10-K/A 1 h92999ae10-ka.txt AMERICAN ECOLOGY CORPORATION - AMENDMENT ================================================================================ SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-K/A ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR FISCAL YEAR ENDED DECEMBER 31, 2000 COMMISSION FILE NUMBER 0-11688 AMERICAN ECOLOGY CORPORATION (Exact name of registrant as specified in its charter) DELAWARE 95-3889638 (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.) 805 W. IDAHO, SUITE #200, BOISE, IDAHO 83702-8916 (Address of Principal Executive Offices) (Zip Code) Registrant's telephone number, including area code: (208) 331-8400 SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: COMMON STOCK, $.01 PAR VALUE PER SHARE (Title of Class) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] At December 14, 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 items in the Notes to the financial statements and to Item 7. Management Discussion and Analysis. Based on these comments, the Company amended the Results of Operations Part I Item 7 and the Statement of Operations and Note 3, 9, 16, and 17 of Item 8 of its Form 10-K to include clarifications of those items in conjunction with a response letter filed with the Commission on November 13, 2001. ================================================================================ ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. The following discussion 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 as a result of a number of factors, including, but not limited to, those set forth under "Factors That May Affect Future Results," Notes to the Consolidated Financial Statements, Part I, Item 3., Legal Proceedings, and the discussion below. 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 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. The following discussion should be read in conjunction with audited consolidated financial statements and the notes thereto for the year ending December 31, 2000, included elsewhere in this Form 10-K. The Company is a hazardous, non-hazardous, and radioactive waste management company that offers comprehensive treatment and disposal solutions for hazardous and low-level radioactive waste to commercial and government entities including, but not limited to nuclear power plants, petro-chemical plants, steel mills, the U.S. Department of Defense, medical facilities, universities and research institutions. The Company principally derives its revenue from fees charged for access to the Company's five fixed waste disposal facilities and one LLRW processing facility. Fees are charged for transportation, processing, and disposal of waste, subject to strict waste acceptance criteria. The Company has been in business for more than 49 years. 2000 FINANCIAL RESULTS COMPARED WITH 1999 FINANCIAL RESULTS The Company's 2000 revenue reached $41.9 million which was a 22% increase over revenue in 1999. Operating costs in 2000 increased 31% over 1999, but were only a 4% increase over 1999 while there was a 22% revenue growth. Year 2000 represented the first year in 5 years that the Company posted increasing revenue. The combination of higher revenue improved gross margin and relatively flat operating costs have improved the Company's profitability. For the years ended December 2000 and 1999, the Company posted a net income (before dividends) of $4.7 and $4.4 million. Both years compared favorably to a net loss of $48.9 million in 1995. Through the first two months of 2001, the Company has maintained revenue growth and profitability and anticipates this trend to continue. EXPENSES Operating expenses include direct and indirect costs for labor, transportation, maintenance and repairs, subcontracted costs and equipment, insurance, taxes, appropriate 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 and consulting fees, office rentals, insurance, and other administrative costs included under general corporate overhead. 2 STRATEGY Management continues to evaluate the Company's relative position and presence in the marketplace. In 2000, the Company actively pursued new business opportunities, entered an agreement to acquire a new subsidiary, implemented new technologies, expanded its licenses and permits, and made new business alliances. The acquisition of Envirosafe Services of Idaho, Inc. was completed February 1, 2001. Other strategic plan implementation activities have continued into 2001. The environmental services industry is dynamic and highly competitive. The Company believes that aggressively pursuing growth and market consolidation opportunities are critical to its future success. The Company annually develops a strategic plan and budget that reflects market and competitive changes, as well as good business practices, flexibility, and regulatory compliance. The Company's strategic plan focuses on six key areas. 1. Emphasize Safety and Compliance The Company believes that its success and economic performance is based on providing scientific solution for the waste it receives in a safe and compliant manner. The Company has a stringent health and safety plan for all of its operations and has hired, from time to time, outside consultants to advise the Company on ongoing improvements to the Company's health and safety policies and procedures. In addition, the Company manages all of its facilities in a manner to assure compliance with applicable state and federal law and regulations. Company management emphasizes to employees on an ongoing basis the importance of health, safety, and compliance. 2. Emphasize Business Fundamentals and Cost Control The Company continues to stress business fundamentals and cost control. Management remains committed to improving core business operations at each of its sites by increasing revenue, profitability and cash flow. The Company continues to implement and enforce new policies, procedures, and systems to ensure that appropriate business controls are in place. 3. Expand Services and Increase Utilization of Assets at Existing Facilities In mid-year 2000, the Company opened its El Centro municipal and industrial solid waste landfill located at Robstown, Texas. In late 2000, the Company introduced Thermal Treatment and Recovery processes at its Nevada location. The Company intends to introduce this technology at other locations during 2001. Successful permitting of vertical disposal space expansions at its Nevada and Texas disposal sites further demonstrates the Company's ability to maximize the value of its existing core business assets. In 2001, the Company's substantial operating experience will be applied to the newly acquired Grand View, Idaho treatment and disposal facility. The Company continues to work with its regulators to expand service capabilities at its existing sites. 4. Increase Emphasis on E-Business and Automation The Company recognizes the value of a comprehensive electronic business strategy and has committed significant resources to improving its electronic business capabilities. This includes but is not limited to improving the Company's website, automating customer forms and government approval documents, posting facility waste acceptance criteria on its website, and providing customers with on-line access to information regarding their waste and their account activity. In 2000, the Company has started implementing order processing and accounts receivable information on the Internet. The Company is also using the Internet to find new customers, improve sales force integration, speed waste processing, and reduce costs. The Company believes that its electronic business capabilities will allow it to better serve existing customers and develop new business. 3 5. Increase Cross Selling The Company believes it offers excellent customer service and a complimentary and unique set of services through its multiple sites and operations. The Company is committed to cross-selling this integrated array of services to both existing customers and prospects. To achieve this goal the Company is updating marketing and sales materials, arming sales personnel with updated information on Company capabilities and services, and cross training key personnel. Management believes the addition of experienced sales personnel and rail transportation expertise acquired as part of the Envirosafe Services of Idaho transaction will further enhance cross-selling in 2001 and beyond. 6. Execute Well Conceived Mergers and Acquisitions The Company will continue to evaluate and pursue strategic mergers or acquisitions of companies or assets that fit the Company's core competencies. Management believes that well-conceived mergers or acquisitions will continue to significantly enhance the Company's market position and value. The Company will also continue to pursue strategic alliances, joint ventures or partnership arrangements. RECENT DEVELOPMENTS AND FUTURE CONSIDERATIONS FACTORS THAT MAY AFFECT FUTURE RESULTS COMPLIANCE WITH APPLICABLE LAWS AND REGULATIONS The changing regulatory framework governing the Company's business creates significant risks, including potential liabilities from violations of environmental statutes and regulations. Failure to timely obtain, or to comply with the conditions of applicable federal, state and local governmental licenses, permits or approvals for our waste treatment and disposal facilities could prevent or inhibit the Company from operating our facilities and providing services, resulting in a significant loss of revenue and earnings. Changes in laws or regulations may require the Company to obtain additional operating licenses, permits or approvals if new environmental legislation or regulations are enacted or existing legislation or regulations are amended, reinterpreted or enforced differently than in the past. Any new governmental requirements that raise compliance standards may impose significant cost upon the Company. The Company's failure to comply with applicable statutes and regulations may result in the imposition of substantial fines and penalties and could adversely affect the Company's ability to carry on its business as presently constituted. CHANGES IN LAWS AND REGULATIONS A substantial relaxation of the requirements of compliance with environmental laws or a substantial reduction of enforcement activities by governmental agencies could materially reduce the demand for the Company's services. A large portion of the Company's revenues are generated as a result of requirements arising under federal and state laws, regulations and programs related to protection of the environment. If the requirements of compliance with environmental laws and regulations were substantially relaxed in the future or were less vigorously enforced, particularly those relating to the transportation, treatment, storage or disposal of hazardous and low-level radioactive waste, the demand for the Company's services could decrease and revenues could be significantly reduced. EXPOSURE TO LITIGATION Since Company personnel routinely handle radioactive and hazardous materials, the Company may be subject to liability claims by employees, customers and third parties. There can be no assurance that the Company's existing liability insurance is adequate to cover claims asserted against the Company or that the Company will be able to maintain such insurance in the future. The Company has adopted risk management programs designed to reduce these risks and potential liabilities, however, there can be no assurance that such programs will fully protect the Company. 4 ACCESS TO CAPITAL The Company needs to have cost effective access to capital in order to implement its strategic and financial plan. If the Company cannot retain its existing access to capital or raise additional capital the Company may need to curtail or scale back its planned expansion. The Company requires additional financing for working capital, capital expenditures and new acquisitions. NEW TECHNOLOGIES The Company expects to increase its utilization of new thermal treatment and possibly other advanced technologies. The Company' s future growth is somewhat reliant upon its ability to discern emerging industry service niches and respond to clients' needs. If the Company cannot successfully implement commercially viable technologies for treatment of wastes in a manner that is responsive to the clients' requirements, the business could be adversely affected. COMPETITIVE ENVIRONMENT The Company faces competition from companies with greater resources and potentially more cost-effective waste treatment and disposal solutions. Any increase in the number of licensed commercial treatment facilities or disposal sites for hazardous or low-level radioactive waste in the United States, or any decrease in the treatment or disposal fees charged by competitive facilities or sites, could reduce the competitive advantage of the Company's facilities and services. LOSS OF MAJOR CONTRACTS A loss on one or more of the Company's larger contracts could significantly reduce the Company's revenues and negatively impact earnings. The Company's contract with the Corps of Engineers for example is a contract that could have a material adverse impact on the Company if lost or not renewed, and represents a significant portion of the revenue for the Company's newly acquired Grand View, Idaho site. THE COMPANY MAY FACE RISKS RELATING TO GENERAL ECONOMIC CONDITIONS The Company believes there is risk related to general economic and market conditions, including the potential impact of any economic slowdown, recession, interest rate fluctuation or other adverse external economic conditions. Negative general economic conditions could adversely affect our financial condition, results of operation and cash flows. RESULTS OF OPERATIONS The Company has continued to show improved operations since 1994, especially for the last three years ended 2000, 1999, and 1998 when the Company reported net income of $4,697,000, $4,409,000, and $762,000 respectively. Operationally, the Company has continued to grow and reposition itself after having difficulty from three unsuccessful acquisitions in 1994 that affected the reporting years ending December 31, 1997, 1996, and 1995. The following table summarizes the operational performance of the operating segments, Chemical Services, LLRW Services, and Corporate & Other. Only Chemical Services and LLRW Services generate revenue and profit. The Corporate & Other part of the Company generate no revenue and provide administrative, managerial, and support services for Chemical Services, LLRW Services and the ongoing closure and post closure operations of closed facilities. Since there is no revenue generated at the corporate level or at closed facilities there is no profitability at this level. Summarized financial information concerning the Company's reportable segments is shown in the following table. The "Corporate & Other" column includes corporate-related items not allocated to the reportable segments. 5
Reported in $(000) CHEMICAL LLRW CORPORATE SERVICES SERVICES & OTHER TOTAL ---------- ---------- ---------- ---------- 2000 Revenue $ 18,975 $ 23,725 $ (742) $ 41,958 Direct Cost 10,084 12,223 (475) 21,832 ---------- ---------- ---------- ---------- Gross Profit 8,891 11,502 (267) 20,126 S,G&A 3,975 7,113 5,577 16,665 ---------- ---------- ---------- ---------- Income (loss) from operations 4,916 4,389 (5,844) 3,461 Investment income 51 1 383 435 Gain on sale of assets 69 23 -- 92 Interest expense (57) (109) (184) (350) Other income 164 380 297 841 ---------- ---------- ---------- ---------- Income before extraordinary items and taxes 5,143 4,684 (5,348) 4,479 Extraordinary item and taxes -- -- 218 218 ---------- ---------- ---------- ---------- Net Income $ 5,143 $ 4,684 $ (5,130) $ 4,697 Total Assets $ 23,875 $ 39,537 $ 2,338 $ 65,750 1999 Revenue $ 12,074 $ 23,070 $ (792) $ 34,352 Direct Cost 7,482 9,740 (613) 16,609 ---------- ---------- ---------- ---------- Gross Profit 4,592 13,330 (179) 17,743 S,G&A 3,218 6,191 5,353 14,762 ---------- ---------- ---------- ---------- Income (loss) from operations 1,374 7,139 (5,532) 2,981 Investment income 29 1 750 780 Gain on sale of assets 895 1 (70) 826 Interest expense (14) (65) (129) (208) Other income 76 6 143 225 ---------- ---------- ---------- ---------- Income before extraordinary items and taxes 2,360 7,082 (4,838) 4,604 Extraordinary item and taxes -- -- (195) (195) ---------- ---------- ---------- ---------- Net Income $ 2,360 $ 7,082 $ (5,033) $ 4,409 Total Assets $ 16,162 $ 38,866 $ 3,431 $ 58,459 1998 Revenue $ 16,030 $ 22,930 $ -- $ 38,960 Direct Cost 9,488 14,057 -- 23,545 ---------- ---------- ---------- ---------- Gross Profit 6,542 8,873 -- 15,415 S,G&A 6,544 6,272 2,886 15,702 ---------- ---------- ---------- ---------- Income (loss) from operations (2) 2,601 (2,886) (287) Investment income 381 118 (13) 486 Gain on sale of assets 55 -- 17 72 Interest expense (11) (58) (3) (72) Other income 29 1 588 618 ---------- ---------- ---------- ---------- Income before extraordinary items and taxes 452 2,662 (2,297) 817 Extraordinary item and taxes -- -- (55) (55) ---------- ---------- ---------- ---------- Net Income $ 452 $ 2,662 $ (2,352) $ 762 Total Assets $ 15,535 $ 38,000 $ 8,265 $ 61,800 ---------- ---------- ---------- ----------
6 The following table sets forth items in the Statements of Operations for the three years ended December 31, 2000, as a percentage of revenue:
Percentage of Revenues for the Year Ended December 31, -------------------------------------- 2000 1999 1998 ---------- ---------- ---------- Revenue 100.0% 100.0% 100.0% Operating costs 52.0 48.3 60.4 ---------- ---------- ---------- Gross profit 48.0 51.7 39.6 Selling, general and administrative expenses 39.7 43.0 40.3 ---------- ---------- ---------- Income (loss) from operations 8.3 8.7 (.7) Other (income) expense, net 2.4 .7 2.8 ---------- ---------- ---------- Income (loss) before income taxes and extraordinary item 10.7 13.4 2.1 Extraordinary item .4 -- -- Income tax expense (benefit) -- .6 .1 Preferred stock dividends .9 1.2 1.1 ---------- ---------- ---------- Net income to common shareholders 10.2% 11.7% .9% ========== ========== ==========
The following table compares the Company's two operating segments without consolidated corporate costs, intercompany charges, or the captive insurance company ALEX. CONDENSED STATEMENT OF OPERATIONS
Reported in $000 DECEMBER 31, 2000 December 31, 1999 CHEMICAL LLRW Chemical LLRW ------------ ------------ ------------ ------------ Revenue $ 18,975 $ 23,725 $ 12,074 $ 23,070 Operating costs 10,084 12,223 7,482 9,740 ------------ ------------ ------------ ------------ Gross Profit $ 8,891 $ 11,502 $ 4,592 $ 13,330 Selling, G & A 3,975 7,113 3,218 6,192 ------------ ------------ ------------ ------------ Income from operations $ 4,916 $ 4,389 $ 1,374 $ 7,139 ------------ ------------ ------------ ------------
REVENUE Revenue for 2000, increased to $41,958,000 a 22% increase over 1999 revenue of $34,352,000. During 1999, revenue had decreased 11.8% from 1998 revenue of $38,960,000. The increase in revenue was principally the result of growth in the Chemical Services business, while the LLRW business remained relatively flat. The Chemical Services division has increased profitability in each of the last three years and substantially grew revenue in 2000 from 1999. This was mainly due to adding new hazardous waste customers and successfully bidding and winning several new projects, including one large steel mill project and one large remediation project. While it had little effect on revenue, the Company opened El Centro municipal and industrial waste landfill in 2000. The Beatty, Nevada facility had two large contracts, and made a very large contribution to revenue in 2000, for hazardous waste disposal. Management expects revenue to continue to increase in 2001, as the newly constructed vertical expansion airspace is utilized at the Beatty and Texas facilities, the newly acquired Idaho facility contributes to revenue, and El Centro captures a greater share of the Corpus Christi, Texas market. The LLRW services revenue remained relatively flat in 2000, 1999, and 1998 at between $23 and $24 million. Production increased slightly at the Oak Ridge, Tennessee LLRW facility with revenue of $14,506,000 in 2000 7 compared to $13,575,000 in 1999, and $9,129,000 in 1998. While revenue has increased at Oak Ridge, direct operating costs increases rendered this facility unprofitable in each of these reported years. Revenue increased to $8,857,000 compared to $7,500,000 in 1999 and 1998 at the Company's Richland, Washington rate regulated LLRW facility. This increase was due to significant NARM contracts, which are not rate regulated. The Company expects approval of a new 5-year Washington rate agreement in May 2001. The Company expects that the minimum revenue requirement under a new rate agreement will be materially less than the current agreement. While both Oak Ridge and Richland have increased revenues, the Company has decreased its business with the Central Interstate Compact Commission pending the outcome of litigation, as explained in Item 1. Low Level Radioactive Waste Services. DIRECT OPERATING COSTS Direct operating costs for 2000, totaled $21,832,000 an increase of $5,223,000 or 31% from the prior year. Direct operating costs were $16,609,000 in 1999, and $23,545,000 in 1998. Direct operating costs increased in 2000, as the result of increased revenue and activity, principally at Chemical Services sites. Further contributing to the increase in direct operating costs was the Company's decision to broker transportation when it made economic sense and introduction of new thermal treatment and recovery processes at the Nevada site. Management expects operating costs to increase, commensurate with and relative to revenue in 2001.
Reported in $000 DECEMBER 31, 2000 December 31, 1999 December 31, 1998 CHEMICAL LLRW Chemical LLRW Chemical LLRW -------- -------- -------- -------- -------- -------- Direct operating costs $10,085 $12,223 $7,482 $9,740 $9,488 $14,057
In 2000, Chemical Services direct operating costs increased $2,602,000 or 35% from the prior year. The increase in direct operating costs was primarily the result of additional service and activity associated with contracts. In 2000, the Company capitalized approximately $2,478,000 of costs compared to $1,822,000 of capitalized costs in 1999. The capitalization of labor, engineering, and material costs for the development of additional disposal capacity at the Nevada and Texas facilities will generate revenue and contribute to profit in the future. In 2000, LLRW Services direct operating costs increased $2,483,000 or 25% from the prior year. This increase is only moderately reflective of a 3% increase in revenue. The increases in direct operating costs are mainly at the Oak Ridge facility where an NLRB judgment was received against the Company for $547,000 additional subcontract and consulting costs at the motor center that the Company made no profit on and additional equipment rental. The Company continues to have difficulty in managing costs at the Oak Ridge facility. Operating costs continue to be high at this facility mainly for labor, transportation and subcontracted services, and equipment rental. Consolidated Results of Operations (in thousands):
2000 1999 1998 -------- ------- ------- Revenue $41,958 $34,352 $38,960 Direct operating costs 21,832 52.0% 16,609 48.3% 23,545 60.4% ------- ------- ------- Gross profit (loss) $20,126 48.0% $17,743 51.7% $15,415 39.6%
For the year ended 2000, direct operating costs were 52.0% of revenue compared to 48.3% in 1999 and 60.4% in 1998. The increase in direct operating costs reflect the increased activity levels associated with growing the business, as well as higher than anticipated costs at the Company's Oak Ridge facility. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Selling, general and administrative expenses ("SG&A") for 2000 totaled $16,665,000, an increase of 13% from the prior year. SG&A were $14,762,000 and $15,702,000 in 1999 and 1998 respectively. While SG&A expenses increased in absolute terms $1,903,000, SG&A actually decreased relative to revenue, dropping from 43% of revenue last year to 39.7% of revenue this year. The higher SG&A spending (in dollars) was caused by additional 8 investment in infrastructure, information systems, more travel, additional sales personnel, outside consulting expense, and legal expense. The Company expects that SG&A will grow in absolute dollars, but actually decrease relative to sales. Consolidated Results of Operations (in thousands):
2000 1999 1998 ---- ---- ---- Revenue $41,958 $34,352 $38,960 Selling, G&A expenses 16,665 39.7% 14,762 43% 15,702 40.3%
The following table includes SG&A for the Chemical and LLRW Services, but excludes corporate consolidated adjustments and eliminations.
Reported in $000 DECEMBER 31, 2000 December 31, 1999 CHEMICAL LLRW Chemical LLRW -------- ---- -------- ---- SG&A $3,974 $7,113 $3,219 $6,192
In 2000, Chemical Service's SG&A increased 23.5%. The main reason for the increase was additional sales people, new contracts, and new customers described earlier. Chemical services had previously reduced costs as a result of selling the transportation operations. LLRW Services SG&A increased by 14.9% from 1999. The increase for LLRW is the result of 35% SG&A to revenue spending at the Oak Ridge facility, compared to 22.7% at the Richland facility. However, on January 2, 2001 the Company's Oak Ridge facility implemented an aggressive cost containment program that included a reduction in force of 10 people. The reduction in force coupled with ongoing spending controls is expected to reduce SG&A expense at the Company's Oak Ridge facility. INVESTMENT INCOME In 2000, the Company restated investment income and other income in order to separately state interest expense for the three years ending December 31, 2000, 1999, and 1998. In the original report for December 31, 2000, the amount of investment income for 1998 was transposed with other income in the statement of operations and in the segment reporting table and the other income amounts for 1999 and 1998 were incorrectly compared with the 2000 investment income in the explanation of changes. The amount of investment income as of December 31, 2000, of $435,000 should have been compared to $780,000 and $486,000 in 1999 and 1998, respectively. 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 stock portfolio classified as trading securities in 1999 and 1998. The main reason for fluctuations in investment income was realized gains on investment securities in the ALEX portfolio. The Company had invested in some aggressive security issues and made a higher return in 1999 when some of these issues were sold. The ALEX stock portfolio was used as collateral for insurance in the event of a claim at certain closed sites. The Company has secured alternate financial assurance and the ALEX portfolio and subsidiary has been dissolved, and the cash used for various capital expansion projects. GAIN ON SALE OF FIXED ASSETS As a result of the sale lease back in August 2000, the Company recognizes a portion of the deferred gain each month. Payments are made to the bank for $35,000 and a gain is recognized for $16,600. In 2000, a $83,000 gain was realized on the sale of the fixed assets for the sale-leaseback. Other miscellaneous assets were sold during the year for a gain of approximately $9,000. In May of 1999, the Company sold its Houston-based hazardous and non hazardous waste transportation service provider (formerly WPI) and Surecycle(R) (a business division that operated a containerized hazardous waste collection service in the Gulf coast market) to Clean Harbors Environmental Services, Inc. The sale of the two 9 operations and related facilities produced working capital of $1.9 million and a gain on the sale over remaining book value of $843,000 before sales commissions. INTEREST EXPENSE The Company incurred interest expense of $350,000, $208,000, and $72,000 in 2000, 1999, and 1998 respectively. Before July 1999, the majority of this interest expense was capitalized for the development of the Company's proposed LLRW facilities in California and Nebraska in accordance with Statement of Financial Accounting Standards No. 34, Capitalization of Interest Cost. In 1999, the Company ceased capitalization of interest costs. In 2000, the Company opened a new bank credit facility with an $8 million borrowing base. Interest charges for 2000 and 1999 are from bank borrowings and interest on long-term capital leases for heavy equipment. Substantially all of the interest cost incurred in 1998 related to borrowings under the Company's Credit Agreement with its former commercial bank lender. OTHER INCOME Other income was $841,000, $225,000 and $618,000 as of December 31, 2000, 1999, and 1998. At the time of the original report for December 31, 2000, the amount of other income for 1998 was transposed with investment income in the statement of operations and the segment reporting table when year-end numbers were restated to break out interest expense and investment income amounts for 1999 and 1998 were incorrectly compared with the 2000 other income for the explanation of changes. The amounts of other income are generally the result of adjustments, or money received that was originally recorded in a prior period. 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 charge to other income those costs and expenses which were reversed from accruals in prior periods of estimated operating or selling, general & administrative expense. As a result, credits from prior periods go to other income rather than crediting current years expenses or revenue, thus preserving the true current period results from operations. 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 in large part is the result of corrections, adjustments, and reversal of contingent liabilities and collection of accounts previously written off, all relating to a reduction in expense from a prior year. These transactions are all a part of the Company's general defined business of hazardous, municipal or nuclear waste treatment and disposal. A smaller part of other income is the earnings from outside the Company's general defined business. These might include property rents, receipts from gas and oil exploration, the Company's land used by sharecroppers, rock, gravel or timber sales, and vending machine commissions. These transactions are not a part of the Company's general line of business and thus are not included in operational revenue. 10 The following table makes the classification of general business transactions and those income items from outside the Company's general business scope. (Reported in whole dollars)
AS OF DECEMBER 31, ------------------------------------ OTHER INCOME FROM GENERAL BUSINESS ITEMS 2000 1999 1998 ---------- ---------- ---------- State tax refunds from prior year $ 7,440 -- $ 100,945 Loan repayment to Chase Bank of Texas originally expensed as bank fees (see below) 112,000 -- -- Insurance claim refunds 24,145 $ 38,148 -- Payment on sales invoices previously written off 98,283 59,350 163,922 Adjust prior years accrued burial fee and tax accrual for Washington facility based on actual payment (see below) 260,206 -- -- Reverse bad debt expense reserve 75,641 7,745 117,805 Refund of Texas contract bidding fees -- 6,754 -- Refund of RCRA and burial fees from Nevada -- -- 11,997 Adjust the prior years accrual for Texas burial fees based on final payment 58,509 -- -- Correction of prior years expenses that were allowable as capitalized costs for El Centro project (see below) 132,500 8,776 -- Adjustment to the closure and post closure reserve for the Washington facility (see below) 52,630 -- -- Sale of various Winona, Texas facility assets -- -- 22,000 Closed Winona, Texas facility and reversed reserves -- -- 122,755 ---------- ---------- ---------- SUBTOTAL 821,354 120,773 539,424 OTHER INCOME FROM NON-GENERAL BUSINESS ITEMS Miscellaneous equipment sales -- 12,458 30,216 Cash receipts for property rents, gravel sales, and sharecropping 9,900 39,207 41,545 Data services sold -- 27,096 -- Vending machine commissions 1,149 1,016 -- Recycling credits 968 232 -- Customer refunds and rebates 7,289 23,734 7,399 ---------- ---------- ---------- TOTAL OTHER INCOME $ 840,660 $ 224,516 $ 618,584 ========== ========== ==========
In November of 1998, the Company began repayment of a loan with $8,000 monthly payments. These monthly payments were incorrectly charged to an expense account called bank fees and service charges. In 2000, the Company had repaid the note obligation and found it still had the obligation on the balance sheet. Obviously, an error had occurred and the debit charge should have been made to the note obligation account. This correction of charges from prior periods resulted in a $112,000 debit to the note payable account and a credit to other income in 2000, for the same $112,000. The adjustment in 2000 for $260,206 is the result of correcting the prior years accrual of state taxes and fees based on actual burial fees and taxes paid. The Company made the monthly accrual for state taxes and fees based on actual waste receipts throughout 1999, at the rate regulated Washington facility. However, during the first quarter of 2000, the State of Washington's annual review adjusted the allowable amounts of low level radioactive waste to be received. This review indicated that waste generators would receive large rebates in 2000, from waste they shipped and deposited with the Company in 1999. Likewise, the Company had over accrued for taxes and fees in 1999, and paid less in 2000. The result of less taxes and fees paid in 2000, for 1999 operations, was the correction of the monthly accrual by crediting other income for $260,206. This accrual was unusually high and the Company does not believe that future operations will result in such a large difference between accrued and paid taxes and fees. The Richland facility was also over accrued on its obligation for scheduled closure and post closure costs by $52,630. This correction 11 was made based on the calculations of the annual comparison of accrual and actual waste receipts and the remaining space available at the facility. Similar to other landfill facilities, the hazardous waste facility at Robstown, Texas accrues monthly an amount for burial fees and taxes based on actual waste receipts. However, when the actual amount paid for the prior years burial fees and taxes was determined in 2000, the accrual was too high. The actual amount paid was $58,509 less than the accrual resulting in other income of $58,509. The Company believes the original estimate was reasonable since the facility pays over $1.0 million annually in burial fees and taxes. During 1999, the Company began the preliminary studies, surveying, and engineering of the El Centro municipal solid waste landfill at Robstown, Texas. The facility was permitted in December 1999, and opened in July of 2000. When the Company reviewed the costs that had been expensed for payments to attorneys during permitting, engineering fees, and other development fees, it realized that $132,500 of these expenses were required to be capitalized under the rules for project cost capitalization. In 2000, the landfill asset was debited, or increased in value by this amount $132,500 and a corresponding credit was made to other income. INCOME TAXES The Company's effective income tax (benefit) rates were .2%, 4.2%, and 14.3% for the fiscal years 2000, 1999, and 1998 respectively. In 2000, the Company generated a $12,000 income tax benefit with the dissolution of its ALEX subsidiary. ALEX had generated a positive tax allowance to cover the sale of investment securities, which is consolidated to the corporate level as a tax credit following the dissolution. The income tax expense of $195,000 and $55,000 for 1999 and 1998 is for payments on different state and local taxes including franchise taxes. The Company has a valuation allowance of approximately $19.8 million for deferred tax assets with more than $2.7 million of limited loss carry-forwards and $34.4 million of unlimited net operating loss carry-forwards. See Item 8. Note 14. Income Taxes. EXTRAORDINARY GAIN - EARLY EXTINGUISHMENTS OF DEBT On December 19, 2000, the Company entered into an agreement with Chase Bank of Texas for settlement of debt associated with the Company's 1994 Federal Income Tax Claim. The Company had pledged the income tax receivable and a deed of trust on the Company's Winona, Texas site to Chase Bank in 1998. The settlement, which was paid in December 2000, allowed the Company to pay $350,000 to Chase Bank and receive in return release and discharge from all obligations of the $556,000 loan. The result is an extraordinary gain on early extinguishment of debt of $206,000 and the release by the bank of its security interest in the Winona property and the income tax refund claim. NET INCOME Net income and earnings per share for the last 5 years are listed below.
Dollars in Thousands EXCEPT PER SHARE AMOUNTS 2000 1999 1998 1997 1996 ---------- ---------- ---------- ---------- ---------- Net Income (Loss) $ 4,697 $ 4,409 $ 762 $ (676) $ (11,407) Basic Earnings Per Share $ .31 $ .30 $ .03 $ (.17) $ (1.47)
12 CAPITAL RESOURCES AND LIQUIDITY As of December 31, 2000, the Company had positive working capital of $2,279,000. This compares favorably to the working capital deficits of $2,309,000 and $7,567,000 reported for 1999 and 1998 respectively. This significant improvement in working capital reflects financing activities in 2000 combined with increased revenue and profit and a reduction in current liabilities. During 1999, the Company also met certain obligations allowing a cash secured for a $2.5 million dollar letter of credit to be replaced with a $1.5 million performance bond. Also, certain cash assets previously pledged were released allowing for reclassification of assets from long term to short term. The $1.5 million bond was replaced by an insurance policy in year 2000. The Company's current ratio improved to 1.17:1 in 2000 compared with 0.9:1.0 and 0.7:1.0 for the years ending December 31, 1999, and 1998. Liquidity, as measured by day's receivables outstanding ("DRO"), was constant for 2000 and 1999. Average DRO for 2000 and 1999 was 69 days down from an average of 89 days in 1998. The overall improvement in the Company's liquidity allowed the Company to continuously pay down accounts payable and retire other short-term obligations. The Company's leverage has increased since 1999, as evidenced by a .46:1 debt to equity ratio at December 31, 2000, compared to .20:1 for the same period one year before. This debt to equity ratio is debt divided by shareholder's equity as of year-end, where debt includes bank line of credit, long and short-term borrowings through notes, commercial paper, and lease agreements all of which are included in either current or total liabilities. Equity is the shareholder's equity excluding any deferred tax assets or liabilities. The year-end 2000 ratio increasing to .46:1 reflects an $8.0 million credit facility established with First Security Bank of Boise, Idaho. The Company did not have any bank debt for the preceding two years before 2000. This new credit facility provided available cash for the expansion at both the Beatty, Nevada and Robstown, Texas facilities and improved the daily operational cash position for the Company as a whole. The Company has borrowed on this line and repaid when business dictates and cash receipts are available. As of March 27, 2001, the Company has maintained a business banking relationship with First Security Bank, Boise, Idaho that provides this $8,000,000 line of credit. At this date the Company had $3,500,000 borrowed. OTHER MATTERS 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. These reserves and insurance policies are based on professional engineering studies and interpretations of current regulatory requirements and potential regulatory changes performed at least annually. Accounting for closure and post-closure costs includes final disposal unit capping for the site, gas emission control, subsurface soil and groundwater monitoring, and other monitoring and routine maintenance costs expected after a site stops accepting waste. The Company believes it has made adequate provisions through reserves and the insurance policy for its obligations. The Company estimates that the aggregate final closure and post-closure costs for all insured facilities owned or operated was approximately $15,953,000 as of December 31, 2000. This compares to recorded closure and post-closure liabilities of $17,285,000 and $19,539,000 for 1999 and 1998 respectively. As described in Item 1, Insurance, the Company has a three-year prepaid insurance policy for closure and post closure of these facilities, and has set aside certain pledged cash and investment securities to pay certain deductible limits. Management believes that disposition of these environmental matters will not have a material adverse effect on the financial condition of the Company. The Company's operation of disposal facilities creates operational, monitoring, site maintenance, closure and post-closure obligations that could result in unforeseen costs for monitoring and 13 corrective action. The Company cannot predict the likelihood or effect of such costs, regulations or legislation enacted, or other future events affecting these facilities. SEASONAL EFFECTS The Company's operating revenue is generally lower in the winter months, and increases in the warmer summer months. The volume of both hazardous waste and LLRW tends to decrease during winter months, however, market conditions have a larger effect on revenue than seasonality. SENIOR MANAGEMENT In the third quarter of 2000, Jack K. Lemley, Chairman, Chief Executive Officer and President and the Company's Board of Directors appointed Barbara Trenary as a Vice President of the Company. Ms. Trenary's responsibilities principally relate to management of the Company's LLRW operations. NEW ACCOUNTING PRONOUNCEMENTS The Financial Accounting Standards Board has recently issued Statement of Financial Accounting Standards 137 "Deferral of the Effective Date of FASB Statement 133." FASB 133 established standards for recognizing all derivative instruments including those for hedging activities as either assets or liabilities in the statement of financial position and measuring those instruments at fair value. FASB No. 133 is deferred until fiscal quarters beginning after June 15, 2000. Management believes the adoption of this statement will have no material impact on the Company's financial statements. 14 INDEPENDENT AUDITORS' REPORT To the Shareholders and Board of Directors American Ecology Corporation We have audited the accompanying consolidated balance sheets of American Ecology Corporation and subsidiaries as of December 31, 2000 and 1999, and the related consolidated statements of operations, shareholders' equity and cash flows for the years ended December 31, 2000, 1999, and 1998. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of American Ecology Corporation and subsidiaries as of December 31, 2000 and 1999, and the results of their operations and their cash flows for the years ended December 31, 2000, 1999, and 1998, in conformity with generally accepted accounting principles in the United States. Balukoff, Lindstrom & Co., P.A. Boise, Idaho February 16, 2001 15 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA. AMERICAN ECOLOGY CORPORATION CONSOLIDATED BALANCE SHEETS ($ IN 000'S EXCEPT PER SHARE AMOUNTS)
As of December 31, ------------------------ 2000 1999 ---------- ---------- ASSETS Current Assets: Cash and cash equivalents $ 4,122 $ 4,771 Receivables, net of allowance for doubtful accounts of $568 and $619 respectively 9,839 7,696 Income taxes receivable 740 740 Prepayments and other 1,316 1,207 ---------- ---------- Total current assets 16,017 14,414 Cash and investment securities, pledged 235 226 Property and equipment, net 18,488 12,818 Facility development costs 27,430 27,430 Intangible assets relating to acquired businesses, net 366 390 Other assets 3,214 3,181 ---------- ---------- Total Assets $ 65,750 $ 58,459 ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Current portion of long term debt $ 1,094 $ 781 Accounts payable 2,680 2,706 Accrued liabilities 9,149 12,334 Accrued closure and post closure obligation, current portion 700 700 Income taxes payable 115 202 ---------- ---------- Total current liabilities 13,738 16,723 Long term debt 10,775 3,569 Accrued closure and post closure obligation, excluding current portion 15,253 16,585 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, issued and outstanding; 5,263 converted and retired 1 1 Series E redeemable convertible preferred stock, $10.00 par value, 300,000 authorized, 300,000 shares converted and retired -- -- Common stock, $.01 par value, 50,000,000 authorized, 13,729,632 and 13,704,050 shares issued and outstanding, respectively 137 137 Additional paid-in capital 54,610 54,513 Retained earnings (deficit) (28,764) (33,069) ---------- ---------- Total shareholders' equity 25,984 21,582 ---------- ---------- Total Liabilities and Shareholders' Equity $ 65,750 $ 58,459 ========== ==========
The accompanying notes are an integral part of these financial statements. 16 AMERICAN ECOLOGY CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS ($ IN 000'S EXCEPT PER SHARE AMOUNTS)
As of December 31, -------------------------------------- 2000 1999 1998 ---------- ---------- ---------- Revenue $ 41,958 $ 34,352 $ 38,960 Direct operating costs 21,832 16,609 23,545 ---------- ---------- ---------- Gross profit 20,126 17,743 15,415 Selling, general and administrative expenses 16,665 14,762 15,702 ---------- ---------- ---------- Income (loss) from operations 3,461 2,981 (287) Investment income 435 780 486 Gain on sale of assets 92 826 72 Interest expense (350) (208) (72) Other income 841 225 618 ---------- ---------- ---------- Income before income tax and extraordinary item 4,479 4,604 817 Income tax expense (benefit) (12) 195 55 ---------- ---------- ---------- Income before extraordinary item 4,491 4,409 762 Extraordinary gain - early extinguishments of debt 206 -0- -0- Net income 4,697 4,409 762 Preferred stock dividends 398 397 417 ---------- ---------- ---------- Net income available to common shareholders $ 4,299 $ 4,012 $ 345 ========== ========== ========== Basic earnings per share $ .31 $ .30 $ .03 ========== ========== ========== Diluted earnings per share $ .26 $ .27 $ .03 ========== ========== ========== Dividends paid per common share $ -- $ -- $ -- ========== ========== ==========
The accompanying notes are an integral part of these financial statements. 17 AMERICAN ECOLOGY CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS ($ 000'S)
Year Ended December 31, -------------------------------------- 2000 1999 1998 ---------- ---------- ---------- Cash flows from operating activities: Net income $ 4,697 $ 4,409 $ 762 Adjustments to reconcile net income to net cash provided (used) by operating activities: Depletion, depreciation and amortization 2,028 2,054 3,152 (Gain) loss on sale of assets (92) (826) (72) Gain on sale of investments -- (14) -- Income Taxes Payable (87) 111 -- Stock compensation 79 129 79 Changes in assets and liabilities: Receivables (2,143) 1,810 (1,577) Investment securities classified as trading (9) 820 1,942 Other assets (507) (1,415) (1,034) Closure and post closure obligation (1,332) (2,254) (1,640) Accounts payable and accrued liabilities (1,410) (7,328) 90 ---------- ---------- ---------- Total adjustments (3,473) (6,913) 940 ---------- ---------- ---------- Net cash provided (used) by operating activities 1,224 (2,504) 1,702 Cash flows from investing activities: Capital expenditures, excluding site development costs (6,442) (3,219) (697) Facility development costs, including capitalized interest -- (521) (1,431) Proceeds from sales of assets 2,000 1,840 72 Net proceeds from sales of investment securities -- 2,497 6,940 Transfers to (from) cash and investment securities, pledged -- 1,876 -- ---------- ---------- ---------- Net cash provided by (used in) investing activities (4,442) 2,473 4,884 Cash flows from financing activities: Proceeds from issuances and indebtedness 4,912 558 16,096 Payments of indebtedness (2,361) (198) (21,519) Proceeds from rights offering -- -- 2,913 Stock options exercised 18 -- -- ---------- ---------- ---------- Net cash provided by (used in) financing activities 2,569 360 (2,510) ---------- ---------- ---------- Increase (decrease) in cash and cash equivalents (649) 329 4,076 Cash and cash equivalents at beginning of year 4,771 4,442 366 ---------- ---------- ---------- Cash and cash equivalents at end of year $ 4,122 $ 4,771 $ 4,442 ========== ========== ========== Supplemental disclosures of cash flow information: Cash paid during the year for: Interest, net of amounts capitalized $ 350 $ 208 $ 72 Income taxes paid 74 156 144 Non-cash investing and financing activities: Long-term debt exchange for asset interest -- -- 24,323 Long-term offset capitalized interest -- -- 12,461 Warrants issued on exchange for debt -- -- 1,660 Stock issuance--Director's compensation 79 129 79 Preferred Stock Dividends 398 397 417 Acquisition of equipment with capital leases 1,769 1,235 --
The accompanying notes are an integral part of these financial statements. 18 AMERICAN ECOLOGY CORPORATION CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY ($ IN 000'S)
ADDITIONAL RETAINED PREFERRED COMMON PAID-IN EARNINGS STOCK STOCK CAPITAL (DEFICIT) ------------ ------------ ------------ ------------ Balance, December 31, 1997 $ 3,001 $ 85 $ 47,701 $ (37,407) Net income -- -- -- 762 Common stock issuance -- 51 5,024 -- Dividends of preferred stock -- -- -- (417) Common stock warrants -- -- 1,660 -- Preferred stock-retired (3,000) -- -- -- ------------ ------------ ------------ ------------ Balance, December 31, 1998 $ 1 $ 136 $ 54,385 $ (37,062) Net income -- -- -- 4,409 Common stock issuance -- 1 109 -- Dividends of preferred stock -- -- -- (397) Preferred stock-retired -- -- 19 (19) ------------ ------------ ------------ ------------ Balance, December 31, 1999 $ 1 $ 137 $ 54,513 $ (33,069) Net income -- -- -- 4,491 Common stock issuance -- -- 97 -- Dividends of preferred stock -- -- -- (398) Extraordinary gain -- -- -- 206 Other -- -- -- 6 ------------ ------------ ------------ ------------ BALANCE, DECEMBER 31, 2000 $ 1 $ 137 $ 54,610 $ (28,764) ============ ============ ============ ============
Note: Convertible Preferred Stock is not shown above because no shares have been issued. The accompanying notes are an integral part of these financial statements 19 AMERICAN ECOLOGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1. NATURE OF BUSINESS. American Ecology Corporation (a Delaware Corporation) and its subsidiaries ("the Company") provide a variety of processing, recycling, packaging and hazardous and non-hazardous waste services to commercial and government customers, remediation and disposal services for generators of low-level radioactive waste. The Company has one of the largest motor rebuilding facilities in the United States for large electric motors from nuclear power plants. The Company acquired Envirosafe Services of Idaho, Inc., on February 1, 2001. This purchase is a significant addition to the Chemical division for the treatment and disposal of hazardous and PCB waste. The Company also services the needs of hazardous waste generators nationally, but the larger market share is in the Gulf and West Coast regions of the country at its hazardous waste landfill disposal sites in Robstown, Texas and Beatty, Nevada. The Company services the needs of low-level radioactive waste ("LLRW") generators in the Northwest and Rocky Mountain Compact regions at its rate regulated LLRW facility located near Richland, Washington and provides LLRW processing and recycling services to LLRW waste generators in the Mid-West and East Coast regions at its Oak Ridge, Tennessee facility. NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES. Principles of Consolidation. The accompanying financial statements are prepared on a consolidated basis. Six reporting subsidiaries and the parent company were active in 2000. The consolidated financial statements include the accounts of the Company and its subsidiaries after the elimination of all significant inter-company balances and transactions. Certain estimates and assumptions are made to accurately reflect the business operations under the accrual basis of accounting. The Company's year-end is December 31, 2000 and there were fifty-two weeks of reporting compared to fifty-three weeks of reporting in 1999 and fifty-two weeks in 1998. The Company has made certain estimates and assumptions for the consolidated financial statements. The consolidated financial statements are prepared in accordance with generally accepted accounting principles (GAAP). Reclassification. Reclassifications have been made to prior year financial statements to conform to the fiscal 2000 presentations. Cash and Investment Securities Pledged. Pledged cash and investment securities totaled $235,000 at December 31, 2000. These consisted of a letter of credit and money market accounts. The Company maintains these investments to cover an insurance policy commitment and the escrow account for the closed Sheffield facility. Revenue Recognition. Generally, revenues are recognized as services are performed, and as waste materials are buried or processed. Revenue also includes sales from the Company's subsidiary Nuclear Equipment Services Corporation ("NESC"), which accounts for revenue on a percentage of completion basis. The Company had both unbilled and deferred revenue at year-end 2000, 1999, and 1998. Property and Equipment. Property and equipment are recorded at cost and depreciated on straight-line and declining balance methods over estimated useful lives. See Note 6 for major categories of property and equipment. Lease obligations for which the Company assumes or retains substantially all the property rights and risks of ownership are capitalized. Replacements and major repairs of property and equipment are capitalized and retirements are made when the useful life has been exhausted. Minor components and parts are charged to expense as incurred. During 2000, 1999, and 1998 maintenance and repair expenses were $176,000, $241,000, and $209,000 respectively. Land is comprised of property owned at the processing and disposal sites. Land owned and used for disposal is depleted over the estimated useful life of the disposal site on a straight-line basis. Cell development costs represent waste disposal facility preparation costs that are capitalized and charged to operating costs as disposal space is utilized. The Company engaged certified engineers and surveyors to make independent surveys and measure remaining cell volume. 20 Intangible Assets. Intangible assets relating to acquired businesses consist primarily of the cost of purchased businesses in excess of fair value of net assets acquired ("goodwill"). Intangible assets are being amortized on the straight-line method over periods not exceeding 40 years with the majority being amortized over 25 years. The accumulated amortization of intangible assets amounted to $384,000, $360,000, and $336,000 at December 31, 2000, 1999, and 1998 respectively. Amortization of intangible assets was $24,000 for each of the last three years. On an ongoing basis, the Company measures the value of its intangible assets. In the event that facts and circumstances indicate intangible or other assets may be impaired, an evaluation of recoverability would be performed. If an evaluation was required, the estimated future undiscounted cash flows associated with the assets would be compared to the asset's carrying amount to determine if a write-down to market value or discounted cash flow value was necessary. Permitting Costs. Permitting costs, included under the caption Other Assets in the Consolidated Balance Sheets, are primarily comprised of outside engineering and legal expenses and are capitalized and amortized over the life of the applicable permits. At December 31, 2000, and 1999 there were $3,009,000 and $3,001,000 respectively of net capitalized permitting costs included in other assets in the accompanying consolidated balance sheets. The Company operates its various sites under the regulations of, and permits issued by, various state and federal agencies. In December 1999, the Robstown, Texas facility received its permit for a municipal waste landfill and in February 2000, it received a permit to vertically stack either hazardous or non-hazardous waste on top of existing cells. Self-Insurance. The Company has insurance policies that cover any annual losses exceeding $50,000 per employee for employee health care. The Oak Ridge union employees are not covered under the self-insured healthcare program, but are covered by a traditional insurance plan as negotiated under their collective bargaining agreement. The Company also maintains a Pollution and Remediation Legal Liability Policy pursuant to RCRA regulations. The policy is subject to a $250,000 self-insured retention. In addition, the Company is insured for consultant's environmental liability. The policy is subject to a $100,000 retention. The Company restructured its closure and post-closure insurance with Indian Harbor Insurance Company on an extended prepaid policy term for June 2000 to September 2003. The Company no longer is reinsuring financial assurances requirements for closure and post-closure of its facilities. Alex, the inactive captive insurance company was dissolved in November 2000. Accrued Closure and Post-Closure. Accrued closure and post-closure liability includes the accruals associated with obligations for closure and post-closure of the Company's operating and closed disposal sites and for corrective actions and remediation. The Company generally provides accruals for the estimated costs of closures and post-closure monitoring and maintenance as permitted disposal space is consumed. Liabilities are recorded when environmental assessments and/or remedial efforts are probable, and the costs can be reasonably estimated. The Company performs routine periodic reviews of both closed and operating sites and revises accruals for estimated post-closure, remediation or other costs related to these locations as deemed necessary. The Company's recorded liabilities are based on best estimates of current costs and are updated periodically to include the effects of existing technology, presently enacted laws and regulations, inflation and other economic factors. In 2000, the Company completed a review with an independent engineering firm and determined that Texas Ecologists will have a reduced cost of closure with the addition of a slurry wall, which was completed in 2000 for approximately $1.2 million. The Company completed a study on ground water contamination and the U.S. EPA concurred that such remediation will be complete by 2002. The Company has closely monitored its closure obligations and reduced the amount to $15,253,000 in 2000 from $16,585,000 and $18,839,000 in 1999 and 1998 respectively. The Company estimates its future cost requirements for closure and post-closure monitoring and maintenance for operating chemical disposal sites based on Resource Conservation and Recovery Act ("RCRA") and the respective site permits. RCRA requires that companies provide financial assurance for the closure and post-closure care and maintenance of their chemical sites for at least thirty years following closure. Income 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 and 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. 21
(000's except per share amounts) Year Ended December 31, ------------------------------------ 2000 1999 1998 ---------- ---------- ---------- Income before extraordinary item $ 4,491 $ 4,409 $ 762 Net Income $ 4,697 $ 4,409 $ 762 Preferred stock dividends 398 397 417 ---------- ---------- ---------- Net income available to common shareholders $ 4,299 $ 4,012 $ 345 Weighted average shares outstanding- Common shares outstanding at year end 13,711 13,585 12,772 Effect of dilutive shares 3,157 1,475 -- ---------- ---------- ---------- Adjusted shares 16,868 15,060 12,772 Basic earnings per share $ .31 $ .30 $ .03 ========== ========== ========== Diluted earnings per share $ .26 $ .27 $ .03 ========== ========== ==========
Use of Estimates. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements as well as the reported amounts of revenue and expenses during the reporting period. The Company used significant estimates in the accompanying consolidated financial statements primarily related to recoverability of closure and post closure obligation costs and facility development assets, waste processing and burial costs, and deferred site maintenance. Actual results could differ from these estimates. Major Customers. In 2000, the Company managed the disposal of hazardous waste for Tamco Steel of Rancho Cucamonga, California, for $5,500,000 or 13% of consolidated revenue. The Company does not expect this to be a reoccurring event in 2001. In 1999, no single customer accounted for 10% or more of the Company's consolidated revenue. Revenue resulting from the cost reimbursement contract with the Central Interstate Low-Level Radioactive Waste Commission was approximately $6,808,000 in 1998 or 18% of the Company's consolidated revenue that year. No other single customer accounted for 10% or more of the Company's consolidated revenue for these years. Credit Risk Concentration. The Company maintains most of its cash with First Security Bank. Substantially all of the cash balances are uninsured and are not collateralized. Concentrations of credit risk with respect to accounts receivable are believed to be limited due to the number, diversification and character of the obligors and the Company's credit evaluation process. Typically, the Company has not required collateral for such obligations. Commitments. The Company has various long term lease commitments, payments on a sale lease back, a bank credit facility, customer and vendor obligations and certain state and federal regulatory commitments all of which the Company believes it has properly accounted for or has made proper accruals to meet these obligations in the future. The Company signed an agreement in January 1999 to dispose of a minimum of 60,000 cubic feet of waste material; stored at the Oak Ridge, Tennessee facility before December 31, 2001. The Company has been disposing of this waste on schedule and expects to meet this commitment. Labor Concentrations. The Paper, Allied-Industrial Chemical & Energy Workers International Union, AFL-CIO, CLC (PACE), formerly the OCAW, represent 58 employees at two of the Companies facilities and 6 employees are represented by the United Steel Workers of America and 1 by the United States Workers of America. In March 1998, the Company ended discussions on a new labor agreement and reached an impasse in negotiations of a new collective bargaining agreement. The Company implemented its final offer. PACE subsequently charged the Company with unfair labor practices. The National Labor Relations Board ("NLRB") hearing office ruled against the Company, which was sustained by a three member panel of the NLRB. The Company has petitioned the court to 22 reverse this decision and moved to stay the NLRB order pending review. This matter is pending. If the Company is unsuccessful in its appeal, it may be required to retroactively apply the prior labor agreement and bargain with PACE. New Accounting Pronouncements. The Financial Accounting Standards Board has recently issued Statement of Financial Accounting Standards 137 "Deferral of the Effective Date of FASB Statement 133." FASB 133 established standards for recognizing all derivative instruments including those for hedging activities as either assets or liabilities in the statement of financial position and measuring those instruments at fair value. FASB No. 133 is deferred until fiscal quarters beginning after June 15, 2000. Management believes the adoption of this statement will have no material impact on the Company's financial statements. NOTE 3. OPERATING SEGMENTS. The Company operates with two segments, Chemical Services and LLRW Services. The Chemical Services division provides hazardous, non-hazardous and municipal waste management services. The LLRW Services division processes, packages, and disposes of material contaminated with low-level radioactive material. The accounting policies of the segments are the same as those described in Note 2, "Summary of Significant Accounting Policies." 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 intercompany transactions at cost, as well as allocation for certain corporate costs. Summarized financial information concerning the Company's reportable segments are shown in the following table. The "Corporate & Other" column includes corporate-related items not allocated to the reportable segments.
Reported in $(000) CHEMICAL LLRW CORPORATE SERVICES SERVICES & OTHER TOTAL ---------- ---------- ---------- ---------- 2000 Revenue $ 18,975 $ 23,725 $ (742) $ 41,958 Direct Cost 10,084 12,223 (475) 21,832 ---------- ---------- ---------- ---------- Gross Profit 8,891 11,502 (267) 20,126 S,G&A 3,975 7,113 5,577 16,665 ---------- ---------- ---------- ---------- Income (loss) from operations 4,916 4,389 (5,844) 3,461 Investment income 51 1 383 435 Gain on sale of assets 69 23 -- 92 Interest expense (57) (109) (184) (350) Other income 164 380 297 841 ---------- ---------- ---------- ---------- Income before extraordinary items and taxes 5,143 4,684 (5,348) 4,479 Extraordinary item and taxes -- -- 218 218 ---------- ---------- ---------- ---------- Net Income $ 5,143 $ 4,684 $ (5,130) $ 4,697 Total Assets $ 23,875 $ 39,537 $ 2,338 $ 65,750 1999 Revenue $ 12,074 $ 23,070 $ (792) $ 34,352 Direct Cost 7,482 9,740 (613) 16,609 ---------- ---------- ---------- ---------- Gross Profit 4,592 13,330 (179) 17,743 S,G&A 3,218 6,191 5,353 14,762 ---------- ---------- ---------- ---------- Income (loss) from operations 1,374 7,139 (5,532) 2,981 Investment income 29 1 750 780 Gain on sale of assets 895 1 (70) 826 Interest expense (14) (65) (129) (208) Other income 76 6 143 225 ---------- ---------- ---------- ---------- Income before extraordinary items and taxes 2,360 7,082 (4,838) 4,604 Extraordinary item and taxes -- -- (195) (195) ---------- ---------- ---------- ---------- Net Income $ 2,360 $ 7,082 $ (5,033) $ 4,409 Total Assets $ 16,162 $ 38,866 $ 3,431 $ 58,459 1998 Revenue $ 16,030 $ 22,930 $ -- $ 38,960 Direct Cost 9,488 14,057 -- 23,545 ---------- ---------- ---------- ---------- Gross Profit 6,542 8,873 -- 15,415 S,G&A 6,544 6,272 2,886 15,702 ---------- ---------- ---------- ---------- Income (loss) from operations (2) 2,601 (2,886) (287) Investment income 381 118 (13) 486 Gain on sale of assets 55 -- 17 72 Interest expense (11) (58) (3) (72) Other income 29 1 588 618 ---------- ---------- ---------- ---------- Income before extraordinary items and taxes 452 2,662 (2,297) 817 Extraordinary item and taxes -- -- (55) (55) ---------- ---------- ---------- ---------- Net Income $ 452 $ 2,662 $ (2,352) $ 762 Total Assets $ 15,535 $ 38,000 $ 8,265 $ 61,800 ---------- ---------- ---------- ----------
23 NOTE 4. UNAUDITED SELECTED QUARTERLY FINANCIAL DATA. The unaudited consolidated quarterly results of operations for 2000 and 1999 (in thousands, except per share amounts) were:
FIRST QUARTER SECOND QUARTER THIRD QUARTER FOURTH QUARTER 2000 1999 2000 1999 2000 1999 2000 1999 ------ ------ ------ ------ ------ ------ ------ ------ Revenue 9,319 9,179 10,485 8,907 11,796 6,007 10,358 10,259 Gross profit 4,444 4,356 4,587 4,710 5,241 2,343 5,854 6,334 Income before 1,483 125 723 1,466 1,108 (155) 1,165 3,168 extraordinary items Net Income (loss) 1,381 119 764 1,425 1,100 (126) 1,452 2,990 ------ ------ ------ ------ ------ ------ ------ ------ Basic earnings (loss) per share .09 .001 .05 .10 .07 (.02) .10 .21 Diluted earning (loss) per share .08 .001 .04 .08 .06 (.02) .08 .18 ------ ------ ------ ------ ------ ------ ------ ------
Basic and diluted earnings per common share for each of the quarters presented above is based on the respective weighted average number of common shares for the quarters. The dilutive potential common shares outstanding for each period and the sum of the quarters may not necessarily be equal to the full year basic and diluted earnings per common share amounts. NOTE 5. CASH AND INVESTMENT SECURITIES. In 2000 and 1999, the Company has restructured its insurance policies allowing more flexibility with cash and investment securities pledged. The Company now only holds sufficient pledged securities to cover letters of credit for closed facilities and an insurance bond for a total of $235,000 and $226,000 for 2000 and 1999 respectively. The Company holds no securities for trading, and all cash is held in money market, certificate of deposit, or the business checking accounts. 24 Cash and investment securities at December 31, 2000, and 1999 were as follows (in thousands):
Market Unrealized DECEMBER 31, 2000 Cost Value Gain/(loss) ------------ ------------ ------------ Cash and cash equivalents $ 4,122 $ 4,122 $ -- Securities held-to-maturity 235 235 -- ------------ ------------ ------------ $ 4,357 $ 4,357 $ -- ============ ============ ============ December 31, 1999 Cash and cash equivalents $ 4,452 $ 4,771 $ 319 Securities held-to-maturity 226 226 -- ------------ ------------ ------------ $ 4,678 $ 4,997 $ 319 ============ ============ ============
The change in net unrealized gains on trading securities was $0, $276,000, and $(495,000) in 2000, 1999, and 1998 respectively, each of which has been included in earnings. Investments in securities held-to-maturity mature over various dates during 2001 and are reported at their amortized cost basis, which approximates fair value at December 31, 2000. Investments in securities held-to-maturity at December 31, 1999, and 1998 consisted of the following (in thousands):
2000 1999 ---------- ---------- Corporate Bonds/Commercial Paper $ 106 $ 100 Certificates of deposit -- 52 Money market accounts and other 129 74 ---------- ---------- $ 235 $ 226 ========== ==========
Certain cash accounts and substantially all investments in securities held-to-maturity and trading securities totaling $235,000 and $226,000 at December 31, 2000, and 1999 respectively, have been classified as non-current assets as cash and investment securities pledged. 25 NOTE 6. PROPERTY AND EQUIPMENT. Property and equipment at December 31, 2000, and 1999, were as follows (in thousands):
2000 1999 ---------- ---------- Construction in progress $ 1,754 $ 1,754 Land 1,546 1,537 Cell development costs 14,767 12,289 Buildings and improvements 6,411 5,968 Decontamination and processing equipment 419 1,144 Vehicles and other equipment 16,988 16,084 ---------- ---------- 41,885 38,776 Less: Accumulated depletion, depreciation and amortization (23,397) (25,958) ---------- ---------- $ 18,488 $ 12,818 ========== ==========
Depreciation expense was $1,439,000, $1,433,000, and $1,958,000 for 2000, 1999, and 1998 respectively. The Company leases equipment under various noncancellable capital leases. The cost and accumulated depreciation are as follows at December 31, 2000:
Accumulated Cost Depreciation ---------- ------------- Capitalized Cost $3,260,000 $538,000 ========== ========
NOTE 7. FACILITY DEVELOPMENT COSTS. The Company has been licensed to construct and operate the low-level radioactive waste ("LLRW") facility for the Southwestern Compact ("Ward Valley facility"), and 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 US Government will need to transfer the land to the State of California, or the Company will need to recover monetary damages from the U.S. Government, the State of California or both. The Company has taken steps to protect its investment in Ward Valley and will continue to do so. In the first quarter of 1997, the Company filed two lawsuits against the United States. In the first case, US Ecology is suing to recover approximately $73.1 million of Ward Valley site development costs as well as lost profits and lost opportunity costs. US Ecology lost this case at the trial court level and has appealed to the Federal Circuit Court of Appeals. In the second case US Ecology sought an order (writ of mandamus) from a federal court to compel the transfer of the Ward Valley LLRW site. Both the trial court and the D.C. Circuit Court of Appeals have ruled against US Ecology in this second case and such rulings are now final. The Company also filed a lawsuit against the State of California on May 2, 2000, seeking to compel California to acquire the property to build the Ward Valley project and monetary damages in excess of $162 million. On October 24, 2000, the California trial court granted the state's motion to dismiss the case on demurrer, and the Company has appealed the trial court's decision. All costs through July 31, 1999 related to the development of the Ward Valley facility had been capitalized, and since then have been expensed as incurred. After adjusting for the bank settlement in November 1998, and as of December 31, 2000, the Company had deferred $20,952,000 (32% of total assets) of pre-operational facility development costs of which $895,000 represents capitalized interest. These deferred costs are to be recovered during the facility's first 20 years of operation from disposal fees approved by the Department of Health Services (DHS). The approval process is to include a prudency review of pre-operational costs incurred by the Company. The Company expects all costs that it has deferred for this facility, and uncapitalized project interest costs, to be included in the rate-base. However, there can be no assurance 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. From the beginning of 2000, the Company is no longer required to pay the $250,000 annual license fee to the state of California, Department of Health Services, pending further notice. 26 The Company has incurred reimbursable costs and received 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 December 30, 2000, the Company has contributed and capitalized approximately $6,478,000 of costs (9.9% 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 pursue a Petition for a contested case challenging the State's denial. US Ecology filed its Petition pursuant to Nebraska law on January 15, 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 to protect the Company's interest and is seeking relief. The Contested Case is stayed by a preliminary injunction issued by the presiding federal judge. The Company believes the case will go to trial in 2002. In the meantime, the major generators have only been willing to fund the minimum amounts necessary to maintain the project. Consequently, the Company's revenue from this project has declined substantially since April 1999. The timing and outcome of the above matters are unknown. The Company continues to pursue the conveyance of the land from the federal government to California as well as its remedies in federal and state court, and, if necessary in the future, will attempt to cure alleged defects in the State of Nebraska's licensing process for the Butte, Nebraska facility. The Company believes that the deferred site development costs for both facilities will be realized. In the event the Butte facility license is not granted, 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 its financial position. The following table shows the ending capitalized balances for facility development costs for the periods ended December 31, 2000 and December 31, 1999 (in thousands):
December 31, Capitalized Capitalized 2000 and 1999 Costs 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 ============ ============ ============
NOTE 8. ACCRUED CLOSURE AND POST CLOSURE OBLIGATION. Closure and post closure obligation accruals at December 31, 2000 and 1999 were as follows (in thousands):
2000 1999 ---------- ---------- Accrued costs associated with open facilities $ 8,993 $ 10,376 Accrued costs associated with closed facilities 6,960 6,909 ---------- ---------- Sub-total 15,953 17,285 Less: current portion (700) (700) ---------- ---------- Closure and post closure obligation, excluding current portion $ 15,253 $ 16,585 ========== ==========
Closure and post closure obligation includes the accruals associated with obligations and liabilities of the Company's operating and closed disposal sites and for corrective actions and remediation. The Company generally provides accruals for the estimated costs of closures and post-closures monitoring and maintenance as permitted airspace of such sites is consumed. Liabilities are recorded when environmental assessments and/or remedial efforts are probable, and the costs can be reasonably estimated. These estimates are made by third party engineering companies. The Company does not bear responsibility for closure and post-closure costs for the state owned land used for waste disposal. The Company leases two such facilities at Beatty, Nevada and Richland, Washington. The State of Nevada 27 and the State of Washington have collected money from a portion of the tipping fees on disposal for these two facilities and ultimately controls the dispensation of those funds for proper closure. The funds are maintained in segregated accounts for the future costs of closure and post-closure care and maintenance of the Richland, Washington and Beatty, Nevada facilities. The Company currently submits waste volume-based fees to these state maintained funds. Such fees are periodically negotiated with, or established by, the states and are based upon engineering cost estimates provided by the Company and approved by the state. The Texas Natural Resources Conservation Commission (TNRCC) issued to Texas Ecologists a permit on December 15, 1999, for the El Centro Municipal Waste Landfill and then on February 9, 2000, a permit for vertically stacking hazardous and non-hazardous waste on current existing closed cells. In 2000, the Company engaged an independent engineer to assess the closure and post closure costs for these facilities, and a $105,000 reduction was made to the closure and post-closure accrual. NOTE 9. LONG TERM DEBT. Long term debt at December 31, 2000 and 1999 consisted of the following (in thousands):
2000 1999 ---------- ---------- Notes payable $ 792 $ 1,847 Credit facility loan 4,093 -- Capital lease obligations and other 6,984 2,503 ---------- ---------- 11,869 4,350 Less: Current maturities (1,094) (781) ---------- ---------- Long term debt $ 10,775 $ 3,569 ========== ==========
Aggregate maturity of future minimum payments under notes payable and capital leases is as follows (in thousands):
Year Ended December 31, ------------ 2001 $ 1,094 2002 8,586 2003 805 2004 621 2005 19 ---------- TOTAL $ 11,869 ==========
In December 2000 the Company repaid $1,431,000 including $131,000 of interest for two notes payable to two of the Company's shareholders and board members. These notes were issued in March 1999 with an eighteen-month term, 9% interest, and $1.3 million principal, and prohibited the Company from paying dividends on common or preferred shares. In April 1999, the Company issued a note with AFCO Finance for a one-year term for $705,000 financing an insurance premium, with an average interest rate of 9% to 10.5%. The Company has several long-term capital leases. The value of these leases is approximately $2.5 million. These leases are at Oak Ridge, Tennessee with 10% interest, at Beatty, Nevada at 5.8% and 8.9%, Richland, Washington with 5.25% through 6.14% and at Robstown, Texas at rates between 6% and 14% interest expiring over the next 5 years. On August 17, 2000, the Company entered into a 2-year, revolving line of credit with a local bank. The line of credit is secured by the Company's accounts receivable and is governed by a Credit Agreement. Under the terms of the Credit Agreement, borrowings cannot exceed 80% of eligible accounts receivable or $5.0 million, whichever is less. Interest on borrowings under the Credit Agreement are based on a 'pricing grid,' whereby after the first 6 months, 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 monies utilizing the Prime Rate or the offshore London 28 Inter-Bank Offering Rate (LIBOR) plus an applicable spread. During the first six months of the credit facility, 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 December 31, 2000, the Company was in compliance with all applicable bank financial covenants. At December 31, 2000, the outstanding balance on principal loan and revolving line of credit was $4,093,000, with $807,000 available with any balance due June 30, 2002. During the fourth quarter, the interest rate on borrowings ranged from 9.8% to 10.5%. The Company has continued to borrow and repay according to business demands and availability of cash. The Company anticipates that with the new acquisition of Envirosafe of Idaho that borrowings as such will continue to fluctuate and with the continued plans for growth that additional borrowing capacity will be required in the future. Subsequent to year end the Company increased the line of credit to $8.0 million. There can be no assurance that the Company can raise additional financing beyond the current $8.0 million line of credit, and if the Company is not successful it will reassess its current plans for expansion and growth. The Company expects to refinance approximately $2.8 million of current liabilities with its long-term revolving line of credit. These liabilities have been reclassified to long-term debt as of December 31, 2000. NOTE 10. SALE LEASEBACK. On August 3, 2000, the Company entered into a $2 million equipment sale and leaseback transaction. The Company sold various Company-owned equipment and rolling stock to a third party lessor. The Company received $2,000,000 in proceeds from the asset sale and entered into an operating lease for the use of the equipment beginning August 8, 2000 with monthly payments through January 8, 2006, with no security deposit. The lease allows for the early buyout of the equipment at a fixed price at the 60th month. The lease requires the Company to pay customary operating and repair expenses and to observe certain operating restrictions and covenants.
At December 31: Minimum Lease Payment 2000 $ 173,971 2001 417,529 2002 417,530 2003 417,530 2004 417,530 2005 417,530 2006 34,794 ----------- Total Minimum Payments $ 2,296,414
The Company realized a $1,098,000 gain on the sale of the equipment that will be amortized over the life of the lease. The gain will be recognized proportionate to the gross rental charged over the 66-month lease life. Proceeds from this sale of assets were used to fund expansion of the El Centro facility and other general business obligations. NOTE 11. 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 bore an 11.25% annual dividend, paid quarterly in shares of the Company's common stock. The Series E was issued to fulfill a prior banking requirement. There were no voting rights or powers attached to this 11.25% Series E Preferred Stock. There was a partial redemption and mandatory conversion of the remaining Series E at the conclusion of the rights offering on February 10, 1998, as a term of the Series E Designation Certificate. 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 ("8 3/8% Preferred Stock") and authorized the issuance of 105,264 of such shares and warrants to purchase 1,052,640 shares of the Company's common stock. The Company sold 105,264 of 8 3/8% Preferred Stock with warrants in a private offering to a group of members or past members of the Board of 29 Directors for $4,759,000. Offering expenses of $101,000 and $140,000 in settlement of liabilities was deducted from the proceeds. At December 31, 2000, each 8 3/8% Preferred Stock share is convertible at any time at the option of the holder into 14.52 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 sales. Dividends on the 8 3/8% Preferred Stock 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. Accrued dividends at December 31, 2000 totaled $796,000. On September 12, 1999, the warrants on the 8 3/8% Preferred Stock 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 preferred 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. NOTE 12. STOCK OPTION PLANS. The Company presently maintains three stock option plans. One, which expired in 1998, afforded employees and outside directors of the Company the right to purchase shares of its common stock. The exercise price, term and other conditions applicable to each option granted under the Company's plans are generally determined by the Compensation Committee of the Board of Directors at the time of the grant of each option and may vary with each option granted. No option may be granted at a price less than the fair market value of the shares when the option is granted, and no options may have a term longer than ten years. The first plan is the 1988 plan that provided a 10-year life and all but 260,000 options have expired. In 1992, the Company adopted the second and third plans as the 1992 Stock Option Plan for Employees and the 1992 Stock Option Plan for Directors. On May 13, 1999, 500,000 options were added to the Employee's Plan of 1992. Options under the employee plan are designated as incentive or non-qualified in nature at the discretion of the Compensation Committee, and only employees will receive options under the 1992 Stock Option Plan for Employees. Only directors will receive options under the Director's Plan. As of December 31, 2000, the 1992 Stock Option Plan for Employees had issued 777,498 options with 522,502 remaining available and under the Stock Option Plan for Directors, 542,500 options had been issued with 107,500 available. The Company accounts for these plans under APB Opinion No. 25, "Accounting for Stock Issued to Employees". Under this opinion, the Company recorded compensation cost for 2000, and none for 1999, and 1998. Had compensation cost for the plans been determined consistent with FASB Statement No. 123, "Accounting for Stock-Based Compensation", the Company's 2000, 1999, and 1998 net income would have been decreased by $354,000, $316,000, and $661,000 respectively. Basic income per share would have decreased $.03, $.02, and $.05 for 2000, 1999, and 1998 respectively. Diluted income per share would have been decreased by the same amount per share as basic income per share as the common stock equivalents are anti-dilutive. The pro forma compensation cost may not be representative of that to be expected in future years. The fair value of each option grant is estimated using the Black-Scholes option-pricing model with the following weighted-average assumptions used for grants in 2000, 1999, and 1998: 30
2000 1999 1998 ---------- ----------- ---------- Expected volatility 116% 136% 213% Risk-free interest rates 5.01% 6.3% 6.0% Expected lives 3 YEARS 3 years 3 years Dividend yield 0% 0% 0% Weighted-average fair value of options granted during the year (Black-Scholes) $ 2.23 $ 1.94 $ 1.14 Under option: Options outstanding, beginning of year 1,326,572 1,186,572 688,650 Granted 135,926 147,500 607,922 Exercised (13,600) 7,500 (110,000) Canceled -- -- -- ---------- ---------- ---------- Options outstanding, end of year 1,448,898 1,326,572 1,186,572 ========== ========== ========== Price range per share of outstanding options $ 1.00 $ 1.00 $ 1.00- $ 14.75 $ 14.75 $ 14.75 ========== ========== ========== Price range per share of options exercised $ 1.25 $ 1.25 $ -- $ 2.00 $ 1.25 $ -- ========= ========== ========= Price range per share of options canceled $ -- $ 1.25 $ 8.58- $ -- $ 7.13 $ 8.58- ========= ========== ========== Options exercisable at end of year 1,448,898 1,121,872 1,124,772 ========== ========== ========== Options available for future grant at end of year 630,002 852,728 461,928 ========== ========== ==========
NOTE 13. EMPLOYEE'S BENEFIT PLANS. 401(k) Plan. The Company maintains a 401(k) plan for employees who voluntarily contribute a portion of their compensation, thereby deferring income for federal income tax purposes. The plan is called The American Ecology Corporation 401(k) Savings Plan. The Plan covers substantially all of the Company's employees after one full year of employment. Participants may contribute a percentage of salary up to the IRS limits. The Company's contribution matches 55% of participant contributions up to 6% of deferred compensation. The Company contributions for the 401(k) plan were $176,000, $181,000, and $119,000 for 2000, 1999 and 1998 respectively. The Company has no post-retirement or post-employment benefit plan. 31 NOTE 14. INCOME TAXES. The components of the income tax provision (benefit) were as follows (in thousands):
Year Ended December 31, 2000 1999 1998 -------- --------- --------- Current - Federal $ -- $ -- $ -- - State (12) 195 55 -------- --------- --------- (12) 195 55 -------- --------- --------- Deferred - Federal -- -- -- -------- --------- --------- $ (12) $ 195 $ 55 -------- --------- ---------
The following reconciles between the effective income tax (benefit) rate and the applicable statutory federal and state income tax (benefit) rate:
Year Ended December 31, 2000 1999 1998 -------- --------- --------- Income tax (benefit) - statutory rate 34.0% 34.0% 34.0% Valuation allowance for deferred tax assets (20.7) (33.1) (38.7) State income tax and loss carry forward (11.8) 8.4 12.2 Other, net (1.3) (5.1) 6.8 -------- --------- --------- Total effective tax rate .2% 4.2% 14.3% -------- --------- ---------
The tax effects of temporary differences between income for financial reporting and taxes that gave rise to significant portions of the deferred tax assets and liabilities and their changes during the year were as follows (in thousands):
DEFERRED DECEMBER 31, 2000 PROVISION December 31, 1999 ----------------- ------------ ----------------- DEFERRED TAX ASSETS Environmental compliance and other site related costs, principally due to accruals for financial reporting purposes $ 4,405 $ (1,371) $ 5,776 Depreciation and amortization 3,568 (495) 4,063 State operating loss carry forward 952 952 -- Net operating loss carryforward 11,593 30 11,563 Other 880 84 796 ------------ ------------ ------------ Total gross deferred tax assets 21,398 (800) 22,198 Less valuation allowance (19,799) 858 (20,657) ------------ ------------ ------------ Net deferred tax assets 1,599 58 1,541 DEFERRED TAX LIABILITY Site development costs (1,230) (58) (1,172) Capitalized interest (369) -- (369) ------------ ------------ ------------ Total gross deferred tax liabilities (1,599) (58) (1,541) ------------ ------------ ------------ Net deferred tax assets $ -- $ -- $ -- ============ ============ ============
The Company has established a valuation allowance for certain deferred tax assets due to realization uncertainties inherent with the long-term nature of deferred site maintenance costs, uncertainties regarding future operating results and for limitations on utilization of acquired net operating loss carry forwards 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 32 certain temporary differences and on the generation of taxable income before such reversals. The net operating loss carry forward of approximately $34,097,000 at December 31, 2000, begins to expire in the year 2006. Of this carry forward, $2,745,000 is limited pursuant to the net operating loss limitation rules of Internal Revenue Code Section 382. The portion of the carry forward 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 carry forward expires $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 carry forwards could be reduced if the Company is ultimately unsuccessful in pursuing the refund claim discussed below. 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 which would allow a partial refund, retain a portion of the tentative refunds already received and retain the net operating loss carryforwards. This settlement requires the approval of the Congressional Joint Committee on Taxation. NOTE 15. COMMITMENTS AND CONTINGENCIES. In the ordinary course of conducting business, the Company becomes involved in judicial and administrative proceedings involving federal, state, and local governmental authorities. There may also be actions brought by individuals or groups in connection with permitting of planned facilities, alleging violations of existing permits, or alleging 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 its operations. Periodically management reviews and may establish reserves for legal and administrative matters, or fees expected to be incurred in connection therewith. At this time, management believes that resolution of these matters will not have a material adverse effect on the Company's financial position, results of operations or cash flows. LITIGATION One of the Company's principal subsidiaries is a plaintiff in a case against the United States and in a case against the State of California seeking to protect its interest in the Ward Valley site. In the federal case, US Ecology is suing to recover approximately $73.1 million of Ward Valley site development costs as well as lost profits and lost opportunity costs. US Ecology lost this case at the trial court level and has appealed to the Federal Circuit Court of Appeals. The Company was also a plaintiff in a second case where US Ecology sought an order (writ of mandamus) to compel the federal land transfer required for construction of the state licensed facility to proceed. Both the trial court and the D.C. Circuit Court of Appeals ruled against US Ecology in this case. This decision is now final. The Company also filed a lawsuit against the State of California on May 2, 2000, seeking to compel California to acquire the property to build the Ward Valley project and monetary damages in excess of $162 million. On October 24, 2000, the California trial court granted the state's motion to dismiss the case on demurrer, and the Company has appealed the trial court's decision. If the Company is unsuccessful in this litigation and in other avenues available to it for recovery, the Company might be required to write-off a portion of its deferred site development cost. A similar situation exists in regard to the litigation relating to the Company's Butte, Nebraska site. See Note 7 above. Zurich American Insurance Company v. National Union Fire Insurance Company of Pittsburgh, et al incl. AEC, AEESC, AEMC and AESC; Supreme Court of State of New York, County of New York; Case No. 604662/99 In an action filed October 12, 1999, Plaintiff Zurich American Insurance Co. ("Zurich"), seeks declaratory and other relief against National Union Fire Insurance Company of Pittsburgh ("National Union"), AEC and named subsidiaries ("AEC Defendants") and Doe Insurers 1-50 ("Doe Defendants") with respect to Zurich's defense coverage in the Virgie Adams and the General Motors action. In December 2000, Zurich filed a motion with the court for leave to amend its complaint to seek recoupment of moneys paid to defend and settle the Adams case and to defend the General Motors case. The Company intends to vigorously defend this action. General Motors Corporation v. American Ecology Environmental Services Corp., et al., Case No. 3-99CV2626-L, U.S. District Court, Northern District of Texas. 33 The Complaint names the Company and certain named subsidiaries as defendants in the suit. The former owner of the Winona Facility and its associated business entities settled their portion of the suit in November 2000. General Motors seeks contribution and indemnity, including reimbursement of defense costs, attorneys' fees, court costs and a settlement payment to the Adams plaintiffs, incurred by General Motors. In December 2000, the Company's insurance carrier, Zurich, notified the Company that it was disclaiming coverage for the suit and would not indemnify the Company or its subsidiaries. The Company does not believe it breached the contract or was negligent, and intends to vigorously defend the case. Mattie Cuba, et al. v. American Ecology Environmental Services Corporation, et al., Cause No. 2000-092, 4th Judicial District Court, Rusk County, Texas. The complaint in this legal proceeding was served on the Company and its subsidiaries, American Ecology Environmental Services Corporation, American Ecology Management Corporation and American Ecology Services Corporation on November 20, 2000. The lawsuit is a toxic tort lawsuit brought by 28 named plaintiffs against the Company and the named subsidiaries, as well as the former facility owners and potentially approximately 60 former customers of the Winona, Texas facility. The plaintiffs seek damages based generally on intentional and negligence tort claims, as well as punitive damages. The Company believes it has conducted its operations in accordance with applicable laws and regulations that the lawsuit is without merit and intends to vigorously defend the action. The Company's current insurance carrier has agreed to pay for the defense of this matter, subject to the Company's $250,000 deductible. The Company timely filed an answer on December 27, 2000, and intends to defend the case vigorously. Discovery is in the very early stages. ENVIRONMENTAL MATTERS The United States Environmental Protection Agency (EPA) has requested information regarding waste the Company may have shipped to a former LLRW storage facility near Denver, Colorado, which is now a Superfund site. The EPA has subsequently informed the Company it may be liable for approximately $29,000 for clean-up costs as a potentially responsible party. The Company does not believe these amounts are material. On September 29, 1999, investigators associated with the Federal Bureau of Investigation, EPA, and Tennessee Valley Authority arrived at the Oak Ridge Facility to investigate the site in connection with a search warrant issued by the U.S. District Court, Eastern District of Tennessee. The Company fully cooperated with the investigators and provided requested information. Since the initial visit, the Company has not been asked to provide additional information and has no information regarding outcome at this time. The Company currently is conducting an internal investigation as a precautionary measure, believes it has conducted its operations in compliance with the applicable statutes and regulations, and intends to vigorously contest any allegations arising from the investigation. In the Matter of American Ecology Recycle Center, Inc., RCRA Docket No.: RCRA-4-99-0020 On July 18, 2000, In the Matter of American Ecology Recycle Center, Inc., RCRA Docket No.: RCRA-4-99-0020 was settled. The settlement did not have a material adverse impact on the Company's financial position, results of operations, or cash flows. 34 NOTE 16. ALLOWANCE FOR DOUBTFUL ACCOUNTS. The allowance for doubtful accounts is made up of three components. There is the continuing allowance or reserve for bad debts, which may carry on from one year to the next. Adjustments to the allowance account were $1,299,480 and $1,385,425 for the years ending December 31, 1999, and 2000, respectively. These adjustments are the result of management's evaluation and the independent auditor's review of the accounts receivable and collection process to determine if the accounts were being collected were increasing or decreasing in relation to sales. In these two years collections of accounts receivable had improved and sales began to increase in 2000. The allowance for doubtful accounts is generally increased by credits to the provision during the current year. There may be certain charges that affect the provision but for simplification in the table below these charges were netted with the account adjustments. The provision, as a general company policy, is a monthly accrual equal to 1 1/2 % of sales, and 100% reserve for accounts over 150 days old. The account increased by these credits of $762,608 and $966,399 for the years ending December 31, 1999, and 2000. The allowance account will increase or decrease by accounts written off or collected, or by a change in the status of a customer's accounts receivable if determined the collection prospects have improved or declined. The accounts written off increased the allowance account by $854,260 and $811,650 in each respective year of 1999, and 2000. The collection of accounts previously written off accounted for decreases in the allowance for doubtful accounts of $745,483 and $443,369 for each of the years ending December 31, 1999, and 2000. The Company believes with the historical trends it has experienced the allowance account is adequate. (reported in whole dollars)
Balance at Increase in Decrease in January 1, Allowance Allowance Balance at Description 1999 Account Account December 31 ----------- ---------- ------------ -------------- ------------- Adjustments to allowance account $1,047,000 $ 1,299,480 Provision for the current year $ 762,608 Accounts written off current year 854,260 Collection of accounts previously written off 745,483 ---------- ------------ -------------- ------------- Balance December 31, 1999 $ 1,616,868 $ 2,044,963 $ 618,905 Adjustments to allowance account $ 1,385,425 Provision for the current year 966,399 Accounts written off current year 811,650 Collection of accounts previously written off 443,469 ---------- ------------ -------------- ------------- Balance December 31, 2000 $ 1,778,049 $ 1,828,894 $ 568,060
NOTE 17. SUBSEQUENT EVENT. On February 1, 2001, the Company, by its wholly-owned subsidiary American Ecology Environmental Services Corporation, a Texas corporation, acquired Envirosafe Services of Idaho, Inc. a Delaware corporation ("ESII"), pursuant to a Stock Purchase Agreement from Envirosource Technologies Inc., a Delaware corporation and Envirosource, Inc., a Delaware corporation, and parent company of Envirosource Technologies Inc. Under the terms of the Agreement, the Company paid One Thousand and 00/100 dollars ($1,000.00) in cash for all of the outstanding shares of ESII, a subsidiary of Envirosource Technologies Inc., subject to approximately $20.4 million in liabilities. This acquisition was accounted for as a purchase. The acquisition was approved by the respective board of directors of each company and is now complete. There was no prior relationship between the Company and Envirosource, Inc. Pursuant to the Agreement, the Company acquired all of the authorized and issued stock of ESII, thereby obtaining ownership of all ESII assets and liabilities. The principal ESII assets are a RCRA and TSCA permitted hazardous and PCB waste treatment and disposal facility located in southwestern Idaho, a hazardous waste treatment facility operating 35 under contract at an Illinois steel mill site, and exclusive rights to use a patented hazardous waste treatment process for steel mill electric arc furnace waste within a defined service territory in the western United States. The assets acquired totaled approximately $20.4 million as of the December 31, 2000, unaudited balance sheet date. This purchase increased the Company's asset base by approximately 25%. ESII currently provides commercial hazardous and PCB waste treatment, storage and disposal services and intends to increase its share of the U.S. market for this business through the acquired assets and continued operation of its existing hazardous and PCB waste treatment and disposal facilities. Balukoff, Lindstrom & Co., P.A., the independent auditors for the Company are currently conducting an audit of ESII in March 2001. The required financial statements will be prepared by management and filed in a Form 8-K on or within 60 days from February 15, 2001, the date the initial report on Form 8-K was required to be filed. 36 Exhibits -------- 23 Consent of Independent Public Auditors 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 37 EXHIBIT INDEX Exhibit -------- 23 Consent of Independent Public Auditors