10-Q 1 doc1.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-Q (x) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended March 31, 2002 OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _______________ to _______________ Commission File Number 0-11688 AMERICAN ECOLOGY CORPORATION ---------------------------- (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 95-3889638 ----------------------------- --------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 805 W. Idaho Suite #200 Boise, Idaho 83702-8916 ------------ ---------- (Address of principal executive offices) (Zip Code) (208) 331-8400 -------------- (Registrants telephone number, including area code) Indicate by a check mark whether Registrant (1) has filed all reports required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] At May 10, 2002, Registrant had outstanding 14,403,985 shares of its Common Stock. AMERICAN ECOLOGY CORPORATION QUARTERLY REPORT FORM 10-Q FOR THE THREE MONTHS ENDED MARCH 31, 2002 TABLE OF CONTENTS PART I. FINANCIAL INFORMATION Item 1. Financial Statements PAGE Consolidated Balance Sheets (Unaudited) 4 Consolidated Statements of Operations (Unaudited) 5 Consolidated Statements of Cash Flows (Unaudited) 6 Notes to Consolidated Financial Statements 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 10 Item 3. Quantitative and Qualitative Disclosures About Market Risk 15 PART II. OTHER INFORMATION Item 1. Legal Proceedings 16 Item 2. Changes in Securities and Use of Proceeds 17 Item 3. Defaults upon Senior Securities 17 Item 4. Submission of Matters to a Vote of Security Holders 17 Item 5. Other Information 17 Item 6. Exhibits and Reports on Form 8-K 17 Signatures 18 2
OFFICERS CORPORATE OFFICE -------- ---------------- Stephen A. Romano American Ecology Corporation Chief Executive Officer, President and Chief 805 W. Idaho, Suite 200 Operating Officer Boise, Idaho 83702 (208) 331-8400 James R. Baumgardner (208) 331-7900 (fax) Senior Vice President, Chief Financial Officer www.americanecology.com Treasurer and Secretary ----------------------- Michael J. Gilberg COMMON STOCK Vice President and Controller ------------ American Ecology Corporation's common stock trades on the NASDAQ Stock Market under the symbol ECOL. DIRECTORS --------- Rotchford L. Barker Independent Businessman FINANCIAL REPORTS ----------------- A copy of American Ecology Corporation Paul C. Bergson Financial Reports, filed with the Principal Securities and Exchange Commission, Bergson & Company may be obtained by writing to: 805 W. Idaho, Suite 200 Keith D. Bronstein Boise, Idaho 83702 President or at www.americanecology.com Tradelink, LLC ----------------------------- Edward F. Heil TRANSFER AGENT Sole Member -------------- E.F. Heil, LLC Mellon Investor Services LLC Overpeck Centre 85 Challenger Road Dan Rostenkowski Ridgefield Park, New Jersey 07660 President (201) 296-4000 DanRoss &Associates, Inc. or at www.mellon-investor.com ----------------------------- Paul F. Schutt AUDITOR Chairman of the Board ------- Nuclear Fuel Services, Inc. Balukoff, Lindstrom & Co., P.A. 877 West Main Street, Suite 805 Boise, Idaho 83702 Thomas A. Volini (208) 344-7150 Chairman, CEO and President Town & Country Utilities, Inc.
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PART I. FINANCIAL INFORMATION ----------------------------- ITEM 1. FINANCIAL STATEMENTS. AMERICAN ECOLOGY CORPORATION CONSOLIDATED BALANCE SHEETS (UNAUDITED) ($ IN 000'S EXCEPT PER SHARE AMOUNTS) March 31, December 31, 2002 2001 ----------- -------------- ASSETS Current Assets: Cash and cash equivalents $ 1,741 $ 4,476 Receivables (trade and other), net of allowance for doubtful accounts of $813 and $1,176 respectively 14,087 12,674 Income tax receivable 740 740 Prepayments and other 1,220 1,881 ----------- -------------- Total current assets 17,788 19,771 Cash and investment securities, pledged 243 243 Property and equipment, net 40,386 34,265 Facility development projects 27,430 27,430 Other assets 3,926 5,115 ----------- -------------- Total assets $ 89,773 $ 86,824 =========== ============== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Current portion of long term debt $ 10,746 $ 9,860 Short term line of credit 1,500 5,000 Accounts payable 1,618 2,408 Accrued liabilities 9,860 12,121 Current portion of accrued closure and post closure obligations 1,119 700 Income taxes payable 535 250 ----------- -------------- Total current liabilities 25,378 30,339 Long term debt, excluding current portion 4,266 4,436 Closure and post closure obligation, excluding current portion 13,759 25,633 Commitments and contingencies Shareholders' equity: Convertible preferred stock, $.01 par value, 1,000,000 shares authorized, none issued -- -- Series D cumulative convertible preferred stock, $.01 par value, 100,001 authorized and issued, 5,263 shares converted and retired 1 1 Series E redeemable convertible preferred stock, $10.00 par value, 300,000 authorized and issued, 300,000 shares converted and retired -- -- Common stock, $.01 par value, 50,000,000 authorized, 14,416,485 and 13,766,485 shares issued and outstanding respectively 144 138 Additional paid-in capital 55,606 54,637 Retained earnings (deficit) (9,381) (28,360) ----------- -------------- Total shareholders' equity 46,370 26,416 ----------- -------------- Total liabilities and shareholders' equity $ 89,773 $ 86,824 =========== ============== See notes to consolidated financial statements.
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AMERICAN ECOLOGY CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) ($ IN 000'S EXCEPT PER SHARE AMOUNTS) Three Months Ended March 31, 2002 March 31, 2001 ---------------- ---------------- Revenue $ 18,377 $ 12,866 Direct operating costs 9,241 6,733 ---------------- ---------------- Gross profit 9,136 6,133 Selling, general and administrative expenses 5,680 4,803 ---------------- ---------------- Income from operations 3,456 1,330 Investment income 11 174 Interest income (expense) (288) (258) Gain on sale of assets 40 46 Other income (loss) (465) 236 ---------------- ---------------- Net income before income taxes 2,754 1,528 Income tax expense -- 46 ---------------- ---------------- Net income before cumulative effect of accounting change 2,754 1,482 Cumulative effect of accounting change 16,323 -- ---------------- ---------------- Net income 19,077 1,482 Preferred stock dividends 98 97 ---------------- ---------------- Net income available to common shareholders $ 18,979 $ 1,385 ================ ================ Basic earnings from continuing operations .19 .10 Basic earnings from cumulative effect of accounting change 1.19 -- ---------------- ---------------- Basic earnings per share $ 1.38 $ .10 ================ ================ Diluted earnings from continuing operations .19 .08 Diluted earnings from cumulative effect of accounting change 1.14 -- ---------------- ---------------- Diluted earnings per share $ 1.33 $ .08 ================ ================ Dividends paid per common share $ -- $ -- ================ ================ Pro forma results as if FAS 143 was implemented January 1, 2001: Net income before cumulative effect of accounting change, as previously reported $ 2,754 $ 1,482 Less pro forma accretion of closure and post closure liability -- (252) Less pro forma amortization of closure asset -- (70) Plus previous closure and post closure liability expenses -- 204 ---------------- ---------------- Pro forma net income $ 2,754 $ 1,364 ================ ================ See notes to consolidated financial statements.
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AMERICAN ECOLOGY CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) ($ in 000's) Three months Ended March 31, 2002 2001 ---------------- ---------------- Cash flows from operating activities: Net income $ 19,077 $ 1,482 Adjustments to reconcile net income to net cash provided (used) by operating activities: Depreciation, amortization, and accretion 1,857 1,256 Cumulative effect of accounting change (16,323) -- (Gain) on sale of assets (40) (46) Changes in assets and liabilities: Receivables (1,413) 48 Other assets 172 (1,248) Accounts payable and accrued liabilities (3,051) (4,272) Income tax payable (5) (5) Facility closure and post closure obligations (137) 24 ---------------- ---------------- Total adjustments (18,940) (4,243) ---------------- ---------------- Net cash provided (used) by operating activities 137 (2,761) Cash flows from investing activities: Capital expenditures (1,005) (1,192) Proceeds from sales of assets 40 46 Acquisition of Envirosafe Services of Idaho, Inc. -- 2,575 Transfers from cash and investment securities, pledged -- 440 ---------------- ---------------- Net cash provided (used) by investing activities (965) 1,869 Cash flows from financing activities: Proceeds from issuances and indebtedness 1,102 3,000 Payments of indebtedness (3,984) (3,203) Stock options and warrants exercised 975 32 ---------------- ---------------- Net cash (used) by financing activities (1,907) (171) Decrease in cash and cash equivalents (2,735) (1,063) Cash and cash equivalents at beginning of period 4,476 4,122 ---------------- ---------------- Cash and cash equivalents at end of period $ 1,741 $ 3,059 ================ ================ Supplemental disclosures of cash flow information: Cash paid during the period for: Interest expense $ 288 $ 258 Income taxes 5 46 Non-cash investing and financing activities: Acquisition of equipment with notes/capital leases -- 743 Acquisition of Envirosafe Services of Idaho, Inc. -- 18,541 Preferred stock dividends accrued 98 97 Transfer of prepaid assets to settle closure liability 462 -- See notes to consolidated financial statements.
6 AMERICAN ECOLOGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1. BASIS OF PRESENTATION In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments and disclosures necessary to present fairly the financial position of American Ecology Corporation and its wholly owned subsidiaries (the "Company") and the results of operations and cash flows. These financial statements and notes should be read in conjunction with the financial statements and notes included in the Company's 2001 Annual Report on Form 10-K for the year ended December 31, 2001, filed with the Securities and Exchange Commission. Certain reclassifications of prior quarter amounts were made to conform with current quarter presentation, none of which affect previously recorded net income. NOTE 2. EARNINGS PER SHARE Basic earnings per share are computed based on net income and the weighted average number of common shares outstanding. Diluted earnings per share reflect the assumed issuance of common shares for outstanding options and conversion of warrants. The computation of diluted earnings per share does not assume exercise or conversion of securities that would have an anti-dilutive effect on earnings per share.
(In Thousands) Three Months Ended March 31, ---------------------------- 2002 2001 ------------- ------------- Net income before cumulative effect of accounting change $ 2,754 $ 1,482 Cumulative effect of accounting change 16,323 -- ------------- ------------- Net income 19,077 1,482 Less preferred stock dividends 98 97 ------------- ------------- Net income available to common shareholders $ 18,979 $ 1,385 ============= ============= Weighted average shares outstanding: Common shares 13,781 13,746 Effect of dilutive shares 478 3,483 ------------- ------------- Weighted average shares outstanding 14,259 17,230 ============= =============
NOTE 3. EQUITY In 1996, the Company issued 300,000 shares of Series E Redeemable Convertible Preferred Stock ("Series E") that were subsequently retired in 1998. The Series E stock carried 3,000,000 warrants with a $1.50 per share exercise price, which expire July 1, 2003. On March 29, 2002, a Series E warrant holder exercised 650,000 Series E warrants. The Company issued 650,000 shares of common stock and received cash of $975,000 in this transaction. At March 31, 2002 there were 2,350,000 Series E warrants outstanding, which expire July 1, 2003. 7 NOTE 4. OPERATING SEGMENTS The Company operates with three segments, Operating Disposal Facilities, Non-Operating Disposal Facilities, and Processing and Field Services. These segments have been determined by evaluating the Company's internal reporting structure and nature of services offered. The Operating Disposal Facility segment represents disposal facilities currently accepting hazardous, non-hazardous and radioactive waste. The Non-Operating Disposal Facility segment represents facilities that no longer accept waste or require additional approvals to begin operation. The Processing and Field Services segment aggregates, volume-reduces, and performs remediation and other services on radioactive and other hazardous material, but excludes processing performed at the disposal facilities. Income taxes are assigned to Corporate, but all other items are included in their originating segment. Inter-company transactions have been eliminated from the segment information and are not significant between segments. Summarized financial information concerning the Company's reportable segments is shown in the following table.
Reported in $(000) OPERATING NON-OPERATING PROCESSING DISPOSAL DISPOSAL AND FIELD FACILITIES FACILITIES SERVICES CORPORATE TOTAL ====================================================================================================== THREE MONTHS ENDED MARCH 31, 2002 --------------------------------- Revenue $ 13,976 $ 67 $ 4,334 $ -- $18,377 Direct Cost 5,549 303 3,389 -- 9,241 ------------ --------------- ------------ ----------- -------- Gross Profit 8,427 (236) 945 -- 9,136 S,G&A 3,583 80 1,210 807 5,680 ------------ --------------- ------------ ----------- -------- Income (loss) from operations 4,844 (316) (265) (807) 3,456 Investment income 8 -- -- 3 11 Gain on sale of assets 40 -- -- -- 40 Interest expense (233) -- (8) (47) (288) Other income (expense) 25 (490) -- -- (465) ------------ --------------- ------------ ----------- -------- Income before extraordinary items and taxes 4,684 (806) (273) (851) 2,754 Extraordinary item and taxes -- -- -- -- -- Cumulative effect of accounting change 18,165 1,548 (3,390) -- 16,323 ------------ --------------- ------------ ----------- -------- Net Income $ 22,849 $ 742 $ (3,663) $ (851) $19,077 Depreciation Expense $ 1,572 $ 124 $ 143 $ 18 $ 1,857 Total Assets $ 47,148 $ 27,484 $ 11,315 $ 3,826 $89,773 ====================================================================================================== THREE MONTHS ENDED MARCH 31, 2001 ---------------------------------- Revenue $ 10,303 $ 3 $ 2,560 $ -- $12,866 Direct Cost 4,137 391 2,205 -- 6,733 ------------ --------------- ------------ ----------- -------- Gross Profit 6,166 (388) 355 -- 6,133 S,G&A 2,260 -- 1,182 1,361 4,803 ------------ --------------- ------------ ----------- -------- Income (loss) from operations 3,906 (388) (827) (1,361) 1,330 Investment income 159 1 -- 14 174 Gain on sale of assets 37 -- 9 -- 46 Interest expense (215) -- (17) (26) (258) Other income 76 -- -- 160 236 ------------ --------------- ------------ ----------- -------- Income before extraordinary items and taxes 3,963 (387) (835) (1,213) 1,528 Extraordinary item and taxes -- -- -- 46 46 ------------ --------------- ------------ ----------- -------- Net Income $ 3,963 $ (387) $ (835) $ (1,259) $ 1,482 Depreciation Expense $ 1,126 $ -- $ 113 $ 17 $ 1,256 Total Assets $ 41,192 $ 27,944 $ 9,696 $ 4,348 $83,180
8 NOTE 5. CUMULATIVE EFFECT OF ACCOUNTING CHANGE Effective January 1, 2002, the Company implemented Statement of Financial Accounting Standards 143, Accounting for Asset Retirement Obligations (FAS 143). FAS 143 requires a liability to be recognized as part of the fair value of future asset retirement obligations and an associated asset to be recognized as part of the carrying amount of the asset. Previously the Company recorded a Closure and Post Closure Obligation for the pro-rata amount of space used to the original space available in the facilities. On January 1, 2002, in accordance with FAS 143, this obligation was valued at the current closure cost, increased by a cost of living adjustment for the estimated time of payment, and discounted back to present value. A previously unrecognized asset was also recorded. Accrued closure and post-closure liability represents the expected future costs associated with closure and post-closure of the Company's facilities. Liabilities are recorded when environmental assessments and/or remedial efforts are probable, and the costs can be reasonably estimated, consistent with Statement of Financial Accounting Standards No. 5. The Company performs periodic reviews of both non-operating and operating sites and revises accruals for estimated post-closure, remediation or other costs as necessary. The Company's recorded liabilities are based on best estimates of current costs and are updated periodically to include the effects of existing technology, presently enacted laws and regulations, inflation and other economic factors. Changes to reported closure and post closure obligations were as follows (in thousands): December 31, 2001 obligation $ 26,333 January 1, 2002 implementation of FAS 143 (11,130) Accretion of obligation 275 Payment of obligation (600) --------- March 31, 2002 obligation $ 14,878 ========= At March 31, 2002, $243,000 of pledged cash and investment securities were legally restricted for purposes of settling the closure and post closure obligation. Cumulative effect of accounting change is comprised as follows (in thousands): Reduction in closure and post closure obligation $11,130 Initial recognition of closure and post closure asset 5,193 ------- Cumulative effect of implementation of FAS 143 $16,323 ======= NOTE 6. LINE OF CREDIT At March 31, 2002 and December 31, 2001, the outstanding balance on principal loan and revolving line of credit was $1,500,000 and $5,000,000, respectively. The Company has continued to borrow and repay according to business demands and availability of cash. On April 5, 2002 the Company repaid the remaining $1,500,000, bringing the current balance to $0. NOTE 7. LITIGATION Significant developments occurred on the following legal matters during the quarter ending March 31, 2002: GENERAL MOTORS CORPORATION V. AMERICAN ECOLOGY ENVIRONMENTAL SERVICES CORP., ET -------------------------------------------------------------------------------- AL., CASE NO. 3-99CV2626-L, U.S. DISTRICT COURT, NORTHERN DISTRICT OF TEXAS. --- On May 10, 2002, the Company signed a settlement agreement with General Motors ("GM") related to a claim previously brought by GM regarding a waste disposal contract between GM and the Company's Winona, Texas facility in the early 1990's. Without admitting fault or wrongdoing, the Company agreed to pay GM $1,040,000 of which $300,000 was accrued as of December 31, 2001. The remaining $740,000 was accrued as of March 31, 2002. 9 ZURICH AMERICAN INSURANCE COMPANY V. NATIONAL UNION FIRE INSURANCE COMPANY OF -------------------------------------------------------------------------------- PITTSBURGH, ET AL INCL. AEC, AEESC, AEMC AND AESC; SUPREME COURT OF STATE OF NEW ------------------------------------------------- YORK, COUNTY OF NEW YORK; CASE NO. 604662/99 On February 12, 2002, the Company settled a dispute with National Union Fire Insurance Company of Pittsburgh and other entities ("National") related to indemnification of the above GM claim. The Company received a $250,000 payment and dismissed all claims against National. The $250,000 was recognized as other income during the quarter-ending March 31, 2002. US ECOLOGY, INC. V. DAMES & MOORE, INC., CASE NO. CV OC 0101396D, FOURTH ---------------------------------------------- JUDICIAL DISTRICT COURT, ADA COUNTY, IDAHO On May 3, 2002, the Company settled a dispute with Dames & Moore, Inc.\URS ("URS") over URS' alleged failure to pay for work performed under contract at Brookhaven National Laboratory ("BNL"). Pursuant a settlement agreement, URS has agreed to pay the Company $700,000 no later than May 31, 2002, of which $600,000 was previously recorded as revenue. Earlier, on March 20, 2002, the Company settled a related payment dispute with BNL relating to storage of cement ducts at the Company's Oak Ridge facility. BNL agreed to pay $86,000 for storage of the ducts, which was recorded as revenue in the first quarter. MANCHAK V. US ECOLOGY, INC., U.S. DISTRICT COURT FOR THE DISTRICT OF NEVADA, -------------------------------- CIVIL ACTION NO. 96-494. On April 24, 2002 the Company filed a motion for summary judgment seeking dismissal of the Beatty patent infringement lawsuit (the "Manchak" case). The Company expects to file additional motions contesting the matter during the second quarter of 2002. Additionally, the Company has opened a dialogue with the plaintiffs regarding the possibility of settlement, although the possibility of settlement cannot be predicted. The Company continues to maintain that it did not violate any Manchak patents. FEDERAL RCRA INVESTIGATION AT THE OAK RIDGE, TENNESSEE FACILITY ----------------------------------------------------------------------- In April 2002, Company management met with an Assistant US Attorney for Eastern Tennessee and the Federal investigators involved in the case to discuss the status of the investigation concerning unlicensed storage of hazardous waste from 1994 to 1999. The Company continues to cooperate fully with all Federal agencies involved. US ECOLOGY, INC. V. THE STATE OF CALIFORNIA, ET AL., CASE NO.GIC747562, SUPERIOR --------------------------------------------------- COURT OF THE STATE OF CALIFORNIA FOR THE COUNTY OF SAN DIEGO In a case regarding the Company's construction and operation of a State-licensed, low-level radioactive waste facility in Ward Valley, California, a peremptory writ filed by the Company resulted in the appointment of a new Judge in the case in Superior Court for the County of San Diego. At a January 2002 scheduling conference, the new Judge tentatively set a trial date of January 2003. Discovery is ongoing and a status conference is tentatively scheduled for July 2002. ENTERGY ARKANSAS, INC., ET AL, CENTRAL INTERSTATE LOW-LEVEL RADIOACTIVE WASTE -------------------------------------------------------------------------------- COMMISSION AND US ECOLOGY, INC. ("PLAINTIFFS") V. STATE OF NEBRASKA, ET AL., ------------------------------------------------------------------------------ CASE NO. 4:98CV3411, U.S. DISTRICT COURT, DISTRICT OF NEBRASKA In a case regarding the Company's construction and a operation of a low-level radioactive waste facility in Butte, Nebraska, a number of motions filed by the State of Nebraska seeking dismissal of the matter or judicial review of specific issues were denied during the first quarter of 2002. The trial will begin on June 3, 2002 and will be heard by the judge without a jury. 10 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. This document contains forward-looking statements that involve known and unknown risks and uncertainties which may cause actual results in future periods to differ materially from those indicated herein. These risks include, but are not limited to, compliance with and changes to applicable laws and regulations, exposure to litigation, access to capital, access to insurance and financial assurances, new technologies, competitive environment, and loss of major contracts. When the Company uses words like "may," "believes," "expects," "anticipates," "should," "estimate," "project," "plan," their opposites and similar expressions, the Company is making forward-looking statements. These terms are most often used in statements relating to business plans, strategies, anticipated benefits or projections about the anticipated revenues, earnings or other aspects of our operating results. The Company makes these statements in an effort to keep stockholders and the public informed about our business based on our current expectations about future events. Such statements should be viewed with caution and are not guarantees of future performance or events. As noted elsewhere in this report, our business is subject to uncertainties, risks and other influences, many of which the Company has no control over. Additionally, these factors, either alone or taken together, could have a material adverse effect on the Company and could change whether any forward-looking statement ultimately turns out to be true. The Company undertakes no obligation to publicly release updates or revisions to these statements. The following discussion should be read in conjunction with the audited consolidated financial statements and the notes thereto filed on Form 10-K for the year ending December 31, 2001. Unless otherwise described, changes discussed relate to the increase or decrease from the three months ended March 31, 2001 to the three months ended March 31, 2002. INTRODUCTION ------------ The Company is a hazardous, non-hazardous, and radioactive waste management company that offers comprehensive treatment and disposal solutions to commercial and government entities including, but not limited to nuclear power plants, petro-chemical refineries, steel mills, the U.S. Department of Defense, biomedical facilities, universities and research institutions. The Company principally derives its revenue from fees charged for access to the Company's five fixed waste disposal facilities and one processing facility. Fees are charged for removal, transportation, processing, and disposal of waste subject to law, regulation and applicable licenses and permits. The Company and its predecessors have been in business for 50 years. On April 18, 2002, the Company entered into a 5-year lease for office space, for approximately 8,500 square feet of commercial office space in Boise, Idaho. The lease for the Company's current office space expires September 1, 2002. The Company expects to move into the new office space in July 2002 and projects savings of approximately $80,000 over the five-year term of the lease. Effective July 2002, the Company's new address is expected to be: 300 E. Mallard Drive, Suite 300, Boise, ID 83706. RESULTS OF OPERATIONS ----------------------- THREE MONTHS ENDED MARCH 31, 2002 AND 2001 ------------------------------------------------- The following table presents, for the periods indicated, the percentage of operating line items in the consolidated income statement to operating revenues: Three Months Ended Three months Ended March 31, 2002 March 31, 2001 ----------------- ----------------- $ % $ % -------- ------- -------- ------- Revenue 18,377 12,866 Direct operating costs 9,241 50.3% 6,733 52.3% -------- -------- Gross profits 9,136 49.7% 6,133 47.7% SG & A 5,680 30.9% 4,803 37.3% -------- -------- Income from operations 3,456 18.8% 1,330 10.3% Investment income 11 0.1% 174 1.4% Gain on sale of assets 40 0.2% 46 0.4% Interest expense (288) -1.6% (258) -2.0% 11 Other income (expense) (465) -2.5% 236 1.8% -------- -------- Net income before income taxes 2,754 15.0% 1,528 11.9% Income tax expense -- 0.0% 46 0.4% -------- -------- Net income before cumulative effect of 2,754 15.0% 1,482 11.5% accounting change Cumulative effect of accounting change 16,323 88.8% -- 0.0% -------- -------- Net income 19,077 103.8% 1,482 11.5% Preferred stock dividends 98 0.5% 97 0.8% -------- -------- Net income available to common shareholders 18,979 103.3% 1,385 10.8% ======== ======== REVENUE ------- For the three months ended March 31, 2002, the Company reported consolidated revenue of $18,377,000 or a 43% increase compared to the $12,866,000 in the corresponding period in 2001. During the 3 months ending March 31, 2002, $6,129,000, or 33% of revenue was for work performed for the U.S. Army Corps of Engineers. During the quarter, the Richland, Washington LLRW disposal facility contributed $2,080,000 of the increase in revenue due to the completion of a $3,850,000 contract for the Army Corps of Engineers. This completed clean-up project represented 86% of revenue at the Richland facility during the first quarter of 2002. The Grand View, Idaho disposal facility, purchased on February 1, 2001, contributed $1,777,000 to the quarterly increase in revenue. The higher Grand View revenue reflects $1,495,000 from a full first quarter of operation in 2002, versus two months in 2001, and $282,000 from increased waste volumes at the facility. A record volume of 56,000 tons of material disposed during the first quarter of 2002 primarily reflects increased utilization of the Army Corps of Engineers contract by the Corps and other Federal agencies. The Oak Ridge, Tennessee processing facility contributed $1,559,000 of the increase in revenue during the quarter due to increased throughput of radioactive waste at the facility. A second shift added at the facility during the fourth quarter of 2001was continued in the first quarter of 2002 to expedite off-site shipment of accumulated wastes. Along with improved material handling procedures that enabled the facility to process additional material over the first quarter of 2001, selling prices at the Oak Ridge facility have been increased. This pricing increase did not significantly affect revenue during the first quarter of 2002 due to backlogs of both customer waste and non-revenue producing materials requiring processing and off-site shipment. Field Services, a project oriented remediation business, contributed $1,040,000 of the increase in revenue. Four projects were active during the first quarter of 2002. Three significant projects are ongoing and expected to generate increased revenue in the second quarter of 2002. In the fourth quarter of 2001, the Company sold certain under-performing, non-core business operations that represented $826,000 of revenue in the three months ended March 31, 2001. The Company did not report revenue for these closed or sold business units in the first quarter of 2002. Reported revenue at the Beatty, Nevada disposal facility was $464,000 lower in the first quarter of 2002 due to lower direct disposal volumes and continued low thermal processing throughput. In an effort to increase throughput, the Company entered into an incentive-driven operating agreement with the thermal equipment manufacturer and thermal process patent holder during the quarter. 12 DIRECT OPERATING COSTS ------------------------ For the three months ended March 31, 2002, the Company reported direct operating costs of $9,241,000 or a 37% increase compared to $6,733,000 in the corresponding period in 2001. Direct costs increased at a lower rate than revenue reflecting that significant portions of the Company's direct costs are fixed. Direct costs relative to revenue actually declined, dropping to 50% of revenue in 2002, compared to 52% of revenue in the first quarter of 2001. The Oak Ridge, Tennessee processing facility contributed $933,000 of the increase in direct costs due to increased labor costs and related off-site shipment of both customer and non-revenue producing materials. Direct costs at the Oak Ridge facility fell as a percentage of revenue from 112% of revenue to 81% of revenue. The backlog of material on site was decreased substantially during the first quarter of 2002, allowing increased processing of more recently received and new, incoming wastes. The Beatty, Nevada disposal facility contributed $74,000 of the increase in direct costs though revenue fell $464,000. Direct costs were 82% of revenue during the first three months of 2002 versus 62% in 2001. During the three months ended March 31, 2002 the facility experienced throughput and efficiency problems with the thermal processing units. In March 2002, the Company entered into an operating agreement with the thermal equipment manufacturer to maintain and operate the equipment. Management expects increased throughput based on the manufacturer/operator's superior knowledge and experience with the equipment, and their throughput-based royalty incentive. During the quarter, one of the two thermal units ceased operations pending a requested modification to the Company's air permit with the State of Nevada. It is expected that the requisite modification to the permit's allowable emissions will take effect in May 2002. SELLING, GENERAL AND ADMINISTRATIVE COSTS (SG&A) ----------------------------------------------------- For the three months ended March 31, 2002, the Company reported SG&A of $5,680,000. This was 18% higher than the $4,803,000 reported in the corresponding period in 2001, but only 2% higher than the SG&A reported in the fourth quarter of 2001. 2001 SG&A only reflected 2 months of SG&A for the Company's Grand View, Idaho facility, which was purchased on February 1, 2001. SG&A increased at a lower rate than sales as certain SG&A are fixed expenses and the Company has focused on SG&A reduction since the management changes instituted in October 2001. The most significant increase in SG&A was at the Richland, Washington disposal facility where $870,000 of taxes were paid to the state for the $3,850,000 US Army Corps of Engineers contract. Absent the Washington taxes and adjusting for the addition of Grand View SG&A, total SG&A was substantially lower than 2001, even though revenue increased 43%. Company management continues to focus on cost control and overhead containment. INVESTMENT INCOME ------------------ For the three months ended March 31, 2002, the Company reported investment income of $11,000 or a $163,000 decrease from the corresponding period in 2001. Investment income is earnings on restricted investments and notes receivable of which the Company maintains minimal amounts. Investment income for the three months ended March 31, 2001 are primarily comprised of earnings on investments acquired on February 1, 2001 as part of the Grand View, Idaho acquisition. These investments were subsequently converted to cash. INTEREST EXPENSE ----------------- For the three months ended March 31, 2002, the Company reported interest expense of $288,000 or an increase of $30,000 from the corresponding period in 2001. The largest component of interest expense is the $60,000 a month interest payable on the $8,500,000 industrial revenue bond ("IRB") for the Grand View, Idaho facility. Increased usage on the Company's line of credit also contributed to the higher interest expense. Significant borrowings on the credit facility are not expected during the remainder of 2002, although the Company expects to periodically utilize the line of credit in response to normal fluctuations in cash flow. The IRB matures on November 1, 2002. Company management is implementing a plan to refinance this IRB and raise additional tax-free funds to expand at the Grand View facility. 13 GAIN ON SALE OF ASSETS -------------------------- For the three months ended March 31, 2002, the Company disposed of an insignificant amount of assets. The gain on sale of assets primarily relates to a pro-rated gain on assets sold as part of the August 2000 sale and leaseback transaction. OTHER INCOME (LOSS) --------------------- Other Income is composed of the following ($ in thousands): Three months ended March 31, 2002 March 31, 2001 ---------------- --------------- Litigation accrual related to GM settlement $ (740) $ -- Payment received on National settlement 250 -- Insurance claim refunds 25 -- Reversal of professional fee accrual -- 160 Reversal of restructuring charge -- 52 Adjustment to bad debt expense reserve -- 23 Other miscellaneous income, net -- 1 ---------------- --------------- Total other income $ (465) $ 236 ================ =============== Management has assigned a high priority to resolving a number of long-standing legal matters to better allow the Company to focus its resources and energies on its core business activities. Four such legal matters were resolved or tentatively resolved in the first quarter. INCOME TAXES ------------- Income taxes are, and should remain insignificant until the Company has fully utilized its net operating loss carry-forward of approximately $27,000,000. While no income tax expense is reported for the three months ended March 31, 2002, expected payments of alternative minimum tax of $290,000 have been accrued as income tax payable and as a deferred tax asset as of March 31, 2002. Alternative minimum tax and state income tax for certain taxing jurisdictions are the only taxes expected to be paid during 2002. CUMULATIVE EFFECT OF ACCOUNTING CHANGE ------------------------------------------ On January 1, 2002, the Company implemented SFAS 143 Accounting for Asset Retirement Obligations. This change is more fully described in Note 5 to the financial statements with a pro-forma effect as shown on the face of the income statement. Compliance with SFAS 143 is mandatory. Implementation is expected to have the following primary effects upon the Company: - A stronger balance sheet through a reduction in liabilities and increase in the Company reported book net worth. While this offers numerous benefitsthat are difficult to quantify management believes a stronger balance sheet should improve the Company's access to, and cost of capital. - Improved comparability of results with the Company's competitors is expected to occur as uniform application of the SFAS 143 standard replaces the diverse practices previously followed in the waste industry. 14 - Future expenses will increase on a period basis as the $16,323,000 cumulative effect recognized as of January 1, 2002 flows through expenses over a currently projected 55 years. The current annualized estimated expense increase is approximately $750,000 per year. COMPANY PERFORMANCE -------------------- Company performance for the three months ended March 31, 2002 as measured by net income before cumulative effect of accounting change reflected significant improvement over both the quarters ending December 31 and March 31, 2001. Management believes the improvement was substantially the result of its emphasis on spending reductions and cost controls, streamlined reporting, creation of a national sales organization and a new sales incentive program designed to increase base business implemented in the fourth quarter of 2001 and first quarter of 2002. The Company does not expect performance for the quarter ending June 30, 2002 to equal the quarter ended March 31, 2002 as a large one-time contract was completed at Richland in March 2002. Other large contracts currently in progress are expected to have a positive impact, but lesser than the first quarter impact of the Alaska Army Corps of Engineers contract, in the second quarter of 2002. SEASONAL EFFECTS ----------------- Operating revenues are generally lower in the winter months than the warmer summer months when short duration, one-time remediation projects tend to occur. However, both disposal and processing revenue are more affected by market conditions than seasonality. CAPITAL RESOURCES AND LIQUIDITY ---------------------------------- On March 31, 2002, cash equivalents totaled $1,741,000, a decrease of $2,735,000 from December 31, 2001. The decrease in cash was primarily due to repayment of debt. A further decrease in cash balances maintained is expected as improved cash management will allow non-interest earning cash to be used to repay interest-bearing debt. The Company's "days sales outstanding" decreased in the first quarter to 69 days at March 31, 2002, compared to 83 days at December 31, 2001. Further improvements in cash and receivable balances are expected based on additional effort on these balances planned for the quarter ending June 30, 2002. As of March 31, 2002 the Company's liquidity, as measured by the current ratio, was constant at .7:1 at March 31, 2002 and December 31, 2001. The Company's working capital deficit decreased to $7,590,000 at March 31, 2002 from $10,568,000 on December 31, 2001. The primary reason for the increase in working capital was the completion of processing and disposal contracts billed in the previous quarter. Since December 31, 2001, the Company's leverage has decreased, as evidenced by debt to equity ratio of .9:1.0 at March 31, 2002, compared to 2.3:1.0 at fiscal year-end 2001. The debt to equity ratio is defined as total debt divided by shareholders equity. This decrease in the Company's leverage is principally the result of the implementation of SFAS 143 as more fully described in Note 5 to the financial statements and the full retention of earnings. The Company maintains a banking relationship with Wells Fargo Bank in Boise, Idaho that provides an $8,000,000 line of credit expiring in October 2002. As of March 31, 2002, the Company had borrowed $1,500,000 on the line of credit, which was repaid to a zero balance on April 5, 2002. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. The Company does not maintain equities, commodities, derivative, or any other instruments for trading or any other purposes, and also does not enter into transactions denominated in currencies other than the U.S. Dollar. The Company has minimal interest rate risk on investments or other assets as the amount held is the minimum requirement imposed by insurance or government agencies. At March 31, 2002, $243,000 is held in short term pledged investment accounts and $740,000 in tax refunds is due from the Federal Government. Together these items earn interest at approximately 5% and comprise 1.1% of assets. 15 The Company has minimal interest rate risk on debt instruments, as management has preferred fixed rate instruments to the risk incurred by variable rate instruments. At March 31, 2002, $1,500,000 of variable rate debt is owed under the line of credit and is accruing interest at the rate of 5.5%. The $1,500,000 line of credit balance comprises 3.2% of the Company's capital. PART II OTHER INFORMATION. ----------------------------- ITEM 1. LEGAL PROCEEDINGS. Except as described below, there were no material developments with regard to previously reported legal proceedings: GENERAL MOTORS CORPORATION V. AMERICAN ECOLOGY ENVIRONMENTAL SERVICES CORP., ET -------------------------------------------------------------------------------- AL., CASE NO. 3-99CV2626-L, U.S. DISTRICT COURT, NORTHERN DISTRICT OF TEXAS. --- On May 10, 2002, the Company signed a settlement agreement with General Motors ("GM") related to a claim previously brought by GM regarding a waste disposal contract between GM and the Company's Winona, Texas facility in the early 1990's. Without admitting fault or wrongdoing, the Company agreed to pay GM $1,040,000 of which $300,000 was accrued as of December 31, 2001. The remaining $740,000 was accrued as of March 31, 2002. ZURICH AMERICAN INSURANCE COMPANY V. NATIONAL UNION FIRE INSURANCE COMPANY OF -------------------------------------------------------------------------------- PITTSBURGH, ET AL INCL. AEC, AEESC, AEMC AND AESC; SUPREME COURT OF STATE OF NEW ------------------------------------------------- YORK, COUNTY OF NEW YORK; CASE NO. 604662/99 On February 12, 2002, the Company settled a dispute with National Union Fire Insurance Company of Pittsburgh and other entities ("National") related to indemnification of the above GM claim. The Company received a $250,000 payment and dismissed all claims against National. The $250,000 was recognized as other income during the quarter-ending March 31, 2002. US ECOLOGY, INC. V. DAMES & MOORE, INC., CASE NO. CV OC 0101396D, FOURTH ----------------------------------------------- JUDICIAL DISTRICT COURT, ADA COUNTY, IDAHO On May 3, 2002, the Company settled a dispute with Dames & Moore, Inc.\URS ("URS") over URS' alleged failure to pay for work performed under contract at Brookhaven National Laboratory ("BNL"). Pursuant a settlement agreement, URS has agreed to pay the Company $700,000 no later than May 31, 2002, of which $600,000 was previously recorded as revenue. Earlier, on March 20, 2002, the Company settled a related payment dispute with BNL relating to storage of cement ducts at the Company's Oak Ridge facility. BNL agreed to pay $86,000 for storage of the ducts, which was recorded as revenue in the first quarter. MANCHAK V. US ECOLOGY, INC., U.S. DISTRICT COURT FOR THE DISTRICT OF NEVADA, -------------------------------- CIVIL ACTION NO. 96-494. On April 24, 2002 the Company filed a motion for summary judgment seeking dismissal of the Beatty patent infringement lawsuit (the "Manchak" case). The Company expects to file additional motions contesting the matter during the second quarter of 2002. Additionally, the Company has opened a dialogue with the plaintiffs regarding the possibility of settlement, although the possibility of settlement cannot be predicted. The Company continues to maintain that it did not violate any Manchak patents. FEDERAL RCRA INVESTIGATION AT THE OAK RIDGE, TENNESSEE FACILITY ----------------------------------------------------------------------- In April 2002, Company management met with an Assistant US Attorney for Eastern Tennessee and the Federal investigators involved in the case to discuss the status of the investigation concerning unlicensed storage of hazardous waste from 1994 to 1999. The Company continues to cooperate fully with all Federal agencies involved. US ECOLOGY, INC. V. THE STATE OF CALIFORNIA, ET AL., CASE NO.GIC747562, SUPERIOR --------------------------------------------------- COURT OF THE STATE OF CALIFORNIA FOR THE COUNTY OF SAN DIEGO In a case regarding the Company's construction and operation of a State-licensed, low-level radioactive waste facility in Ward Valley, California, a peremptory writ filed by the Company resulted in the appointment of a new 16 Judge in the case in Superior Court for the County of San Diego. At a January 2002 scheduling conference, the new Judge tentatively set a trial date of January 2003. Discovery is ongoing and a status conference is tentatively scheduled for July 2002. ENTERGY ARKANSAS, INC., ET AL, CENTRAL INTERSTATE LOW-LEVEL RADIOACTIVE WASTE -------------------------------------------------------------------------------- COMMISSION AND US ECOLOGY, INC. ("PLAINTIFFS") V. STATE OF NEBRASKA, ET AL., ------------------------------------------------------------------------------ CASE NO. 4:98CV3411, U.S. DISTRICT COURT, DISTRICT OF NEBRASKA In a case regarding the Company's construction and a operation of a low-level radioactive waste facility in Butte, Nebraska, a number of motions filed by the State of Nebraska seeking dismissal of the matter or judicial review of specific issues were denied during the first quarter of 2002. The trial will begin on June 3, 2002 and will be heard by the judge without a jury. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS. As of March 31, 2002, the Company had accrued $1,292,000 of dividends on the Series D Preferred Stock whose payment is prohibited by the Line of Credit. The accrued dividend is included in long term debt due to the uncertainty over when it will ultimately be paid. ITEM 3. DEFAULTS UPON SENIOR SECURITIES. None ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. None ITEM 5. OTHER INFORMATION. None ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) No exhibits are filed as part of this report. (b) The Company did not file any reports on Form 8-K during the quarter ended March 31, 2002. 17 SIGNATURES ---------- Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. AMERICAN ECOLOGY CORPORATION (Registrant) Date: May 13, 2002 By:_____________________________ Stephen A. Romano President, Chief Executive Officer and Chief Operating Officer Date: May 13, 2002 By:_____________________________ James R. Baumgardner Senior Vice President, Chief Financial Officer, Secretary and Treasurer 18