combined with the letters of credit, certificates of insurance, and corporate guarantees maintained as financial assurance. When the Company acquired the Grand View, Idaho facility, there was a $15 million surety bond held by the State of Idaho, secured by $2.5 million in cash collateral, for closure and post closure obligations. The Company has since replaced the surety bond with an insurance policy, which was accepted by the regulatory agencies and is consistent, in form and substance, with closure and post closure insurance policies the Company maintains for its other facilities. Replacement of this bond by insurance freed up the $2.5 million cash collateral plus $147 thousand in interest. NOTE 9. OPERATING SEGMENTS. The Company operates two primary business segments, Chemical Services and LLRW Services. The Chemical Services division provides toxic substance, hazardous, non-hazardous and municipal waste management services. The LLRW Services division processes, packages, and disposes of material contaminated with low levels of radioactivity. The Company evaluates the performance of its operating segments based on gross profit, selling, general and administrative expense, interest expense and income, corporate allocation, and after an apportioned income tax. Segment data includes inter-company transactions at cost, and allocation for certain corporate costs. The Company's reportable segments select financial information is shown in the following table. The "Corporate & Other" column includes corporate-related items not allocated to the reportable segments.
Chemical LLRW Corporate Services Services & Other Total -------- -------- --------- -------- Three Months Ending June 30, 2001 Revenue $ 9,387 $ 4,489 $ (145) $ 13,731 Direct Cost 5,170 3,254 (83) 8,341 -------- -------- -------- -------- Gross Profit $ 4,217 $ 1,235 $ (62) $ 5,390 SG&A 2,378 1,781 1,409 5,568 -------- -------- -------- -------- Income (loss) from operations 1,839 (546) (1,471) (178) Investment Income 9 -- 25 34 Gain on sale of assets 52 14 -- 66 Interest expense (311) (29) (6) (346) Other income 913 735 (860) 788 -------- -------- -------- -------- Income before taxes 2,502 174 (2,312) 364 Income taxes -- -- 38 38 -------- -------- -------- -------- Net income $ 2,502 $ 174 $ (2,350) $ 326 Total assets 45,817 36,478 (1,035) 81,260 Six Months Ending June 30, 2001 Revenue $ 17,800 $ 9,071 $ (274) $ 26,597 Direct Cost 9,267 5,947 (140) 15,074 -------- -------- -------- -------- Gross Profit $ 8,533 $ 3,124 $ (134) $ 11,523 SG&A 4,243 3,346 2,692 10,371 -------- -------- -------- -------- Income (loss) from operations 4,290 (312) (2,693) 1,152 Investment Income 167 1 40 208 Gain on sale of assets 85 27 -- 112 Interest expense (515) (58) (31) (604) Other income 255 108 661 1,024 -------- -------- -------- -------- Income before taxes 4,282 (234) (2,156) 1,892 Income taxes -- -- 84 84 -------- -------- -------- -------- Net Income $ 4,282 $ (234) $ (2,240) $ 1,808 Total Assets 45,817 36,478 (1,035) 81,260
12
Chemical LLRW Corporate Services Services & Other Total -------- -------- --------- -------- Three Months Ending June 30, 2000 Revenue $ 5,481 $ 5,137 $ (133) $ 10,485 Direct Cost 3,211 2,711 (24) 5,898 -------- -------- -------- -------- Gross Profit $ 2,270 $ 2,426 $ (109) $ 4,587 SG&A 889 1,686 1,553 4,128 -------- -------- -------- -------- Interest expense (135) -- (3) (138) Corporate Allocation 204 585 (915) (126) Income Taxes -- -- (41) (41) -------- -------- -------- -------- Net Income $ 1,312 $ 155 $ (703) $ 764 Six Months Ending June 30, 2000 Revenue $ 9,205 $ 10,905 $ (306) $ 19,804 Direct Cost 5,431 5,488 (146) 10,773 -------- -------- -------- -------- Gross Profit $ 3,774 $ 5,417 $ (160) $ 9,031 SG&A 1,623 3,801 2,020 7,444 -------- -------- -------- -------- Interest expense (160) -- (119) (279) Corporate Allocation 737 1,162 (2,239) (340) Income Taxes -- -- 61 61 -------- -------- -------- -------- Net Income $ 1,574 $ 454 $ (117) $ 2,145 Total assets 21,332 37,454 678 59,464
NOTE 10. CASH AND INVESTMENT SECURITIES. The Company maintains several bank accounts with various investments including commercial paper, certificates of deposit and money market accounts totaling $242,000 at June 30, 2001. These monies are pledged towards the owned facilities closure and post closure obligations. NOTE 11. COMMITMENTS AND CONTINGENCIES. The Company becomes involved in judicial and administrative proceedings involving federal, state, and local governmental authorities in the ordinary course of business. Actions may also be brought by individuals or groups of individuals in connection with the permitting of planned facilities, alleged violations of existing permits, or alleged damages suffered from exposure to hazardous substances purportedly released from Company operated sites, and other litigation. The Company maintains insurance intended to cover property and damage claims asserted as a result of operations. Insurance: The Company carries a broad range of insurance coverage, which management considers prudent to protect the Company's assets and operations. Some of this insurance coverage is subject to a varying degree of risk retention by the Company. Casualty coverage currently includes $1,000,000 primary commercial general liability with a $2,000,000 aggregate and $1,000,000 primary automobile liability. The Company maintains workers' compensation insurance in accordance with laws of the various states in which it is an employer. This coverage is supported by $35,000,000 in umbrella insurance protection. A property policy provides insurance coverage for real and personal property. The Company also maintains an environmental impairment liability ("EIL") insurance policy for certain of its non-radioactive disposal facilities, transfer stations, and processing facilities. This provides coverage for property damage and/or bodily injury to third parties caused by potential off-site pollution emanating from such disposal facilities, transfer stations, or processing facilities. This policy provides $20,000,000 of coverage per loss with a $20,000,000 aggregate limit. Professional environmental consultants liability insurance is carried to cover damages the Company is legally obligated to pay because of an act, error or omission in professional services, or a loss resulting in environmental 13 impairment away from an owned site. This policy is subject to a $10,000,000 per occurrence limit with a $10,000,000 aggregate limit. Nuclear liability insurance is carried to cover bodily injury and property damage claims to third parties caused by the nuclear energy related hazards for which the Company is legally obligated. Certain of the Company's waste disposal and processing facilities are covered for closure and post closure costs through a direct risk transfer insurance policy. Other sites are covered through funds required by various states. Periodically management reviews and may establish reserves for legal and administrative matters, or fees expected to be incurred in connection with such matters. At this time, management believes that its reserves and insurance are adequate. There have been no significant changes in commitments and contingencies other than that included in Part II, Item I. of this report, Legal Proceedings. NOTE 12. PREFERRED STOCK. In November 1996, the Company issued 300,000 shares of Series E Redeemable Convertible Preferred Stock ("Series E") in a private offering to four of its directors for $3,000,000 in cash. The Series E stock is now retired but carries 3,000,000 warrants with no assigned value and a $1.50 per share exercise price, which expire June 2008. In September 1995, the Board of Directors authorized 105,264 shares of preferred stock designated as 8 3/8% Series D Cumulative Convertible Preferred Stock ("Series D") and warrants to purchase 1,052,640 shares of the Company's common stock. The Company sold 105,264 shares of Series D stock with warrants in a private offering to a group of members or past members of the Board of Directors for $4,759,000. Offering expenses of $101,000 and $140,000 in settlement of liabilities were deducted from the proceeds. At June 30, 2001, each Series D share is convertible at any time at the option of the holder into 15.04 shares of the Company's common stock, equivalent to a conversion price of $5.50 on the $47.50 total per share offering price plus accrued dividends times 1.44 due to dilution by later securities issuance. Dividends on the Series D are cumulative from the date of issuance and payable quarterly commencing on October 15, 1995. Current bank credit facility covenants prohibit the payment of dividends. One holder of Series D stock has claimed the subordination provision in the Series D designation certificate, it does not apply to the current bank credit facility and thus has asserted that quarterly dividends must be paid. The Company believes that this is not the case but is discussing the matter with the Series D holders. Accrued dividends at June 30, 2001 totaled $993,000. On September 12, 1999, the warrants with the Series D expired except for those belonging to one Series D holder. The Company extended an offer to all Series D holders that if they converted their Series D to common stock, the warrants would be extended until September 13, 2002. One holder converted 5,263.2 Series D shares for 69,264 common shares and extended 64,211 warrants. Each warrant has an exercise price of $4.75. No value was assigned to the warrants in the accompanying consolidated financial statements as the value is deemed de minimus. The remaining Series D preferred stock outstanding is 100,001 shares. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. The following discussion and analysis contains trend information and other forward-looking statements that involve a number of risks and uncertainties. Actual results could differ materially from the Company's historical results of operations and those discussed in these forward-looking comments. Factors that could cause actual results to differ materially include, but are not limited to, those identified in Notes 5, 6, 7, and 10 to the Consolidated Financial Statements herein, Part II, Item 1, Legal Proceedings and the discussion below. Certain factors that may influence actual operations in the future are discussed in the Company's Form 10-K for the year ended December 31, 2000 in Part I, Item 1. Business. When the Company uses words like "may," "believes," "expects," "anticipates," "should," "estimate," "project," "plan," their opposites and similar expressions, the Company is making forward-looking statements. These expressions are most often used in statements relating to business plans, strategies, anticipated benefits or projections about the anticipated revenues, earnings or other aspects of our operating results. We make these statements in an effort to keep stockholders and the public informed about our business, and have based them on our current expectations about future events. Such statements should be viewed with caution. These statements 14 are not guarantees of future performance or events. As noted elsewhere in this report, all phases of our business are subject to uncertainties, risks and other influences, many of which the Company has no control over. Additionally, any of these factors, either alone or taken together, could have a material adverse effect on the Company and could change whether any forward-looking statement ultimately turns out to be true. The Company undertakes no obligation to publicly release updates or revisions to these statements. INTRODUCTION Incorporated in 1952, American Ecology Corporation and its predecessors have operated commercial low-level radioactive and chemical waste disposal and treatment facilities nationwide longer than any other company in the nation. The Company mainly derives its revenues from fees charged for processing and disposal of hazardous, non-hazardous, naturally occurring and low-level radioactive waste. Revenues are also derived from rebuilding electric motors and other large components from nuclear power plants, brokering wastes to other service providers, and environmental remediation work. Disposal fees assessed to customers of the Company's operating facilities may include state and local fees, and are generally based on the volume or weight of waste deposited. The Company may assess fees and incur costs to process waste (e.g. compaction or decontamination), stabilize waste (e.g. mixing with concrete), or transport waste. Some of these costs create inter-company charges and revenue, all of which have been eliminated in the consolidated financial statements. Operating expenses include direct and indirect costs for labor, maintenance and repairs, subcontracted costs and equipment, insurance, taxes and accruals for burial fees and other costs. The Company has properly accounted for fees assessed by regulatory authorities for the issuance of permits and licenses. Selling, general & administrative costs include management salaries, sales and marketing efforts, clerical and administrative costs, legal fees, office rentals, corporate insurance, and other administrative costs for general corporate overhead. Revenue for the six months ended June 30, 2001, was $26,597,000 or 34% higher than the same period in 2000. This growth in revenue was primarily the result of the Company acquiring Envirosafe Services of Idaho, Inc., (subsequently renamed US Ecology Idaho, Inc., or "USEI") on February 1, 2001. This increase in revenue resulted in a parallel increase of 39% in both direct costs and selling, general and administrative costs over the same period a year ago. USEI is a part of the Chemical Services segment, which had a 71 and 93 percent growth in revenue for the three, and six month periods ended June 30, 2001, respectively. The LLRW division experienced operational difficulties at the Oak Ridge facility and revenues declined 13 and 17 percent for the same periods, respectively. Overall, the Company continues with an increased operating performance and a positive working capital of $2.8 million. The calculations to report activities for both the three and six months ended June 30, 2001 are exclusive of intercompany transactions and corporate eliminating entries. 15 RESULTS OF OPERATIONS THREE AND SIX MONTHS ENDED JUNE 30, 2001 AND 2000 The following table presents, for the periods indicated, the percentage of operating line items in the consolidated income statement to operating revenues:
Three Months Ended Six Months Ended Three Months Ended Six Months Ended June 30, 2001 June 30, 2001 June 30, 2000 June 30, 2000 --------------- ------------- ------------- ------------- $ % $ % $ % $ % ------ ----- ------ ----- ------ ----- ------ ----- Revenue 13,731 26,597 10,485 19,804 Direct Operating Costs 8,341 60.7% 15,074 56.7% 5,898 56.3% 10,773 54.4% ------ ------ ------ ------ Gross Profits 5,390 39.3% 11,523 43.3% 4,587 43.7% 9,031 45.6% SG & A 5,568 40.6% 10,371 39.0% 4,128 39.4% 7,444 37.6% ------ ------ ------ ------ Income from Operations (178) -1.3% 1,152 4.3% 459 4.4% 1,587 8.0% Investment Income 34 0.2% 208 0.8% 125 1.2% 237 1.2% Gain on sale of assets 66 0.5% 112 0.4% -- 0.0% 1 0.0% Interest Expense (346) -2.5% (604) -2.3% (60) -0.6% (108) -.05% Other (income) Expense 788 5.7% 1,024 3.9% 199 1.9% 489 2.5% ------ ------ ------ ------ Net Income Before income Taxes 364 2.7% 1,892 7.1% 723 6.9% 2,206 11.1% Income tax expense (benefit) 38 0.3% 84 0.3% (41) -0.4% 61 0.3% ------ ------ ------ ------ Net Income 326 2.4% 1,808 6.8% 764 7.3% 2,145 10.8% Preferred Stock Dividends 99 0.7% 196 0.7% 99 0.9% 199 1.0% ------ ------ ------ ------ Net Income (loss) available to common Shareholders 227 1.7% 1,612 6.1% 665 6.3% 1,946 9.8% ====== ====== ====== ======
16 CONDENSED STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDING
Reported in $000 June 30, 2001 June 30, 2000 Chemical LLRW Chemical LLRW -------- ---- -------- ---- Revenue $ 17,800 $ 9,071 $ 9,205 $ 10,905 Direct Operating costs 9,267 5,947 5,431 5,488 Gross Profit 8,533 3,124 3,774 5,417 SG & A 4,243 3,436 1,623 3,801 -------- -------- -------- -------- Income (loss) from operations 4,290 (312) 2,151 1,616 Other income (expense) (1,577) (1,184) (576) (1,162) -------- -------- -------- -------- Net Income (loss) $ 2,713 $ (1,496) $ 1,575 $ 454 -------- -------- -------- --------
REVENUE
Period to Period Change Period to Period Change For the Three Months Ended For the Six Months Ended June 30, 2001 and 2000 June 30, 2001 and 2000 ---------------------- ---------------------- $ % $ % -------------- --------- ------------- -------- Statement of Operations Revenue Chemical Division 3,906 71 8,595 93 LLRW Division (648) (13) (1,834) (17) Corporate & Other 262 -- 306 --
For the three and six months ended June 30, 2001, the Company reported revenue of $13,731,000 and $26,597,000, respectively, or a 31% and 34% increase compared to corresponding periods in the prior year. For the three months ended June 30, 2001, Chemical Division revenue increased $3,906,000 or 71% over the same period last year. This was primarily due to the acquisition of Envirosafe Services of Idaho (subsequently renamed US Ecology Idaho, Inc., or "USEI") in February 2001. USEI waste volume in the second quarter was driven by continued shipments from a steel mill and federal customers. The LLRW division revenue declined by $648,000 or 13% in the second quarters, principally due to the Oak Ridge facility's focus on the elimination of aged waste. During the second quarter Oak Ridge notified customers to delay shipments of revenue generating material so that facility operations could clear the site of aged waste. This deferral of revenue generating material caused a significant decrease in revenue recognized in the quarter. For the six months ended June 30, 2001 revenue for the Chemical Division increased $8,595,000 or 93% and for the LLRW Division decreased $1,834,000 or 17% compared to the same period one year ago. Again, the increased revenue in the Chemical division was principally driven by the strong performance of the newly acquired Idaho facility. However, all of the Company's chemical operations performed well during the first half of the year. In particular, El Centro, the Company's municipal solid waste landfill in Robstown, Texas, posted a strong first half, as did the Texas hazardous waste facility. The Company's hazardous waste facility in Beatty saw a strong second quarter and first half principally due the thermal treatment and recovery technology that was introduced at the site last year. Demand for the thermal treatment and recovery process is high and the site has a several month backlog of material to process. As a part of the USEI acquisition the Company acquired an operation in Sterling, Illinois for the treatment and disposal of an individual steel mill's air pollution control system dust, known as K061. In December 2000 the steel mill, Northwestern Steel & Wire, filed for protection from creditors under Chapter 11 of the federal bankruptcy 17 code. In May 2001, the steel mill ceased operations and laid-off most of its workforce. In response to the cessation of mill operations, USEI negotiated a set of final payments with the mill and the bankruptcy trustee, whereby the Company processed material through June with a defined payment schedule and then beginning July 1, at reduced rates. The Company has reduced headcount and cost at its Sterling operation to compensate for the lower waste volumes and lower processing and disposal rates. The Company continues to be in discussions with the mill regarding possible additional work, including contracting for the closure of the mill-owned hazardous waste landfill, but no assurance can be made regarding securing this or any additional work at the mill. Management believes that it may need to begin closure of the processing facility, which will be funded by a state-managed trust, in the second half of the year. However, management does not believe that cessation of operations at Sterling will have a material adverse impact on the Company. On July 24, 2001 the City of Corpus Christi passed a city ordinance establishing a set of fees to be imposed on haulers of solid waste within the city limits. This ordinance is intended to re-capture revenue that the City of Corpus Christi has lost since the opening of the Company's El Centro solid waste landfill in July of 2000. While the fee places on burden on haulers and eliminates most of the competitive cost advantage that El Centro has maintained over the City's landfill during the last year, the Company believes that it can continue to compete effectively with the City for solid waste streams emanating from within city limits. Moreover, there is a meaningful amount of solid waste outside the city limits that El Centro will continue to have a price advantage on when competing with the City's landfill. However, it is expected that the new ordinance will result in reduced volumes at El Centro in the second half of the year compared to the first half of the year. No assurance can be given that the City will not enact additional ordinances to control the flow of solid waste in the region. Additional measures by the City or other changes in the competitive market could result in El Centro losing additional volumes of solid waste and becoming an unprofitable asset. The Company's corporate segment does not generate any revenue but the eliminating entries between companies and the closed facilities resulted in a period-to-period change for both the three and six months ended June 30, 2001. DIRECT OPERATING COSTS The following table indicates the period-to-period change in direct and indirect costs:
Period to Period Change Period to Period Change For the Three Months Ended For the Six Months Ended June 30, 2001 and 2000 June 30, 2001 and 2000 ---------------------- ---------------------- $ % $ % -------------- --------- ------------- -------- Statement of Operations-Direct Operating Costs Chemical Division 1,959 61 3,836 71 LLRW Division 543 20 459 8 Corporate & Other 81 -- 146 --
For the three and six months ending June 30, 2001 direct operating costs increased for both the Chemical and LLRW Divisions. Total direct operating costs for the Company in the second quarter were $8,340,000 or 61% of revenue compared to $5,898,000 or 56% of revenue during the same quarter last year before the acquisition of USEI. For the six months, direct operating costs increased to $15,074,000 or 56% of revenue compared to $10,773,000 or 54% of revenue for the same period in 2000. In the Chemical Division direct operating expenses increased to $5,170,000 or 55% of revenue in the quarter compared to the $3,211,000 or 59% of revenue during the same 3 months last year. The increase in direct operating costs in the Chemical Division was a result of the newly acquired USEI Idaho hazardous waste facility and the additional revenue resulted in a lower percentage of cost to revenue. Revenue in the Chemical division increased by 71% and 93% for the three and six months ending June 30, 2001, respectively, while the direct operating costs during these periods only increased 61% and 70% for the same periods in 2000. Unlike the Chemical Division, the LLRW Division's direct operating costs increased in spite of a decrease in revenue. As previously discussed, revenue for LLRW decreased 13% and 17% for the three and six months ending 18 June 30, 2001, respectively. However, direct costs increased 20% and 8% for these periods compared to one year ago. These higher direct costs were the result of LLRW processing, subcontract and transportation costs at the Oak Ridge facility for the removal of aged waste. The Company's corporate segment does not generate any direct operating costs but certain eliminating entries between companies and the closed facilities resulted in a period-to-period change for both the three and six months ended June 30, 2001, which is not material in amount. SELLING, GENERAL AND ADMINISTRATIVE COSTS (SG&A)
Period to Period Change Period to Period Change For the Three Months Ended For the Six Months Ended June 30, 2001 and 2000 June 30, 2001 and 2000 ---------------------- ---------------------- $ % $ % -------------- --------- ------------- -------- Selling, General and Administrative Costs Chemical Division 1,489 167 2,620 161 LLRW Division 96 6 (365) (10) Corporate & Other (144) (9) 673 33
SG&A costs increased to $5,568,000 from $4,128,000 for the three months ending June 30, 2000 compared to the same quarter in 2000. The increase was directly proportional to the newly acquired USEI operations, as explained in the operating costs section. Likewise, the SG&A increased for the six months ending June 30, 2001 to $10,371,000 compared to $7,444,000 for the six months ending June 30, 2000. This increase is attributed to the additional costs the Company incurred to acquire and subsequently operate the Idaho facility. This included non-recurring acquisition transition costs, most of which were incurred in the second quarter. As shown by the table above, the majority of the SG&A increase is in the Chemical Division which were the result of the newly acquired USEI, Idaho facility. The LLRW division experienced 6 percent increase and a 10 percent decreases in SG&A costs for the three and six months ending June 30, 2001 respectively. The primary cause for the increase for the three months ending June 30, 2001 was an accrual taken for the ongoing National Labor Relations Board ("NLRB") case. No accrual was applied in the same period one year ago. The decrease in the LLRW spending for SG&A for the six month period is also a result of the Oak Ridge, Tennessee facility's aged waste removal campaign described above. The Company's corporate segment incurs selling, general & administrative costs for legal, consulting, administrative salaries and related expenses of managing the business including certain eliminating entries between companies and the closed facilities. The overall increase of $673,000 for the six month period is mainly attributed to the acquisition of USEI and other new projects that management has been undertaking in an effort to grow the business and increase the Company's marketing capacity. During the second quarter, Company management undertook an initiative to reduce costs and expenses. This included a close review of travel, entertainment, professional, and consulting expenses. Management believes that its cost control initiative will result in lower spending relative to revenue in the second half of the year. OTHER COSTS AND INVESTMENT INCOME
Period to Period Change Period to Period Change For the Three Months Ended For the Six Months Ended June 30, 2001 and 2000 June 30, 2001 and 2000 ---------------------- ---------------------- $ % $ % -------------- --------- ------------- -------- Other Costs Chemical Division 943 (31) (585) (101) LLRW Division (136) (256) (1,084) (93) Corporate & Other (144) (9) 3,028 (128)
19 Investment income is comprised principally of interest income earned on various investments in securities held-to-maturity, dividend income, and realized and unrealized gains and losses earned on the Company's investment portfolio classified as trading securities. For the six-months ended June 30, 2001, the Company reported investment income of $208,000 compared to $237,000 for the same six months ending June 30, 2000. The Company closed an investment portfolio over the last twelve months and now maintains its excess cash in money market accounts and certificates of deposit. Included in this section is gain on sale of fixed assets for both 2001 and 2000. The Company arranged a sale lease back in August of 2000 and each month recognizes a gain of $18,000. For the quarter interest expense increased to $346,000 from $60,000 during the second quarter last year. Likewise, interest expense for the six months ended June 30, 2001 increased to $604,000 from $108,000. The higher interest expense is the result of increased borrowing on the credit facility and the assumption of the $8.5 million industrial revenue bond obligation for USEI. OTHER INCOME Other income is the account used to record various business activities that are not a part of the Company's ordinary and usual business line of revenue. Other income also includes the reversal of expenses charged to reserves for contingent liabilities from prior periods and miscellaneous cash receipts. The Company believes it is appropriate to use an account like other income to reflect accurately in the current period those costs and expenses which were reversed from accruals in prior periods of estimated operating or selling, general & administrative expense. As a result, credits from prior periods go to other income rather than crediting current years expenses or revenue, thus preserving the true current period results of operation operations. If a reserve were established based on a known liability that was reasonably estimated, and later settled for a lesser amount, that unused portion of the reserve from a prior period would result in other income. On the other hand if such contingent liability were resolved within the same year, then the account that the original expense was charged to would take the resultant credit. Other income for the three and six months ended June 30, 2001 was $788,000 and $1,024,000 compared to $199,000 and $489,000 for the same periods of 2000. The main reason for the large increase in 2001 was for a burial fee adjustment made at the Oak Ridge, Tennessee facility for $500,000 for processing and disposing aged waste that had been at the facility over one year. Originally the Company had established this reserve when a court judgment was received in January 1998, for $2,044,346 in the case of Houston 88, where the landlord brought charges for the Company's early vacation of leased premises as company headquarters in Houston, Texas. The Company then settled the case for approximately $1.5 million less than the judgment. This $1.5 million reserve was then assigned to the Oak Ridge facility for the ongoing commitment to the State of Tennessee for disposal of aged waste on company property. This burial fee adjustment was the result of a very concentrated effort to remove the aged waste from the Oak Ridge facility during the first six months of 2001. This aged waste has now been properly disposed of other than a minor amount, which is accounted for, leaving the additional accrual from prior years of $250,000. The Company discovered in the second quarter of 2001, after having made the bond interest payment on a $15 million industrial revenue bond, that the previous owner of USEI had made an accrual for the bond interest payable. At the time of payment the Company had charged bond interest expense for $177,000 rather than charging the accrued bond interest reserve. This recognition of other income for $177,000 in the second quarter of 2001, is to correct and remove the accrual. 20 The table below provides an itemization of transactions that accounted for other income: (Reported in thousands of dollars)
Three Months Ended Six Months Ended June 30, June 30, OTHER INCOME FROM GENERAL BUSINESS ITEMS 2001 2000 2001 2000 ---- ---- ---- ---- Burial fee accrual adjustment $ 500 $ 73 $ 500 $ 73 State tax refunds from prior year -- -- -- 3 Loan repayment to Chase Bank of Texas originally expensed as bank fees -- -- -- 112 Payment on sales invoices previously written off -- 55 -- 55 Reverse bad debt expense reserve 2 68 25 78 Bond interest from excess accrual in prior year 177 177 -- Professional fees adjustment -- -- 160 -- Reverse USEI restructuring charge -- -- 52 -- Correction of prior years expenses that were allowable as capitalized costs -- -- -- 162 ------- ------- ------- ------- SUBTOTAL 678 196 913 483 OTHER INCOME FROM NON-GENERAL BUSINESS ITEMS Adjustment of income tax accrual 107 -- 107 -- Correction of gain on asset sale -- -- (2) -- Cash receipts for property rents 2 2 4 4 Vending machine commission 1 1 2 2 ------- ------- ------- ------- TOTAL OTHER INCOME $ 788 $ 199 $ 1,024 $ 489 ------- ------- ------- -------
OPERATING EARNINGS AND NET INCOME
Period to Period Change Period to Period Change For the Three Months Ended For the Six Months Ended June 30, 2001 and 2000 June 30, 2001 and 2000 ---------------------- ---------------------- $ % $ % -------------- --------- ------------- -------- Income from Operations Chemical Division 458 33 2,139 99 LLRW Division (1,286) (173) (1,928) (119) Corporate & Other 191 (11) (513) 24 EBINT (1) Chemical Division 895 72 2,647 132 LLRW Division (1,257) (170) 1,871 (115) Corporate & Other 506 (31) 2 -- Consolidated Net Income (438) (66) (334) 17 EBITDA (2) (364) (30) 370 (12)
(1) EBINT represents earnings from operations before deducting interest and taxes. (2) EBITDA is defined herein as income from operations excluding depreciation and amortization and asset impairments and unusual items. EBITDA, which is not a measure of financial performance under generally accepted accounting principles, is provided because the Company understands that such information is used by certain investors when analyzing the financial position and performance of the Company. 21 For the three months ending June 30, 2001, the Company's Chemical Division posted income from operations of $1,839,000 or a $458,000 improvement over $1,381,000 reported for the same period of 2000, and had a similarly strong performance for the six months ended June 30, 2001 with $2,139,000 more operating income than one year ago. This improvement is from the addition and strong performance of the newly acquired Idaho facility, combined with El Centro's municipal solid waste growth, and the Beatty facility's strong second quarter principally due to the addition of thermal treatment and recovery technology. The LLRW Division's operating income was lower by $1,286,000 and $1,928,000 for the three and six months ended June 30, 2001 compared to the same periods one year ago. As discussed in the revenue section of the results of operations the LLRW division revenue declined by 173% for the three months ended June 30, 2001and 119% for the six months ended due to the Oak Ridge facility's focus on eliminating aged waste. During the second quarter Oak Ridge notified customers to delay shipments of revenue generating material so that facility operations could clear the site of aged waste. The Richland Washington facility revenue is also limited by rate base regulations and has been somewhat lower for the six months ended June 30, 2001 than for June 30, 2000. Net income is measured at the consolidated level after corporate allocations, taxes and eliminating entries. For the three and six months ended June 30, 2001 the Company's consolidated net income was $227,000 and $1,612,000 or 66% and 17% less than the same periods one year ago. The main reason for this decrease in profitability was the loss in revenue from the Oak Ridge facility. The Company maintained generally a fairly flat direct operating cost and S,G&A for the LLRW division in the past year and likewise when the newly acquired Idaho facility operations are removed from the equation the Chemical Division maintained a strong command of expenses. Management believes that its cost control initiatives will result in lower spending relative to revenue in the second half of the year, thus improving profitability. Management is monitoring closely the performance of the Oak Ridge facility. INCOME TAXES The Company's effective income tax (benefit) rates were 10% and 3% for the quarters ending June 30, 2001 and 2000 respectively. The second quarter income tax expense of $38,000 and credit of $41,000 for each of the quarters ending June 30, 2001, and 2000, respectively is for payments on different state, local, and franchise taxes. For the six months ended June 30, 2001 the Company incurred $84,000 compared to $61,000 one year ago. The Company has a valuation allowance of approximately $19.8 million for deferred federal tax assets with more than $2.7 million of limited loss carry-forwards and $34.4 million of unlimited net operating loss carry-forwards. The Company does not anticipate a federal tax liability for 2001, however, the same credits are not available for state and local taxes and the Company estimates at least $150,000 of tax expense for 2001. SEASONAL EFFECTS Operating revenues are generally lower in the winter months than the warmer summer months. However, both Chemical and LLRW Services revenues are more affected by market conditions than seasonality. NEW ACCOUNTING PRONOUNCEMENTS The Financial Accounting Standards Board has recently issued Statement of Financial Accounting Standards 141 "Business Combinations" and 142 "Goodwill and Other Intangible Assets". The FASB voted on June 29, 2001 unanimously in favor of the two Statements which were subsequently issued in the second half of July 2001. Management believes the adoption of these statements will have no material impact on the Company's financial statements. 22 CAPITAL RESOURCES AND LIQUIDITY The Company has amended the Consolidated Statements of Cash Flows indicating that the original increase in other assets had been erroneously overstated while the repayment of indebtedness had been understated. These changes indicate that the net cash provided form operations at June 30, 2001 was $797,000 compared to $2,749,000 for the same period one year ago. The return of cash in a collateral trust fund to the Company improved net cash used in investing activities to $1,187,000 at June 30, 2001 compared to $4,322,000 at June 30, 2000. The Company received this cash collateral of $2,565,000 that was held in trust for the USEI facility during the second quarter of 2001. The money was held in trust as collateral for the previous owners of USEI to secure a $15 million surety bond for the State of Idaho. The Company's insurance and arrangements to secure the same surety bond was adequate for the State of Idaho to authorize the cash collateral to be released to the Company. The Company used these proceeds for ordinary business, to pay down certain accounts payable and to improve the Company's overall working capital position. The net cash used in financing activities was $2,959,000 at June 30, 2001, a large increase compared to $544,000 at June 30, 2000. This change in 2001 financing was the result of repaying a large portion of long term debt. On June 30, 2001, cash, cash equivalents and short-term investments totaled $773,000, a decrease of $3,349,000 from December 31, 2000. The decrease in cash was due to on-going capital expenditures, customer rebates at the rate-regulated facility in Richland, Washington, payments for aged waste disposal, and the funding of operating losses at Oak Ridge. Accounts receivable totaled $10,372,000 at June 30, 2001 or an increase of $533,000 from December 31, 2000. The Company's "days sales outstanding" has remained fairly steady since the acquisition of USEI at 71 days at June 30, 2001 and 72.5 at March 31, 2001. This shows that since the Company acquired USEI days sales has been fairly constant as the Company maintained 71.6 days at December 31, 2000. As of June 30, 2001 the Company's liquidity, as measured by the current ratio, increased to 1.25:1 compared to 1.17:1 at December 31, 2000. The Company's working capital increased to $2,844,000 from $2,279,000 at December 31, 2000 but was down from $5,774,000 at March 31, 2001. Overall 2001 is a large improvement from one year ago, when the Company had a working capital deficit of $3,620,000 at June 30, 2000. Despite this increase in liquidity and availability of capital from the same period last year, management has a priority in the third quarter to extend the current banking arrangement. If the Company is unable to reach an accommodation and extension with it's bank, the line of credit borrowings now classified long-term debt will become short-term and will be due August 2002. This would cause a material, adverse change in the Company's working capital position. Since December 31, 2000 the Company's leverage has increased, as evidenced by debt to equity ratio of 1.94:1.0 at June 30, 2001, compared to1.53:1.0 at year end. The debt to equity ratio is defined as total debt divided by shareholders equity. This increase in the Company's leverage is principally the result of the assumption of the $8,500,000 industrial revenue bond and $12,000,000 of other USEI liabilities. As of June 30, 2001, the Company has maintained a business banking relationship with Wells Fargo Bank in Boise, Idaho that provides an $8,000,000 line of credit. At this date the Company had $4,200,000 borrowed, not including $1,150,000 reserved for a standby letter of credit. At August 10, 2001, the Company had borrowed $4,000,000 not including the $1,150,000 reserved for a standby letter of credit and has $2,000,000 available for borrowing. 23 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. AMERICAN ECOLOGY CORPORATION (Registrant) Date: December 13, 2001 By: /s/ Stephen A. Romano --------------------- Stephen A. Romano President and Chief Operating Officer Date: December 13, 2001 By: /s/ James R. Baumgardner ------------------------ James R. Baumgardner Senior Vice President, Chief Financial Officer, Secretary and Treasurer 24 -----END PRIVACY-ENHANCED MESSAGE-----